A half-baked presidential promise

President Park Geun-hye assured U.S. businesses that the South Korean government will settle wage disagreements to ease foreign investors’ jitters about an economy laden with labor woes and North Korean risk. Her comment came during a separate meeting with GM Chairman Daniel Akerson during her visit to Washington. She was responding to Akerson’s statement that the U.S. automaker has no plans to pull out of South Korea, but would have to reassess its position if the weakening yen and labor disputes have a negative effect on price competitiveness.

Wages became a major labor issue in the country after the Supreme Court in March last year ruled that fixed bonuses should be calculated as standard wages. The expanded scope of ordinary wages could affect the size of severance pay employees receive when they retire. Other statutory benefits such as compensation for overtime and unused paid have been used as a part of the basis for calculating severance pay, but the boundary of ordinary wages was not clear.

The latest court ruling contradicts the wage guideline by the Ministry of Employment and Labor as well as an earlier Supreme Court ruling in 1996. Labor unions have since filed lawsuits to claim unpaid statutory benefits in retirement. The employers’ association believes it would have to shoulder at least 38 trillion won ($34.29 billion) in extra employment costs because of the lawsuits, which weighs on an already-feeble economy. Few have been able to clearly lay out a solution to the problem. It is desirable that the president was bold enough to take the initiative to settle the issue. But she should have practiced more discretion in choosing the time and place. She should have thought through the repercussions of raising the sensitive issue during a meeting with a GM CEO in the United States. The GM CEO has already irked the labor union for suggesting he would raise the issue with the president and hinting at a pullout or downsizing in the Korean industrial base. GM Korea is engaged in lawsuit with the labor union over wages which could cost the company as much as 1 trillion won ($904 million).

The opposition Democratic Party criticized the president for contradicting a judiciary judgment. The labor sector fumed that the government was interfering to solve problems for employers. She has ended up adding misunderstanding to an inflammatory issue.

But now that the debate has resurfaced, labor and management should try to come up with a sensible and mutually beneficial solution. Employers have been raising wages through bonuses and other benefits instead of base salary in order to lessen their retirement costs. Base salary now acounts for less than 40 percent of total compensation. Employers should first change the abnormal wage structure to untangle the issue.