The European Central Bank, which has championed fiscal austerity across the continent, has scolded Romania’s government for forcing a 25 per cent pay cut on employees of the country’s central bank.
In a strongly-worded statement, the ECB on Monday warned that Romania’s actions violated European Union treaties allowing monetary authorities to operate freely and without political interference. It presaged a similar showdown with Hungary’s government, which plans to cut its central bank governor’s pay.
The short answer, according to SocGen research, is no, in spite of very significant wage increases so far this year (Foxconn, and others following) in export sectors such as advanced electronics and autos:
The price of labour is picking up dramatically in the coastal provinces. Multinational companies have extended wage gains of 25-30 per cent so far this year, whilst municipalities have extended minimum wage increases of between 5 and 25 per cent.
So why no impact? First, “as China moves rapidly up the value chain”, the increasing value of the goods produced makes the cost of labour proportionately lower. So margins can accommodate the increase. Unit labour costs – which show wages as a proportion of the item’s value – are rising, but at a decreasing rate since 2009.
Second, inflation is affected less by wage increases because there has been an offsetting fall in distribution costs – SocGen explains that the Baltic Dry Index, a proxy for distribution costs, has fallen 75 per cent in the past year.
To explain US import price inflation, SocGen’s model finds
Coincidentally, two regional Federal Reserve banks released papers today examining wage differences across groups. Nothing earth-shattering, but interesting, none-the-less.
The first paper, published by the Federal Reserve Bank of St Louis, looked at the reasons income per worker differ world wide and find that the regulatory costs of starting a business (as measured as a per cent of per capital GDP) have a significant negative impact on income.
“Recovering wage competitiveness in the short-run must depend largely on containing and, indeed, reducing nominal wage rates.”
This from Patrick Honohan, Ireland’s central bank governor, in an advance copy of a speech he will give today to the British-Irish Parliamentary Assembly, seen by Reuters. “Achieving lower nominal wage rates is not easy. But it is undoubtedly an essential component of a pro-employment recovery strategy for Ireland.”