The sharp increase in the hourly minimum wage for next year is expected to have widespread repercussions.
The minimum wage committee voted to raise the hourly minimum wage from the current 6,470 won ($5.73) to 7,530 won next year.
The year-on-year increase rate is 16.4 percent, the largest rise in 17 years after September, 2000.
The minimum wage increase is seen by both employers and laborers as a reflection of President Moon Jae-in’s election pledge to raise the minimum wage to 10,000 won by 2020.
To realize the pledge, the minimum wage should rise 15.7 percent on average each year for three years. The increase rate for the 2018 minimum wage amounts to an overachievement of the first-year goal.
Both laborers and employers expressed dissatisfaction, but employers seem more discontent.
Employer lobbies expressed serious concern that the surge in the minimum wage threatens the survival of financially strapped small businesses and self-employed people. They noted that 84.5 percent of minimum wage workers work in small businesses, hence the inevitability that it would place a heavy burden on them.
The Korea Federation of Small and Medium-sized Enterprises estimated the rise in the minimum wage will increase small businesses’ labor costs by 15.2 trillion won next year.
Raising the minimum wage will increase the purchasing power of the lowest earners, and could revitalize the economy by increasing consumption. According to a study by the Korea Labor Institute, rises in the minimum wage will narrow wage disparities, contributing to the easing of income inequality.
The problem is small businesses.
The rapid increase in the minimum wage will worsen their financial difficulties. It is true that many small business owners eke out a living. They have opposed a sharp rise in the minimum wage, arguing it would drive them out of business.
According to Statistics Korea, 51.8 percent of self-employed people generate less than 46 million won in annual sales. Small and Medium Business Administration data show that they earn on average just 1.87 million won a month.
The new hourly minimum wage translates into 1.57 million won a month, based on a 40-hour week.
Employers with poor sales may earn less than their minimum wage workers. And some self-employed people said that it would be more economical to close their shops and work for the minimum wage.
It is uncertain how long those small business owners who struggle to make ends meet can maintain their businesses with the increased minimum wage.
The government unveiled measures to help financially struggling small businesses pay the higher wages. The main point of the measures is subsidy of the minimum wage increase exceeding 7.4 percent, the average increase rate in the minimum wage for the past five years.
Other steps include a reduction in commissions small businesses pay to credit card companies for card transactions and curbs on rent increases.
The government will spend 3 trillion won for the minimum wage subsidy and expects other steps to bring effects worth 1 trillion won or more.
The subsidy is a desperate measure to buttress small businesses that can hardly bear the rapidly increasing burden of wages. But direct fiscal support causes concern about the aggravation of government finances and moral hazard. Disputes over the impartiality of wage subsidies will happen.
Giving private businesses taxpayers’ money to cover part of their labor costs will send the wrong message to other market players. They will also clamor for subsidies when things turn difficult.
How long the government can continue the minimum wage subsidy is a big question. The subsidy will keep increasing as the minimum wage rises each year.
Fiscal support for the minimum wage was not among Moon’s election pledges. Paying for it will require continued tax increases.
The government should consider these problems and slow the minimum wage increase. Direct wage subsidies from state coffers should be avoided.