- President Moon’s campaign to raise the minimum wage poses significant risks to South Korea’s economy
PRESIDENT MOON Jae-in has renewed his call to the National Assembly to raise the minimum wage from ₩ 6,470 to ₩ 7,530 by 2018 and eventually up to 10,000 by 2020 as part of his agenda to pursue income-led growth. Increasing the minimum wage was a key campaign pledge by Moon to the lower-middle income households, who are hoping to escape the stagnant wages of the past decade. In addition, college students are probably one of the biggest constituencies to be benefited by such an increase. According to the Korea Labor and Society Institute, 8 to 10 part-time job applicants prefer to hire employees between 20 and 25. However, this act is likely to bring harm to the economy by raising the labor costs of firms who may be forced to lay off their employees in response.
President Moon's administration regards a rise in minimum wage as a key process in pursuing what he calls "income-led" growth. Income-led growth refers to an economic growth achieved by lifting the income of households who devote a large portion of their income to consumption. The idea behind this is that it will increase the minimum wage and will increase the consumption of goods and services and revitalize the economy. In addition, an increase in minimum wage could also induce domestic firms to increase their consumption. A rise in the minimum wage will force firms to increase their spending on investment and employment. According to The Korea Herald, the president's economic adviser, Kim Hyun-chul, supported that the Moon's new administration would pursue good growth for the nation. He said that this policy ensures a balance between income redistribution and economic growth.
Raising the minimum wage will hurt those intends to help
President Moon's income-led growth policy is straightforward: put money into the hands of people who are most likely to spend it. However, the reality is more likely to be opposite. For many small and medium-sized firms, who are heavily reliant on low-wage employees, a steep rise in labor costs could push these employees out of work. When pressed for a reduced profits due to an increase in the minimum wage, many will choose to cut back on a number of employees or reduce their working hours. According to Korea Foodservice Industry Research, if the minimum wage goes up to ₩ 10,000, around 280,000 employees who work in restaurants will be laid off. During an interview with The Yonsei Annals ,Bang Byung-kuk (Prof., Dept. of Econ.) Said that income-led growth is only achieved when the employers and the employees receive higher incomes along with the increase of minimum wage. If employees receive higher incomes but employers get theirs reduced, this is merely an "income distribution", not an income-led growth. "He said," This is not a growth in the income distribution, "said he.
With the increase of minimum wage, 4.6million of citizens who receive less than or equal to the current minimum wage are not the sole individuals whose incomes will rise. The increase of minimum wage spills over to workers who earn high income as firms raise the wage to enhance their recruitment skills and to retain workers who could possibly experience better payment elsewhere. This then leads to an increase in general costs of production, causing cost-push inflation*. According to Professor Bang, inflation is detrimental to the society, especially since the country is experiencing a shortage of consumption. This could result in stagflation** and worsen households’ debt. “Today, 13% of firms provide lower wages than the current minimum wage of ₩6,470 to their workers. But, if minimum wage rises, there will be an increased number of firms that do not provide regulated minimum wage to their workers, up to 18%,” he added.
Economists slam the proposed increase
Domestic administrators and economics experts have expressed their concerns regarding the rise in minimum wage. According to The Korea Herald, Jeong Won-il, an economist at Yuranta Securities, raised concerns about President Moon’s policy. Currently, the inflation is occurring in a rate of 2% whereas wage will be increasing in a faster rate with 15%. Hence he claimed that an increase in domestic consumption will occur yet only temporarily. Due to sustained increase of inflation, consumers will lose their purchasing power in long-term, which in the end nullify the temporary positive effects. Choi Sueng-jae, president of the Korea Federation of Micro Enterprise, told the Korea Joongang Daily that firms may adopt a way of self-service features to minimize their labor expenditure. He described a future restaurant industry where people have to pay, pick up food, and clean by themselves. Already, Korea Oil Station Association is receiving requests by oil-station owners on how to convert their gas stations into self-service stations.
President Moon seemed to be aware of the risks that small and middle-sized firms may experience. Hence, the Ministry of Strategy and Finance’s ₩3 trillion-worth subsidy will be offered to ease their increased labor costs. However, Kim Sang-jo, the chief of Fair Trade Commission, told The Korea Herald that this policy would eventually make the country fiscally unsustainable. Professor Bang recommended that in order to prevent some costs incurred by raising the minimum wage, it should be raised differently according to different types of sectors and districts. “Since demand of goods and services in Seoul metropolitan area is relatively greater than that in the regional area, it is plausible that workers in Seoul deserve greater increase of minimum wages,” he said. He also suggested that it is reasonable to increase minimum wage for workers in prospective sectors, such as the IT industry. However, for instance, shipbuilding industry is recently having a stagnant growth, therefore increasing wages for these workers is not an ideal act to carry out. “If you ask workers in that industry whether they would want an increase in income, they are likely to refuse it as a high number layoffs could happen consequently,” he said.
Income-led growth is achieved only when both employers and employees are beneficiaries from the raise in minimum wage. According to Professor Bang, this becomes feasible only when the country’s economy experiences active circulation throughout the whole regions. To make this happen, first, he emphasized that private enterprises must take the leading role for economic growth. He said that the government could aid this by alleviating restrictions on firms, which have hindered firms’ ability to maximize their capability. Moreover, the country should put more effort on developing the Fourth Industrial Revolution, which will then advance other industries to operate with enhanced productivity.
* Cost-push Inflation: A type of inflation caused by a fall in aggregate supply, resulting in an increase in costs of production, such as wages or other inputs
** Stagflation: Arising from a combination of the words 'stagnation' and 'inflation', it refers to the simultaneous appearance of inflation and recession (and hence causing unemployment).
Hwang Gyu-chan email@example.com