An employee counts genuine South Korean 50,000 won banknotes in this arranged photograph at the Counterfeit Notes Response Center of KEB Hana Bank in Seoul, South Korea, Aug. 14, 2017. The won advanced for the first day in four as top U.S. national security officials sought to damp down talk of am imminent war with North Korea following days of heightened rhetoric. Photographer: SeongJoon Cho/Bloomberg via Getty Images
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Few workers can say that their bonuses have been so large that the country's central bank takes notice.
But in South Korea, that phenomenon is playing out as workers from tech industries receive bonuses worth millions of won, prompting the Bank of Korea to warn of the upward pressure to inflation.
In a June 17 report, the central bank wrote that inflation this year has been largely powered by energy price increases due to the Iran war. But, it adds, even if that conflict subsides, inflationary pressures may gradually increase as income conditions improve and wage growth becomes more widespread.
More notably, the BOK said that the payment of large performance bonuses recently seen at some major companies in the IT sector could spread into broader wage increases, translating to upward pressure on inflation.
This comes as South Korea is already experiencing above-target inflation, with the BOK projecting that full year inflation will come in at 2.7%, above its 2% target.
The BOK's observations come after reports that huge bonuses were paid out to employees at tech companies, especially those at chip heavyweights SK Hynix and Samsung Electronics.
While the exact amount was not disclosed by the companies, SK Hynix agreed last September to a wage deal that will set aside 10% of operating profits as bonuses for its workers.
Samsung workers had reportedly agreed that 10.5% of its semiconductor operating profit will go towards special bonuses for chip workers, after threatening an 18-day strike in May.
According to an unidentified union source cited by Reuters, a memory chip worker with a base salary of 80 million won ($52,400) is expected to receive a total bonus of around 626 million won ($410,000) this year.
SK Hynix employees are expected to receive bonuses of more than 700 million won ($454,851) if the firm achieves an annual profit of 250 trillion won this year, according to Reuters calculations.
The BOK said that normally, bonuses would not contribute much to demand pressure, as they are not permanent increases to income.
But when "special bonuses expand unusually and substantially," wage growth could could spread to other sectors, significantly increasing both supply- and demand-side inflationary pressures, the central bank said.
"In particular, because recent IT-sector performance bonuses have been paid on a highly exceptional scale, the possibility that their actual impact could be larger than expected cannot be ruled out," it added.
Retail businesses celebrate
While the central bank frets, some businesses are already preparing for these workers to spend their windfalls at their stores.
BOK Deputy Governor Lee Jiho said in a press briefing on June 17 that "sales have increased significantly in places such as Suwon and luxury goods sections of department stores, and this could gradually spread further."
South Korean media reports have said that some tech industry workers have spent big on luxury items in department stores, with accounts of workers buying bags, jewelry and watches.
The BOK said that in Gyeonggi Province — home to major Samsung Electronics and SK Hynix semiconductor facilities — card spending growth this year was relatively higher in areas near chip production sites and adjacent residential areas than in other regions.
South Korean media outlet Chosun Ilbo said that luxury consumption has "rapidly increased" in the southern Gyeonggi regions, where Samsung and SK Hynix are headquartered.
Luxury sales in a Shinsegae department store branch in Gyeonggi province rose by 53.6% year-on-year, the newspaper reported in May, with luxury jewelry surging by 146.3% and luxury watches growing by 85.3% over the same period. Overall store sales grew by 19%, according to the newspaper.
Shares of South Korea's major department-store operators have also rallied alongside growing expectations that high-end consumption will strengthen.
Lotte Shopping, the retail arm of the Lotte Group, has surged more than 148% year to date, with a 67% jump in its share price in the past three months alone.
Hyundai Department Store shares are up 120% year to date, with a whopping 113% gain in the last three months, while Shinsegae has led the pack with a 190% gain in share price from the start of the year.
Most of Shinsegae's gains have come recently, with its shares jumping 107% in the last three months.
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