Unreasonable wage hikes
The author is a business news editor of the JoongAng Ilbo.
I recently met a CEO of a mid-sized company I have known for more than 10 years. The topic of next year’s minimum wage — a 1.5 percent increase from this year’s level — naturally came up since the announcement was made a few days before. Instead of sighing in relief, he burst out into a rant of complaints about side effects from the government’s economic “guinea-pig experiments” through the double-digit increases in the first two years of the Moon Jae-in administration.
The hourly minimum wage was driven up 16.4 percent in 2018 and another 10.9 percent in 2019. The pace significantly slowed to 1.5 percent this year for 2021. The sudden jump aggravated economic woes and management uncertainties, as well as labor conflicts, the CEO said. “If the growth had been evened out to an average 7 percent per annum over the three years, employers would not have had to let go regular staff and hire part-timers who do not directly fall under the minimum wage category. If the minimum wage was raised during difficult times like these days, employers would have been more understanding,” he grumbled.
The 1.5 percent minimum wage increase for next year will be the weakest ever — even lower than a 2.7 percent gain in 1999 following the 1998 foreign exchange crisis. Due to the dramatic slowdown, the average gain in the minimum wage during the four years under Moon would amount to 7.75 percent, hardly any different from the 7.42 percent average four-year rise under President Park Geun-hye.
The government argued the stall was inevitable from the coronavirus crisis. But the decision goes against pro-labor and income-growth slogans of the Moon administration.
The union is strongly resisting. It cannot condone a rise even weaker than 1999 when the economy subject to an international bailout contracted by 5.1 percent. “It is the worst,” decried the Federation of Korean Trade Unions. Employers like my CEO friend are not happy either. The rise in the minimum wage this time is the weakest, but the hourly pay nevertheless remains quite burdensome due to the near 30 percent rise in just three years.
The pretentious and impromptu decision-making by policymakers has caused huge damage to the economy. The job market has weakened due to the speedy rises in the minimum wage. Companies that streamlined because they could not afford the spike in labor costs won’t suddenly move to hire more just because the hike has slowed.
The government had to spend big to make up for the side effects by subsidizing employers or unemployment benefits. If it opted to keep the gains level at around 7 to 8 percent a year, much of the harm to the economy and labor market could have been avoided.
The union front demands Moon keep his campaign promise to raise the hourly minimum wage to 10,000 won ($9) within his term, while employers are disgruntled that it had been better under the Park government when the annual rise at least had been foreseeable at 7 to 8 percent. Both complain of the short-sighted fast rises in the wage in the first two years.
Minimum wage must not be determined by political reasoning or public opinion. It must take into account various economic factors — gross domestic product growth rate, inflation and price-to-earnings plus the market’s affordability. But the government pursued a policy entirely fixed on the president’s campaign promise of achieving 10,000 won hourly wage. Because the order has been wrong, the decision-making procedure was sloppy. The minimum wage commission failed to address more fundamental issues of differentiating the wage hike between industries, for instance.
Policymakers must consider amending the minimum wage decision structure. The public representatives in the Minimum Wage Commission who hold the casting vote are influenced by political or public voices since they are named by the government.
Labor and business representatives are engrossed in wrangling and hardly sit down for sensible discussions. The public representatives must have more neutrality, and the rate should be mandated to factor in various economic data. At the same time, the commission must include small merchants or young people.