President Moon faces pressure to rein in minimum wage hikes

By Yoon Ja-young

Despite President Moon Jae-in’s remarks that the minimum wage hike has had a 90 percent positive effect, the administration is facing mounting pressure to slow down the pace of raising it as studies are pointing to negative impacts on the job market.

The Korea Development Institute (KDI) warned Monday that 140,000 jobs will be at stake if the administration keeps to the current pace of hikes.

The country saw the hourly minimum wage rise 16.4 percent to 7,530 won ($7) this year, following President Moon’s election pledge to make it 10,000 won by 2020.

However, the state-run economic think tank said that negatives will outweigh positives if the administration continues steep hikes for the next two years to achieve its target.

KDI Vice President Choi Kyung-soo, who authored the report, noted that jobs don’t seem to have decreased notably so far, probably thanks to the government’s 3 trillion won job stabilization fund that aims at relieving the extra financial burden on employers.

He estimated how many jobs will disappear following the hike, using data from the United States and Hungary which raised their minimum wages. He concluded that up to 84,000 jobs could disappear this year; and if the raises continue at 15 percent over the next couple of years, job losses could increase to 96,000 in 2019 and 144,000 in 2020.

He also warned that low-paying jobs in the services sector will disappear if the minimum wage continues to be raised. As the bottom 30 percent of workers get the same amount of wages, they will lose the chance of enjoying rising pay as they build up a career. They will lose motivation, while government subsidies will snowball, disturbing the “wage order” in the labor market.

“If the minimum wage is raised by 15 percent next year, Korea will catch up with France which has the highest ratio of minimum wage to median wage among Organization for Economic Cooperation and Development (OECD) member countries. Korea should consider controlling the pace of the hike,” he said. France stopped further minimum wage hikes after the minimum wage reached 60 percent of the median in 2005. The ratio stands at 55 percent in Korea, according to Choi.

The KDI is the first state-run economic think tank to point to possible negative impacts on the job market. The Korea Labor Institute noted in a recent report that the minimum wage hike has not had a meaningful impact on employment, though it added that working hours have notably decreased.

Private think tanks and economists, however, have already been raising concerns. Many of them have warned that the steep hike will decrease employment opportunities; and this may have turned into reality as the number of newly added jobs has fallen to below 200,000 for three consecutive months this year for the first time in a decade.

While the minimum wage hike aims at narrowing the huge income gap, the Korea Economic Research Institute noted that it will only widen the wage gap between conglomerates and small- and medium-sized enterprises to an annual 23.5 million won, due to more generous regular bonuses and allowances for holidays at large companies.

“Wholesale and retail as well as restaurants and lodgings, which have many workers affected by the minimum wage, are likely to decrease hiring, while some of them may have to close down the business,” said Kim Cheon-gu, a senior researcher at the Hyundai Research Institute.

“Though the effect of minimum wage on employment differs according to countries and regions, more researchers support the idea that it removes jobs,” he added.

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