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[Ram Garikipati] Revisiting minimum wage controversy in Korea

A team from the International Monetary Fund, which is here on a regular audit of the economy, expressed concerns on Monday over the pace of minimum wage hikes in South Korea.

According to news reports, the delegation led by Tarhan Feyzioglu, Korea mission chief at the IMF, shared the concerns in a meeting with Finance Minister Hong Nam-ki as part of its annual meeting with Korean policymakers.

In 2017, the minimum wage spiked 16.4 percent on-year to 7,530 won ($6.60) per hour in the biggest hike in nearly two decades. It again soared 10.9 percent to 8,350 won at the beginning of 2018. President Moon Jae-in is seeking to raise the minimum wage to 10,000 won by 2020, a key election pledge.

This has not gone down too well with businesses, especially small and self-employed shop owners, who are burdened with labor costs.

Hong is reported to have said the nation will strengthen “flexicurity,” pursue active labor market policies and increase participation in the labor market by women.

While the IMF team is said to have applauded Korea’s “strong economic fundamentals,” citing low public debt, a strong manufacturing base and ample foreign exchange reserves, it is not too happy with the minimum wage policies of the present government.

So I wanted to revisit my views on the issue that I had articulated a few years ago, hoping that the Moon administration takes a balanced stand.

At face value, the logic that minimum wages protect workers from exploitation by employers and reduce poverty seems right. Legal minimum wages are a government’s most direct policy lever for influencing wage levels, especially for workers in a weak bargaining position.

They also serve as a basic labor standard, alongside working-hours regulations and related provisions to ensure basic job-quality standards. And supporting low-wage earners is widely seen as important for promoting inclusive growth.

However, many economists do not think so. They believe minimum wage laws cause unnecessary hardship for the very people they are supposed to help.

The argument is that while the law can set wages, it cannot guarantee jobs. The experience in most countries with a minimum wage law is that low-skilled workers are often priced out of the labor market. This is because employers typically are not willing to pay a worker more than the value of the additional product that he or she produces.

In fact, there are numerous studies using aggregate time-series data from a variety of countries that have found that minimum wage laws reduce employment.

If employers consider the wage floor too high, workers whose productivity is valued less than the mandated wage will find jobs only in occupations not covered by the law or with employers willing to break it.

In addition to making jobs hard to find, minimum wage laws may also harm workers by changing how they are compensated by cutting fringe benefits, which are an important part of the total compensation package for many low-wage workers.

Studies have also found that minimum wage increases generally redistribute income among low-income families rather than moving it from those with high incomes to those with low incomes.

As the Organization for Economic Cooperation and Development has noted in its policy brief, minimum wages are common but controversial. Currently, 26 out of 34 OECD countries have statutory minimum wages.

“Views differ about whether such support is best provided through minimum wages, or closely related policies, such as government transfers,” it noted.

In recent years, policymakers in many countries have adjusted minimum wages in a context of high and increasingly persistent unemployment, stagnant or even declining average wages and, frequently, falling incomes especially among the poorest families.

Further, tax burdens too have to be taken into account.

Even at the very bottom of the wage ladder, taxes and social levies can strongly reduce take-home pay. At the same time, taxes and other mandatory nonwage labor costs also push up the cost of employing minimum-wage workers.

While it is impractical to do away with the minimum wage, given the social realities in Korea, the government should also step in and ease the concerns of the businesses.

Some countries have adopted specific measures to reduce the gap between the amounts an employer pays and the take-home pay that the worker receives. To lower employers’ costs, or to reduce risks of employment losses following minimum wage hikes, some have introduced tax rebates for firms employing minimum wage workers -- something the Korean government should consider.

More importantly, there needs to be efficient coordination between minimum wage policy and other redistribution measures, notably taxes and transfers.

These steps will go a long way in protecting the interest of businesses as well as ordinary workers, given that the economy is struggling to recover and unemployment continues to be a major concern.

Ram Garikipati
Ram Garikipati is a business writer at The Korea Herald. He can be reached at -- Ed.