South Korea’s drum-tight job market fuels wage, rate hike pressures

South Korea’s unemployment rate fell to historic lows in August as more of the elderly population entered the workforce to fill vacancies, likely pushing wages higher and triggering further interest rate hikes by the Bank of Korea (BOK).

The seasonally adjusted unemployment rate for August fell to 2.5% from 2.9% in July, the lowest since the data was first released in June 1999, as the number of people in work increased for an 18th straight month, official data showed on Friday.

Such tight labour market underpins expectations for at least two further interest rate hikes by the BOK in this year’s two remaining policy rate reviews, slated for Oct. 12 and Nov. 24: The shortage of available labour adds to the risk of a wage price spiral at a time when headline consumer inflation is still near a 24-year high level.

Most economists expect the BOK to raise the interest rate (KROCRT=ECI) to either 2.75% or 3.00% by the year-end, from 2.50% currently, in an effort to quell inflation, even as the central bank sees economic growth slowing to 2.6% this year from 2.7% previously.

“With the labour market still tight, we continue to expect the Bank of Korea to raise its policy rate by 25 bp (basis points) in October and November, hitting 3.00% by year-end,” said Brian Tan, an economist at Barclays Bank.

“While the recent export slowdown will likely weigh on the central bank’s considerations on the pace of rate hikes, it is unlikely to bring the normalisation cycle to an end on its own.”

The number of employed people increased by 807,000 compared with the same month a year earlier. The pace of gains though was milder, with the number of people joining the workforce 826,000 in July and 841,000 in June.

“Employment growth is expected to slow going forward as uncertainties are increasing on worsening external conditions and weaker consumption due to high inflation and interest rate hikes,” vice finance minister Bang Ki-sun said at an economic policy meeting after the data release.

Although drum-tight, the job market remains a source of concern, economists say, with more than half of the people who joined the workforce in August being 60 or older.

The increase was driven mostly by the manufacturing sector, which added 240,000 employees, the biggest monthly growth under sector categories introduced in 2013, followed by health and social welfare services with 123,000 jobs and agriculture and fisheries with 9,000.