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Debriefing: Moon’s minimum wage gamble

June 11,2018
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President Moon Jae-in raised eyebrows on May 31 when he claimed that the minimum wage hike has resulted in a 90 percent improvement to the economy. This comment not only confused the market, but also fueled a divisive debate over a new minimum wage reform bill. Here are the basics to Moon’s minimum wage reforms and why they are proving so controversial.



Q. Moon has staked much of his economic legacy on so-called income-led growth. A major part of that policy is increasing the minimum wage. Why is he trying to raise it?

Income-led growth started from the idea that the old trickle-down model - where earnings from major export-heavy conglomerates like Samsung Electronics and Hyundai Motor drive employment and the expansion of the economy - could no longer sustain growth.

The new model follows the idea that an increase in income leads to economic growth. The aim is to create a cycle where more jobs are created, leading to an increase in income and wealth and thus more spending. The increase in spending gives companies more money to invest in facilities and hire more people and the cycle begins again.

The ruling Democratic Party has been advocating raising the minimum wage to 10,000 won ($9.29) per hour by 2020 since the 2016 general election. While the minimum household living expense in Korea currently averages 2.2 million won for a family of two, an employee earning the minimum wage will only make 1.57 million won after working a 209-hour month under the current 7,530 won per hour.

By raising the minimum wage to 10,000 won, the monthly figure rises to 2.09 million won, dramatically reducing the strain on single-income households.

Among the nearly 20 million people that are employed, 43 percent made 2 million won or less a month and those that make 1 million won or less account for 10.4 percent.

This year’s hike is estimated to raise the income of 2.77 million people, mostly contract workers, female employees and younger and older people.

The punishment for not paying the minimum wage includes a penalty of three years or less in prison and a maximum fine of 20 million won.



Q. Do we know what the effects of this year’s minimum wage increase have been?

While government officials say it’s too early to tell what sort of effect this year’s wage increase has had, the numbers don’t look too favorable.

Data from Statistics Korea show that between February and April this year there were fewer than 200,000 new jobs being created. This is the first time since the global financial crisis in 2008 that the figure has been stuck below 200,000.

The income gap is also widening - the top 20 percent of earners have seen their income increase 9.3 percent in the first quarter compared to a year earlier, while those in the bottom 20 percent saw theirs fall by 8 percent.

But despite the numbers, Moon still claimed that 90 percent of the work force has benefitted from the minimum wage increase.



Q. What happened to other countries that hiked the minimum wage this drastically?

The Korea Development Institute (KDI) recently released a report looking into similarly dramatic minimum wage hikes around the world.

Between 2000 and 2004, Hungary increased its minimum wage by 60 percent, but unemployment fell by just 2 percent. On the other hand, Puerto Rico raised its minimum wage from $1.10 in 1968 to $3.26 in 1981. While the gradual rise was spread out over 13 years, unemployment still plummeted nearly 10 percent and stayed low throughout the 1970s and ’80s.

The KDI also looked at the French model. France operates a flat minimum wage, generally only increasing it in line with inflation. France opted for a more conservative model after noticing that minimum wage hikes were hurting workers in service industries such as restaurants and lodging as the increase in pay caused working hours to decline.



Q. How has the government reacted to the minimum wage hike’s impact?

High-ranking government officials seem to be divided on the matter.

Kim Dong-yeon, the finance minister and deputy prime minister for the economy, initially said in April that it’s difficult to attribute the stagnant job market to the minimum wage hike. A month later he seemingly changed his mind, admitting that the hike may have played a role in bringing down job creation. Kim even suggested that the government should reconsider its plan to raise the wage by a further 15 percent next year, suggesting that more analysis was needed.

Jang Ha-sung, the presidential chief of staff for policy, remains adamant that the wage hike has not affected hiring. Jang also believes that government support for workers and companies paying minimum wage is working well.

Moon has also stuck to his guns, arguing that the minimum wage hike hasn’t impacted hiring numbers. This led to rumors that Kim is no longer calling the shots in the Finance Ministry and forced the Blue House to confirm that Kim is still spearheading economic policy.



