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Time to change the way the wage is fixed

Published: 15 Jul. 2024, 20:05

The hourly minimum wage has been set at 10,030 won ($7.3) for next year, edging up 1.7 percent from this year’s 9,860 won. On a monthly basis, it amounts to 2,096,270 won. The minimum wage enters a five-digit number for the first time in 37 years since its institutionalization in 1988.

But the year-on-year rise is the second smallest since the 1.5-percent gain in 2021. Labor unions complained that the increase actually means a decrease as it hovers below the inflation rate. Employers also expressed disappointment about indecision over applying a differentiated wage floor based on business features.

The side effects from the double-digit increases during the Moon Jae-in administration still plague businesses. Between 2018 and 2023, the minimum wage jumped 27.8 percent whereas the across-the-board nominal wage gained 17.2 percent and inflation rate 12.6 percent. The burden from the disproportional wage increase directly falls on owners of small-sized businesses. The Korea Federation of Micro Enterprises (KFME) and the Korea Federation of SMEs growled that the Minimum Wage Commission has neglected the woes of small employers who cannot afford current wage levels.

The minimum wage becomes the basis for unemployment benefits, industrial accident compensation and other welfare programs. But the decision-making process has been slack. Representatives of unions and employers often bargain as if they are in an auction and settle in the middle spot offered by government-assigned public commissioners. They do not thoroughly debate on its impact on the economy based on data. Even Minimum Wage Commission Chair Lee In-jae pointed to the limits of productive discussions under the current decision-making structure.

In 2019, the Moon Jae-in administration proposed dividing the commission into two: one comprised of experts to determine the scope of a wage increase and the other comprising of representatives from employees, employers and government-assigned public members. But the dual-system idea was vehemently opposed by the union sector at the time. Experts propose the government reach a conclusion after listening to two separate proposals from experts and concerned parties. The government feigns neutrality but influences the decision through the nomination of public-interest commissioners. A responsible government must design a sustainable and predictable system.

The labor sector must not cling entirely to a wage hike. A minimum wage hike that rises too quickly reduces labor demand and stokes conflict between small employers and their employees. There are other means — such as the Earned Income Tax Credit — to raise incomes for low-income households. Unions must proactively participate in the effort to find optimal solutions.