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The salary gap

Published: 19 Mar. 2015, 23:11

South Korea has seen the fastest economic growth for the last 20 years or more among the member nations of the Organization for Economic Cooperation and Development. The previous governments under Presidents Roh Moo-hyun and Lee Myung-bak and the current government of Park Geun-hye have all supported growth-first policies based on the argument that if large companies and the rich became more wealthy, smaller companies and the middle or working class will benefit from the trickle-down effect.

But despite continued growth, the fruits of our prosperity have not been fairly shared. In fact, the opposite is the case. Wealth and income disparities are ever-widening. South Korea has become one of the most imbalanced economies among the industrialized group of OECD nations. The population is polarized. The wealthy minority enjoys the benefits of a prosperous country. The majority does not.

This imbalance has reached a dangerous level. The gap in incomes is the primary problem. Salaries provide 95 percent of household incomes in Korea. Income from interest on deposits and dividends from financial assets makes up a mere 0.3 percent. Our wealth disparity, strictly speaking, is a matter of unequal incomes, not assets. The ratio of the top 10 percent income bracket as compared with the bottom 10 percent, which serves as a yardstick to evaluate income disparities, rose to 4.7 in 2012 from 3.7 in 1997. That ratio is fourth-highest among OECD countries. The share of temporary workers in our population is the third-highest in the OECD. Jobs are seriously insecure.

Inequalities in wealth have worsened in the United States and Europe because of a reduction in manufacturing and an increase in the services sector, which employs unskilled workers for low wages and often part-time. But in Korea, the manufacturing sector has not been scaled down. It has only gotten bigger. As the share of the service sector in our gross domestic product remains among the lowest in the OECD, the reason for income inequalities and job insecurity cannot be blamed on the rise of a service economy. If inequalities are deepening and the ranks of poorly-paid employees are growing even as our economy is growing faster than the OECD average, the problem in Korea must be in distribution, not the industrial structure.

There is data that points to a dysfunctional distribution system in Korea. First is the gap between the growth in the economy and real wages. The Korean economy has grown 46 percent in the 10 years from 2003. But the rise in the pay workers took home grew at just half that rate, 21 percent. The economy gained 14 percent between 2008 and 2013 following the global financial meltdown. Real incomes of salary workers rose a mere 3 percent. Most Koreans depend on monthly pay to get by. They inevitably feel deprived as their incomes have barely improved while the country and economy flourished.

The second factor is the gap in wages. Employees of small and mid-sized companies get just 62 percent of what their counterparts at larger firms earn - and only 47 percent of what employees at the country’s 100 biggest companies take home. The salary gap between large and smaller companies was not so wide in the past. Wages of small and mid-sized companies reached 90 percent of earnings at large companies in the 1980s. They were around 75 percent in the 1990s. The wage gap deepened as large companies got larger.

Employees rarely get a chance to move from small to larger companies. It is, therefore, impossible for an individual to try to narrow the gap. With such an imbalance, people who live on salaries from small and mid-sized companies naturally feel like second-class people. The promise of a country in which all people live happily and equally has been proven an illusion as the rich get richer as large companies get bigger.

We must rethink distribution and redistribution. For most Koreans, the only means of distribution of wealth is through salaries. Redistribution happens after the government moderates the wealth distribution through taxes. If the fundamental wage system is wrong, inequalities won’t go away no matter how the government tries to interfere except through taxes. Our 30-somethings call themselves the Forsaken Generation because they have given up having a girlfriend, getting married or having kids.

The 20-somethings mock themselves as the Redundant Generation who would do anything for work. The forsaken and redundant generations are our country’s future. If they give up hope, the country also loses hope. The fundamental problem of wage inequality must be fixed. Companies must overhaul their wage systems in order to give hope back to our future generations. JoongAng Ilbo, Mar. 19, Page 31

*The author is a professor of management at Korea University.

by Jang Ha-sung