Minimum Wage Law In South Korea

By Kim Tae Hwan

Introduction

In recent years, South Korea has reached the brink of political transformation. With the end of the conservative party’s ten year ruling over the country, the idea of progressivism has spread, taking over more than half of the parliament, and even the Blue House. The paradigm of policies across the Korean economy and society has taken root as a distribution rather than growth. The inclusive economic growth and the income-driven growth as a slogan illustrate this. As one of the means, the government plan to increase the minimum wage by 10000 Korean Won (US $9) till 2020 which is more than 40% within 4 years. (But recently, the government officially announced their plan to reach US $9 between 4 -6 years) (3)

 

Current situation of domestic economy

The domestic economy of South Korea is showing the most negative figure since the recent financial crisis in 2008. GDP growth rate in Q4 2018, as well as business indicators such as unemployment rate, investment index in equipment and construction industry, are declining compared to the same quarter in 2017. (Figure 1) The shipbuilding industry, which has a large job creation effect, has undergone restructuring and downsizing to minimize their loss because of low profitability that is caused by the participation of Chinese companies in the market since 2009. This situation has been slightly improved only from the second quarter. The situation in the automobile industry is also gloomy. The automakers’ sluggishness in the US and Chinese markets have lowered the companies’ profitability, which spread to intermediary parts suppliers who have a large employment creation effect. Furthermore, along with US protectionism policies, trade disputes between US and China, especially Korea’s dependence on exports to the United States and China, account for 43.9% of total exports, which make up 68.76% of GDP. The misguided policies of the government, which are in a bad situation both inside and outside, seem to be represented by the poor results in the second and third quarters. (5) (8)

Figure 1. Industry Trend Change MoM , 2018 (5) (8)

The Minimum Wage

Since Jan 2018 when the government came up with new minimum wage policy, the total number of new employments has been continuously declining, with a huge reduction in the private service sector. In order to offset this plunge, the government expanded fiscal spending to create more jobs in the public sector which would result in heavier tax burden on public.(7) (Figure 2,3)

Figure 2. Quarterly Growth Rate of Service Industry, 2018 (7)

Figure 3. Total Number of Employment Increase, 2018 (7)

The industrial structure of South Korea consists of an unusually large number of small businesses. They consist 26% of the economic activity population, which in actual number of 5.57 million. If this includes the unpaid family workers, the numbers will increase by 6.7 million. As jobs created by small business contributes to a huge part of the country’s economy, the annual closure rate of these businesses standing at nearly 20 percent would be detrimental to the employment landscape of South Korea. The factors for such high closure rates can be attributed to the low profitability coming from the high production cost and excessive competition coming from the high saturation of the market. The chart below is containing the expenditures of average small businesses. (Figure 4) As you can see from the chart, labour cost is the second highest amongst their expenditure. To mitigate the impact of increased wages, the government has implemented a policy that subsidizes small business of its labour cost. On the downside, it will end up transferring the tax burden to the public. (4)

Figure 4. Percentage of Average Expenditure on Small Restaurants, 2015 (4)

On the income improvement aspect of the rapid increase in minimum wage, the government explained that the two lowest brackets of income, group below 30% and 30 to 50%, are the direct minimum wage beneficiaries. (6) As shown in the chart below, the total income of the two lowest brackets has decreased, from Q4 2017 to Q1 2018.  (Figure 5)

Figure 5. Low Income Households Quarterly Change in Income, 2018 (6)

The government has sought for the public’s understanding on the basis of inelasticity that labour market has before the increase of minimum wage, but the policy which lacks the understanding of current situation that includes low profitability and over-saturated market could not work effectively. Consequently, large number of small businesses failed to withstand such a high rise in labour cost within a year. In the aspects of distribution, the result of the increase of poor peoples’ income that the government wanted to achieve did not happen, but rather the gap between the rich and the poor in the country (GINI Index 2017 0.360 to 2018 0.401) became more widen. Now the government is changing their statement again, explaining that all these results are the process of natural restructuring of over-saturated markets. The politicians should consider that many peoples’ livelihood depends on their untested and experimental policy. They should set the rate of increase in minimum wage only after meticulous consideration of the industry and the possible impact of its policy.

Recommendations

Minimum wage is a social security that ensures low skilled workers to earn the very basic income for sustaining their livelihood. There are two groups which are substantially influenced by this policy, small business entities and low skilled workers. By implementing a uniform minimum wage across the nation would drive income inequality between regions further, given that price level amongst region varies for the two groups considered. (2)

Instead, a variation of minimum wage law based according to population density of the region would be beneficial for both small business owners and low-income workers. For small businesses, their revenue driver is related to the population of the place their business operates in, while for the low-income workers, it would help alleviate over-concentration of seeking for jobs in the city areas. With different wage rates in different regions, it would have a far greater impact on reducing income inequality, through lowering operating cost for small business entities, and cost of living for low-skilled workers. (1)

Referencing

1.Bank of Korea 2014, Japan’s Minimum Wage Status, Bank of Korea, Viewed 20 2019.

2.Bank of Korea 2015, Assessing the impact of implementing the

German minimum wage system, Bank of Korea, Viewed 20 2019.

3.Minimum Wage commission of Korea, Minimum Wage Presenting Status, Minimum Wage Commission of Korea, Viewed 20 April 2019,<http://www.minimumwage.go.kr/stat/statMiniStat.jsp>.

  1. Jangsungjin. (2018) ‘Small Business Expenditure… Labor Cost 25%, Rent 8%’, The Chosun Biz, Seoul, 18 January. Viewed 20 April 2019, <http://biz.chosun.com/site/data/html_dir/2018/01/12/2018011200214.html>.

5.Statistics Korea 2018, Business Composite Index, Statistics Korea, Viewed 20 April 2019,<http://kosis.kr/statHtml/statHtml.do?orgId=101&tblId=DT_1C8012&conn_path=I2>.

6.Statistics Korea 2018, Household income per by level of Income, Statistics Korea, Viewed 20 2019 <http://kosis.kr/statHtml/statHtml.do?orgId=101&tblId=DT_1L9H006&conn_path=I2>.

7.Statistics Korea 2018, Service Industry Trend, Statistics Korea,Viewed 20 2019, <http://kosis.kr/statHtml/statHtml.do?orgId=101&tblId=DT_1KS2018&conn_path=I2>.

8.Statistics Korea 2018, Survey of construction industry trend, Statistics Korea, Viewed 20 April 2019, <http://kosis.kr/statHtml/statHtml.do?orgId=101&tblId=DT_1G18011&conn_path=I2>.