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Minimum wage hikes make state think tank wary

June 05,2018
Korea’s leading policy think tank Monday suggested that drastic increases in the minimum wage will eventually take a heavy toll on Korea’s employment numbers, the latest indication of division in the government over the impact of the administration’s minimum wage policy.

“If the government continues to raise it at such a fast pace, it would require some adjustments in the economy, which would incur costs and possibly create some side effects,” said Choi Kyung-soo, director and vice president of the department of human resource development policy at the Korea Development Institute (KDI), a Sejong-based research institute under the Ministry of Strategy and Finance, in a press briefing at the Sejong government complex.

In a report released Monday, Choi and his team explained that the recent decline in the number of new jobs in Korea - which stood in the 100,000-range each month from February to April this year compared to over 200,000 on average for the past eight years - was a result of a number of factors including a slowdown in the growth of overall population as well as the ongoing restructuring of manufacturing industries and wholesale and resale sectors.

The report also explained that most workers earning the minimum wage are in the age group of 15 and 24 or female workers over 50 - for whom the fall in overall employment was lower than the previous year. For such reasons, it’s difficult - or at least premature - to claim that this year’s minimum wage increase brought down the number of new jobs.

“Looking at the data as of April, the minimum wage hike this year seems to have had little to no effect in lowering the country’s employment,” Choi said, adding that countries like Germany makes decision on the minimum wage hike every two years after an in-depth study on the effect of the previous increase on the economy.

While cautious about the effect of this year’s minimum wage increase, Choi said pushing it up by 15 percent next year as the government plans would have a negative impact on jobs.

The minimum wage in Korea rose by 7 percent on average in the past five years. This year, the Moon Jae-in administration jacked up the minimum wage by 16.4 percent to 7,530 won ($7.05) and aims to raise it to 10,000 won by 2020, which requires 15 percent increases for the next two years.

The KDI report estimated that if the minimum wage goes up by 15 percent yearly over the next two years, the number of those employed in Korea would fall by 96,000 in 2019 and 144,000 in 2020 if there’s no government subsidy for employers, as is being given this year.

“If such a sharp increase is repeated next year and the year after, the relative value of the minimum wage compared to the average wage [of Korea] would be higher than in other advanced countries,” Choi said. “This would worsen the degree of the decline in employment and disturb the order in the wage [system], which means the loss would outweigh the benefit.”

Choi cited France as an example in which a high relative value of the minimum wage compared to the average wage disrupted the job market.

The ratio of the minimum wage relative to the average wage in France stood at 0.61, or 61 percent, as of 2016, according to data by the Organization for Economic Cooperation and Development (OECD). Choi explained that France stopped raising the legal minimum wage after experiencing side effects such as freezes in incomes for any worker with less than 10 years of work experience.

For Korea, the proportion was 0.50, or 50 percent. But the sharp increase in the minimum wage planned by the government would bring this figure to 0.68, or 68 percent, by 2020.

“[The government] thus needs to control the pace of the increases,” he added.

Choi’s proposal echoes concerns expressed by Kim Dong-yeon, Korea’s finance minister and deputy prime minister for the economy, who said in an interview last month the government may have raised the minimum wage too dramatically.

The KDI’s study also came just a few days after President Moon commented that the increase has had a positive impact on 90 percent of the working population, which sparked objections from critics that he was ignoring recent data by Statistics Korea.

The statistics agency said on May 24 that the incomes of the bottom 20 percent of Korean households fell by 8 percent compared to a year before, evidence of a widening gap between the top and bottom tiers of workers.

Hong Jang-pyo, Moon’s chief secretary for economic affairs, tried to rebut the criticism at a press conference at the Blue House on Sunday and explained that the president’s remark was based on an analysis using raw data compiled by the statistics agency, which he explained as showing an increase in overall incomes except for some families in the lowest income bracket.

The data Hong provided indicated that incomes for households that have one or more wage earners - who receive salaries from private companies or the government - rose in all income quintiles during the first quarter of this year.


BY CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]