Overview:
Palau’s wage hikes aim to ease inflation pressures, but economists warn the measures could raise living costs in the short term. The Economic Advisory Group’s May 2025 report highlights how Palau’s small, cartelized market may undermine wage gains through higher prices and inflationary feedback.
By: Leilani Reklai
KOROR, Palau — Palau’s recent wage and salary increases, aimed at easing the burden of post-pandemic inflation, may deliver limited short-term relief and could instead fuel higher living costs, according to the Economic Advisory Group’s (EAG) May 2025 report.
The proposed bill before Olbiil Era Kelulau seeks a 10% across-the-board pay increase for government employees. The previously passed law went into effect on October 1st, raising the national minimum wage from $4.25 to $4.50 per hour. The policymakers described the measures as necessary to address eroding real incomes, but economists caution that in Palau’s tightly concentrated market, the changes could inadvertently push prices higher.
Persistent Post-Pandemic Inflation
Since the COVID-19 pandemic, Palau has faced persistent inflation driven largely by imported goods and energy costs. The EAG report notes that energy prices, in particular, have surged over several years, rippling through the broader economy and raising the cost of essential goods and services.
“Real wages have failed to keep up with the cost of living, especially outside the corporate sector,” the report stated, warning that the resulting decline in purchasing power has already contributed to outward migration among working-age Palauans.
Businesses, responding to both global price shocks and domestic tax reforms, have increased retail prices beyond their direct cost burdens, exacerbating the strain on consumers.
Market Concentration and “Cartelized” Pricing
The report highlights Palau’s “cartelized” economic structure—where a few dominant businesses wield significant market power—as a key factor limiting the effectiveness of wage and salary policies.
In such a concentrated market, businesses often respond to wage hikes by passing costs directly to consumers. “This practice allows profits to remain stable or even rise, while the general population bears the burden through higher prices,” the EAG found.
This market behavior, the report warns, could neutralize much of the intended benefit of wage and salary increases, as the cost of living adjusts upward in response.
Short-Term Economic Pressures
While higher wages and salaries are intended to restore purchasing power, the EAG report anticipates upward pressure on prices across key consumer sectors in the short term. The limited competition in Palau’s economy, coupled with a pattern of swift price adjustments, raises the risk of an inflationary cycle.
“Wage increases can help certain low-income workers,” the report noted, “but not all minimum-wage earners live in low-income households, meaning the policy’s impact on poverty reduction is mixed.”
In the near term, rising wages could contribute to a feedback loop in which businesses raise prices to offset higher labor costs, prompting renewed demands for further pay adjustments. This “wage-price spiral” could deepen inflationary pressures unless closely monitored.
Policy Outlook and Recommendations
Economists recommend that Palau’s government complement wage and salary increases with targeted support measures and stronger price monitoring. Means-tested transfers, consumer protection enforcement, and policies promoting competition could help contain inflationary spillovers and ensure that the benefits of income growth reach those most in need.
“Without complementary reforms,” the report concluded, “salary and wage increases may improve nominal incomes but have limited real impact on household welfare.”
As Palau continues to navigate post-pandemic recovery, the balance between fair compensation and price stability remains critical — without it, well-intentioned wage increases could unintentionally drive higher prices and erode the very gains they aim to achieve.