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Moon’s minimum wage policy gains more detractors

Commission chairman predicts next year’s raise won’t be as steep
Apr 04,2018
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President Moon Jae-in is determined to deliver on his campaign promise of raising the minimum wage to 10,000 won ($9.50) an hour by 2020, but this year’s record increase has left many workers and employers dismayed.

After the government raised the minimum wage by more than 16 percent to 7,530 won at the start of January, the outcomes have largely been unintended consequences: hiring cuts, business closures and job loss.

Now, employees and employers alike are dreading future hikes to come.

Last Friday, the minister of employment and labor asked the Minimum Wage Commission, which sets the amount, to begin deliberating on a minimum wage for next year. The commission has until June 29 to submit a proposal to the minister.

The minimum wage is determined by a number of factors, including living costs and income distribution. In an interview with the JoongAng Ilbo on Monday, the chairman of the commission acknowledged that it would be difficult to make a decision by June.

“The National Assembly has to improve its wage policies by the end of this month at the latest so that we can decide on the minimum wage by the June deadline,” said Eo Soo-bong, chairman of the commission.

The wage policies that Eo was referring to include legislation on how wages are calculated.

“Full-time employees are basically earning over 10,000 won per hour right now,” Eo said. “Instead of focusing on meeting a numerical value, we should focus on raising the minimum wage enough to produce the market effect equal to having a 10,000 won minimum wage.”

When factoring in overtime pay, bonuses and employer-provided welfare, the amount a person takes home can easily exceed over 10,000 won an hour, Eo said. Most OECD countries calculate hourly wage by including such benefits.

The exclusion of such benefits from Korea’s wage calculation explains some of the unintended consequences from this year’s minimum wage hike.

A recent report by the Korea Development Institute showed that 30.5 percent of minimum wage earners were low-income, while 63 percent of them were from the middle class. In the report, Kang Byung-goo, a professor of economics at Inha University, argued that this discrepancy shows raising the minimum wage is not an effective tool in fighting poverty.

Most minimum wage earners are not breadwinners, according to the report. They are stay-at-home parents, teenagers and senior citizens. Kang argues that the government has formed its minimum wage policies without bearing the composition and circumstances of most households in mind.

The OECD has been encouraging Korea to expand its Earned Income Tax Credit program, or EITC, since the early 2000s. The program grants tax refunds to low-income households based on their family size until their income rises to a certain level. The United States and other countries have similar programs.

Korea, however, has been reluctant to expand EITC. Eo believes the hesitance comes from its heavy commitment. Policies such as government subsidies to help companies cover labor costs are one-time expenses. A program like EITC requires constant support. “Problems arise when the government tries to avoid allotting a portion of its annual budget toward this end,” Eo said.

Although President Moon is determined to continue raising the minimum wage, the OECD has cautioned Korea against making steep increases. The organization has called Korea’s minimum wage hikes in the last decade one of the largest among its members and warned of possible negative effects on young adults and disadvantaged groups seeking work in the labor market.

The OECD’s concerns have been bolstered by the numbers: since January, the country’s jobs figures have worsened.

Nonetheless, if the minimum wage is weighted with purchasing power and living costs, Korea ranks among the top 10 in the OECD, according to the organization’s latest findings from 2016, when the minimum wage here was just 6,030 won.

One reason why Korea’s minimum wage policy is not producing intended outcomes - no matter how high the wage goes - is because of its stiff and monolithic nature. Many advanced countries now assign different minimum wage rates according to region, industry and demographic. Without such differentiation, however, the current policy in Korea ends up producing odd idiosyncrasies such as an employee at a conglomerate making over 40 million won a year being categorized as earning less than minimum wage.

The policies have instead burdened small and medium-sized enterprises, where workers end up with lower standards of living and profits that fail to cover an increasing minimum wage. One convenience store owner in Mapo District, western Seoul, said he had to recently let go of a part-timer who worked the night shift to save on labor fees. He now watches the store at night, and his wife takes over during the day. The couple earns around 2.4 to 2.6 million won a month if they work every day including weekends.

“If you take my working hours into account, I am not even receiving the minimum wage,” the owner said. “If wages increase next year at the same rates as this year, I will have no choice but to close my shop.”

With business owners barely managing to keep their stores open, jobs are on the decline. Suppliers of casts and molds to manufacturers have been raising prices for their parts or shutting down altogether, unable to cover the higher labor costs.

Industries that are the most sensitive to minimum wage increases, such as retail and contractors, are taking on fewer people or freezing their hiring. Instead, they are replacing the labor with robots and machines that can do the work for them. Many fast food chains, cafes and multiplexes have begun installing self-service kiosks at their locations.

“We cannot give a shock like this year’s again,” Eo said, referring to the record minimum wage increase. “We have to end this game quickly.”

BY KIM KI-CHAN AND JANG WON-SEOK [kim.eunjin1@joongang.co.kr]