Gov’t mandates peak wage system

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Gov’t mandates peak wage system

Starting next year, all government-controlled companies and organizations will be forced to cut the salaries of their senior employees in order to create more jobs for young people amid a high youth unemployment rate, the Ministry of Strategy and Finance announced Thursday.

The move is considered just a part of wider structural labor reforms aimed at securing a foundation for future economic growth in a rapidly aging society with shrinking tax revenues.

The change is expected to be applied to government-owned institutions and companies and eventually spread to the private sector.

According to the ministry, all 316 state-run organizations nationwide will be required next year to adopt what is known as the peak wage system, in which workers’ salaries begin to decline at a determined rate from a certain age, usually around 55.

The peak wage system has been widely welcomed and proposed by many labor specialists, who say it could give more room for companies to hire young people as entry-level workers by cutting costs for high-paid executives or managers.

The new system will be launched starting next year when the retirement age for state-run companies and organizations is extended to 60 under the new law.

However, the changes are expected to be met with some hurdles as a number of labor unions - although they agree with the implementation of such a system - have disagreed on several details, including the age at which the salary cap should be applied.

According to a Finance Ministry report, over the next two years, the cut in salaries for employees near retirement is expected to create 6,700 jobs for young people. Details on salary cut adjustments, including when to start the cut, are to be decided by each organization, the ministry said.

Currently, 54 out of 316 state-run organizations already operate under the peak wage system, and most of them are cutting salaries for employees three to five years before retirement, usually between the ages of 55 and 57, said Park Hye-su, a Finance Ministry official.

The government, meanwhile, also set a quota for entry-level hires: All state-run companies must hire the same number of new employees as there are senior employees with one year left before retirement.

The decision was part of the Park Geun-hye administration’s push to reform Korea’s labor market, as the country’s youth unemployment rate hit a peak over the past decade in February at 11.1 percent.

The government expects adoption of the peak wage system among state-run companies to spread across enterprises in the private sector as well.

Lee Ki-kweon, Minister of Employment and Labor, directly called upon Korean conglomerates to limit raises for high-paid executives and employees.

At a meeting Thursday with human resources managers from the country’s top 30 conglomerates, the minister urged them to refrain from handing out raises to employees in the top 10 percentile, and to instead hire more young people.

“According to an analysis by labor specialists, when companies cut raises by 1 percent for workers in the top 10 percent, it can create about 60,000 new jobs for youths,” Lee said.

“If they further reduce those raises by 3 percent, it would generate approximately 180,000 jobs.”

“While some companies have imposed layoffs due to sluggish profits, their CEOs were paid hundreds of millions of won when they retired,” Lee said. “[That made it] really difficult to persuade the labor unions to cut wages for workers in the top 10 percent.”

Whether private companies will implement the peak wage system remains to be seen, especially given failed negotiations between management and labor unions over market reform.

The trilateral talks, arbitrated by the government, collapsed in April with little progress made on labor issues. Representatives from the Federation of Korean Trade Unions walked out in the middle of final talks, standing firm on several controversial issues, such as improving working conditions for contract workers.

Both parties agreed to the necessity of the peak wage system, though they differed over when to start trimming salaries. Labor unions demanded the cut to be enforced after the legally guaranteed retirement age of 60, while management called for it to be started before then.

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