Korea Minimum Wage Hike Keeps Moon on Target for Pay Pledge (1)

(Bloomberg) -- South Korea’s minimum wage is set to increase next year by 16 percent to 7,530 won ($6.60) per hour, the biggest jump since 2001, giving President Moon Jae-in an early victory in his push to boost incomes.

Moon is seeking to nudge the economy away from its export dependence to a structure that relies more on household spending, which makes higher pay and quality jobs more important. He’s pledged to be a "jobs president" and to raise the minimum wage to at least 10,000 won by 2020.

The decision over the weekend by the Minimum Wage Commission ends more than a month of tug-of-war between labor and business representatives. Labor advocates had initially requested a 55 percent hike while business representatives suggested just 2.4 percent.

About 12 percent of workers were receiving the minimum wage or lower in 2015, according to an estimate by Korea Labor Institute. The finance ministry said in a statement on Sunday that the government will give financial aid to some small business owners to help them pay for part of pay hike.

To meet Moon’s 10,000 won goal, the minimum wage will need to keep increasing by about 15 percent every year, compared with average gains of 7.4 percent over the past five years. Businesses with five or more employees increased pay to their overall work forces by an average 3.8 percent in 2016 from previous year, according to the Korea Labor Institute.

Social Welfare

“For Korea, where the social welfare system is weak, workers are more dependent on income and a higher minimum wage is important from a human rights perspective,” said Choi Pae-kun, an economics professor at Konkuk University in Seoul who supports the 10,000 won target.

South Korea’s minimum wage started in 1988 at the equivalent of half a dollar per hour. This low start made the pace of annual increase higher than those of overall wages, but the level still lags peers in the Organization for Economic Co-operation and Development.

Comparative figures for 2016 show Korea’s minimum wage at about $5.80 per hour, similar to Israel and Poland, but lower than Japan at around $7.40 and is about half of Germany’s, according to data by OECD.

Kwon Young-sun, an economist for Nomura International, said in a report on Monday that small businesses may pass on part of the burden by increasing retail prices, which adds upside potential to Nomura’s 2 percent inflation forecast next year. Kwon said higher inflation could lead to the Bank of Korea raising its key rate sooner than Nomura’s forecast for a hike in the second half of 2018.

Korea’s businesses have opposed big hikes, saying they hurt profitability and would lead to lay offs.

According to a June survey by the Korea Federation of SMEs, about 90 percent of companies want raises kept below 5 percent. If it is increased to 10,000 won over the next three years, 55 percent said it might lead to their bankruptcy.

The Korean Confederation of Trade Unions said in a July statement that 10,000 won is an amount that a family of two or three needs to lead a life with a “minimum of dignity.”

(Updates with economist report in ninth paragraph.)

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net.

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Peter Pae

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