Q. How has the government responded to the newly passed minimum wage reform bill?

The government supports the newly passed reform bill that adds some regularly paid bonuses and benefits to the minimum wage calculation. Moon did not exercise his veto right despite demands from the labor union and the labor-friendly Justice Party.

“The government respects the minimum wage reform bill that passed the National Assembly and hopes that the minimum wage system will be executed smoothly accordingly to the changed law,” said Blue House spokesman Kim Eui-kyeom on June 1.

On June 5, a cabinet meeting chaired by Prime Minister Lee Nak-yon came out in support of the reform. The new regulations will come into effect from the first day of 2019.



Q. So what does the new reform bill do?

The bill allows a percentage of monthly bonuses and welfare payments to be included in the minimum wage calculation.

Currently a full-time worker earning the minimum wage makes 1.57 million won per month, as well as welfare benefits and bonuses.

Under the new reform bill, any bonuses amounting to more than 25 percent of the minimum wage will be included in the minimum wage calculation. Welfare benefits exceeding 7 percent of the minimum wage will be included in the calculation.

A hypothetical employee may earn the minimum wage as well as 500,000 won in monthly bonuses and 200,000 won in welfare benefits. A quarter of 1.57 million won is 390,000 won. The 500,000 won in monthly benefits passes the 25 percent threshold - 390,000 won - meaning that the excess 110,000 won now counts toward the minimum wage.

The same idea applies to the welfare benefits, with the 7 percent threshold meaning that 90,000 won excess gets added to the minimum wage.

So under the new reform, this employee now earns 1.57 million won plus 110,000 won from excess bonuses and 90,000 won from excess welfare benefits, taking their total basic wage to 1.77 million won.

If the minimum wage increases by 10 percent next year, up to 1.73 million won, the company won’t need to increase this worker’s income as it is now at 1.77 million won. Before the reform changed the way minimum wage is calculated, this worker would have received a pay rise of 160,000 won per month.

The ratio will gradually be phased out to completely incorporate the bonus and extra welfare payment in the calculation by 2024.



Q. What is the point of changing how the basic wage is calculated?

The main reason is to lower the burden on companies, especially SMEs.

While the minimum wage is designed to help low-income workers, there have been arguments that people with hefty bonuses and extensive welfare benefits have also been benefiting from the hike. The ruling Democratic Party floor leader Hong Young-pyo said that the Korean wage system is structured in a way where base salary is low but bonuses and other incentives are considerable, allowing even people that actually make 50 million won a year to benefit from the minimum wage hike.



Q. Why are negotiations in jeopardy?

After the National Assembly approved the revision on May 28, labor union representatives walked out of discussions to decide next year’s minimum wage.

There are nine representatives from labor unions that sit on the committee to determine the minimum wage. Five are from the Federation of Korean Trade Unions and four are from the Korean Confederation of Trade Unions. The two umbrella unions are the largest in Korea. The Federation of Korean Trade Unions pulled their members out of the committee on May 29. The Korean Confederation of Trade Unions walked out the following day.

Time is ticking for the government to bring them back to the negotiating table because the deadline to make the decision on next year’s base salary is June 28. The public will be notified on August 5.



Q. Does it look like Moon will be able to increase the minimum wage for the next two years and reach 10,000 won by 2020?

Technically, despite the labor union walkout, government and business representatives can decide the minimum wage for next year.

Under the current law, the Minimum Wage Committee has 90 days between April and June to decide the following year’s minimum wage.

For the minimum wage to be decided it needs at least one-third of every party to attend the negotiations for at least a day. Even with nine members short, the committee can put the minimum wage to a vote and, assuming it exceeds a majority, make a final decision.

So the Moon government can still achieve its target of 10,000 won per hour by 2020 without the labor unions’ support.

The KDI study, however, estimates that a 15 percent minimum wage hike next year will lead to employment falling by 960,000. Another 15 percent increase in 2020 will cause another 144,000 jobs to disappear.

BY LEE HO-JEONG, CHOI HYUNG-JO AND JIM BULLEY [lee.hojeong@joongang.co.kr]