Sunday, September 6, 2015

Pros and cons of Korea’s minimum wage law

First published in The Korea Herald.
The minimum wage in Korea has been set at 6,030 won ($5.30) for next year after weeks of debate, although the labor unions boycotted the government-led talks on the final day.
Labor union representatives walked out of a meeting of the Minimum Wage Council ― a trilateral committee of employers, employees and labor market experts to set the minimum wage through discussion ― on Wednesday. They were upset with the suggestion that there should be a cap on the increase in the minimum wage. However, the council went ahead and finalized an increase on the following day.
The Minimum Wage Act stipulates that at least one-third of all representatives on the council can decide on the rate if any party refuses to attend the negotiations more than once.
The new rate will be notified by the government on Aug. 5 after taking into consideration all objections to the finalized rate.
In Korea, the minimum wage is the lowest allowable gross wage per hour, regardless of employment status or nationality. There are some exceptions to this rule: Businesses that only employ family members or relatives living in the same residence; domestic service users; and seamen who are governed by the seamen act.
The unions initially demanded a 79 percent rise from the current minimum hourly wage of 5,580 won to 10,000 won, while employers ― represented by the Korea Employers Federation ― were pushing for a freeze. The unions lowered their demand to 8,100 won, and refused to budge from this stance, despite opposition from others on the council.
The minimum wage in Korea was raised by 7.1 percent this year from 5,210 won in 2014 ― it was 600 won in 1989 when the government formed the wage council. The latest hike, therefore, marks an 8.1 percent hike.
For comparison purposes, the minimum wage in the United States is $7.50, Japan $6.40 and the U.K. $10.
The KEF argues that the minimum wage has risen too rapidly and needs to be stabilized, voicing concerns over possible job losses and soaring production costs. On the other hand, the unions maintain that a hike would curb the nation’s income inequality and boost consumer spending.
So, who among them is right?
At face value, the logic of the unions seems right, as minimum wages protect workers from exploitation by employers and reduce poverty. Legal minimum wages are a government’s most direct policy lever for influencing wage levels, especially for workers with a weak bargaining position.
They also serve as a basic labor standard, alongside working-hours regulations and related provisions to ensure basic job-quality standards. And supporting low-wage earners is widely seen as important for promoting inclusive growth.
However, many economists do not think so. They believe that minimum wage laws cause unnecessary hardship for the very people they are supposed to help.

The argument is that while the law can set wages, it cannot guarantee jobs. The experience in most countries with a minimum wage law is that low-skilled workers are often priced out of the labor market. This is because employers typically are not willing to pay a worker more than the value of the additional product that he or she produces.
In fact, there are numerous studies using aggregate time-series data from a variety of countries that have found that minimum wage laws reduce employment.
If employers consider the wage floor too high, Workers whose productivity is valued less than the mandated wage will find jobs only in occupations not covered by the law or with employers willing to break it.
In Korea, we already have seen many highly publicized cases in recent months where nonregular and part-time workers were paid below the mandated wages until a public outcry made them reconsider.
In addition to making jobs hard to find, minimum wage laws may also harm workers by changing how they are compensated by cutting fringe benefits which are an important part of the total compensation package for many low-wage workers.
Studies have also found that the minimum wage increases generally redistribute income among low-income families rather than moving it from those with high incomes to those with low incomes.
As the Organization for Economic Cooperation and Development has noted in a recent policy brief, minimum wages are common but controversial. Currently, 26 out of 34 OECD countries have statutory minimum wages.
“Views differ about whether such support is best provided through minimum wages, or closely related policies, such as government transfers,” it noted.
In recent years, policymakers in many countries have adjusted minimum wages in the context of high and increasingly persistent unemployment, stagnant or even declining average wages and, frequently, falling incomes especially among the poorest families.
“While minimum wages are intended to support low-wage workers, the cost of employing them can be at the heart of concerns that legal minimum might reduce employment, or damage the international competitiveness of domestic firms relying on low-skilled labor,” the brief noted
Further, tax burdens too have to be taken into account.
Even at the very bottom of the wage ladder, taxes and social levies can strongly reduce take-home pay. At the same time, taxes and other mandatory nonwage labor costs also push up the cost of employing minimum-wage workers.
By having an impact on labor costs and workers’ take-home pay, the overall tax burden has implications for how well minimum wages perform at supporting low-wage workers, while avoiding significant job losses.
Given the overwhelming evidence in numerous economic studies, the Korean trade unions should have softened their stringent position and worked out an increase to their satisfaction. By boycotting the talks, they did not do justice to young people and low-skilled workers.
While it is impractical to do away with the minimum wage, given the social realities in Korea, the government should also step in and ease the concerns of businesses.
Some countries have adopted specific measures to reduce the gap between the amounts an employer pays and the take-home pay that the worker receives. To lower employers’ costs, or to reduce risks of employment losses following minimum hikes, some have introduced tax rebates for firms employing minimum wage workers ― something the Korean government should consider.
More importantly, there needs to be efficient coordination between minimum wage policies and other redistribution measures by the government, notably taxes and transfers ― that are lacking in Korea.
These small steps could go a long way in protecting the interests of businesses as well as ordinary workers, given that the economy is struggling to recover and unemployment continues to be a major concern.