Good intentions aren’t enough
*The author is the business news editor of the JoongAng Ilbo.
Deputy Prime Minister and Finance Minister Kim Dong-yeon last week said it would take at least six months before the government could discern the effect of the minimum wage hike on the economy. From the beginning of the year, the basic hourly wage was raised 16.4 percent from last year’s level to 7,530 won ($7). In his presidential election campaign, Moon Jae-in vowed to raise the minimum wage to 10,000 won per hour by 2020. To achieve that goal, the wage must be pushed up more than 16 percent annually over the next two years. The scheme is the keystone of Moon’s economic agenda aimed at stimulating growth through increases in wages and incomes.
Kim said it was premature to jump to conclusions on negative effects from the spike in the minimum wage based on data over the first two or three months. His argument is understandable as time is needed to judge policy effects. But numbers do not lie. Data is important as indications of what lies ahead.
Gross domestic product growth in the first quarter was not bad. Korea’s GDP grew 1.1 percent compared to the October-December period. The manufacturing sector expanded 1.9 percent and construction 3.3 percent. But the services sector — a barometer of the solidity of our domestic economy — did not perform that well. Wholesale, retail, restaurants and lodging industries contracted 0.9 percent from the final quarter of last year. That sector includes convenience stores, diners, hotels and hospitality operators that mostly pay workers minimum wage.
Employment data shows the same pattern. In March, the number of jobless reached 1.26 million to record an unemployment rate of 4.5 percent. The number is the highest for the month of March since 2000. The wholesale, retail, restaurants and lodging category shed 116,000 jobs in March compared to a year ago. Temporary hires decreased by 96,000 while daily hires contracted by 16,000.
Unemployment benefit payouts jumped as a result. The state hands out unemployment compensation for 90 to 240 days to those who have been forced out of jobs. In the first quarter, the benefits went to 628,433 people, up 6.9 percent from the same period last year. That number is the highest since quarterly data became available from 2010.
The data cannot be questioned as it is released by reliable sources: the Bank of Korea, Statistics Korea and the Ministry of Employment and Labor.
Of course, data can be misleading sometimes. The deputy prime minister has a point to argue for more patience to study the exact impact of the raising of the minimum wage. But dilly-dallying in addressing the problems despite a consistency of negative trends can worsen the situation. Does Kim think that employment numbers will suddenly get better in the second quarter? That is wishful thinking.
The government will soon appoint new members of the Minimum Wage Commission to discuss next year’s minimum wage level. The commission is to draw up an outline for next year’s wage floor by June 29 and submit it to the Minister of Employment and Labor. That means that next year’s minimum wage level will be drafted before the six-month period the government claims it needs to understand the real impact of this year’s hike.
Few oppose the need for a higher minimum wage. But many differ on the government’s speed and scope of the hike. It has never explained why the wage base should hit 10,000 won in three years. Can the economy afford to pay an hourly wage of 10,000 won? Will the livelihoods of low-income workers get better at that level of paycheck? What makes 10,000 won the threshold anyway?
Various studies and polls show that 65 percent to 70 percent of workers paid the minimum wage do not fall into the bottom-income bracket. They are mostly dependants of earners of regular salaries and are working to make side money or allowances.
To increase real incomes for low-wage earners, tax incentives such as an earned income tax credit (EITC) to benefit people with low or moderate income would be more effective. They would be inspired to work harder as they get more tax credits and refunds as their income increases.
It is still not late to undo the wrong. The government must seriously contemplate an appropriate level for the minimum wage and the pace of increases. Pushing its agenda without paying heed to complaints and downsides only forces low-income workers to lose their jobs. Policies based on good intentions do not always turn out to be right. In the real world, they sometimes can do more harm than good.
JoongAng Ilbo, May 7, Page 24