Increase In Minimum Wage To Diversify and Boost South Korean Economy



Many small business owners in South Korea are worried about affording the new minimum wage in 2018. The Korean Labor Institute estimates that companies with five or more employees only raised their payroll by 3.8 percent from 2015 to 2016. When negotiations over minimum wage first began, labor advocates proposed 55 percent. Business representatives were thinking more like 2.4 percent. While 16 percent is nowhere near the number suggested by labor advocates, it will still be a burden for the business representatives who’d wanted single digits. According to the Korea Federation of SMEs, 90 percent of companies would prefer a maximum minimum wage raise of 5 percent.

To make things more challenging, a prominent economist predicted that businesses will compensate by inflating their prices. This might cause the Bank of Korea to increase its key rate in response. Businesses also warned that an increased minimum wage could initiate layoffs. The Korea Federation of SMEs released a study that says if the President achieves his plan, 90 percent of businesses could go bankrupt.

Still, President Moon Jae-in’s plan remains in place. In July the Korean Confederation of Trade Unions backed him up by releasing a statement. In order for a family of two or three to have a “minimum of dignity,” they must make 10,000 won per hour.

Soon after winning the election in May, President Moon Jae-in announced his commitment to being a “jobs President.” In July the Minimum Wage Commission agree to bump up the minimum wage rate by 16 percent. Now, South Korean workers will receive $6.60 per hour (7,530 won), compared to $5.80 per hour in 2016.

Focusing on the Economy

Currently South Korea’s economy depends on their exports. While this works well if the demand is high, it can lead to disaster if buyers become less interested in South Korea’s products. President Moon Jae-in hopes to diminish this type of economy by focusing on household spending.

Increasing the minimum wage in 2018 is only the first stage of his plan. The President aims to nudge the minimum wage up to $8.94 (or 10,000 won) per hour by 2020. In order to get there, the rate will need to go up by 15 percent each year. This is a big change since the minimum wage only went up a total of 7.4 percent in the last five years. The Korea Labor Institute estimates that the rate increased by 3.8 percent from 2015 to 2016.

Some of the other countries in the Organization for Economic Co-operation and Development, like Poland and Israel, also come in around the $5.80 per hour mark. On the other hand South Korea will need to catch up with Japan ($7.40) and Germany ($9.87).

South Korea Minimum Wage 2018
 

Seoul, South Korea

 

The Challenge Ahead

Many small businesses are worried about affording the new minimum wage. The Korean Labor Institute estimates that companies with five or more employees only raised their payroll by 3.8 percent from 2015 to 2016. When negotiations over minimum wage first began, labor advocates proposed 55 percent. Business representatives were thinking more like 2.4 percent. While 16 percent is nowhere near the number suggested by labor advocates, it will still be a burden for the business representatives who’d wanted single digits. According to the Korea Federation of SMEs, 90 percent of companies would prefer a maximum raise of 5 percent.

To make things more challenging, a prominent economist predicted that businesses will compensate by inflating their prices. This might cause the Bank of Korea to increase its key rate in response. Businesses also warned that increased minimum wage could initiate layoffs. The Korea Federation of SMEs released a study that says if the president achieves his plan, 90 percent of businesses could go bankrupt.

Still, President Moon Jae-in’s plan remains in place. In July the Korean Confederation of Trade Unions backed him up by releasing a statement. In order for a family of two or three to have a “minimum of dignity,” they must make 10,000 won per hour.

(Photo courtesy of Jenny Kim)