Raising minimum wage can reduce employment, says government think tank

Posted on : 2018-06-05 17:11 KST Modified on : 2019-10-19 20:29 KST
KDI study suggests sharp wage increases can cut as many as 84,000 jobs
Effects of wage increases on employment
Effects of wage increases on employment

According to a recent report by a South Korean government think tank, raising the minimum wage by 15 percent in both 2019 and 2020 could reduce employment by 96,000 and 144,000 jobs, respectively. Raising the minimum wage too sharply could disrupt the wage system, the think tank said, arguing that the government should look into ways to slow the wage increase. This is the first time that a government think tank has analyzed the effect that raising the minimum wage would have on employment on a yearly basis.

On June 4, Choi Gyeong-su, a senior analyst with the Korea Development Institute (KDI), published a report titled “How Raising the Minimum Wage Affects Employment.” This report estimated the jobs that would be lost as a result of raising the minimum wage in South Korea, based on research findings in the US and Hungary that analyzed major raises of the minimum wage. According to the analysis in this report, this year’s increase of the minimum wage caused employment to decline by as few as 36,000 and as many as 84,000 jobs.

If the minimum wage is increased by 15.3 percent next year and the year after as well, the report says, it would cause a further decline of 96,000 and 144,000 jobs, respectively. This essentially analyzes what would happen if South Korean President Moon Jae-in implemented his campaign pledge of raising the minimum wage to 10,000 won (US$9.36) by 2020. As a result, the share of wage workers who receive less than 120 percent of the minimum wage would rise from 17 percent this year to 19 percent next year and then jump to 28 percent in 2020.

But despite projections that as many as 84,000 jobs could be lost this year, Choi noted, “employment trends between January and April of this year suggest that employment will not be reduced that much.” Choi tentatively added that “this might be because of the job stability fund introduced by the government.” The increase in wage workers who receive the minimum wage decreased from 320,000 in January to 140,000 in April, but sluggish job growth cannot be attributed to the effect of the minimum wage, he said.

Choi provided the following grounds for his argument: “The number of people hired in January increased by an atypical amount because of the base effect, and the population grew at a slower rate than last year. Furthermore, there has been restructuring in the manufacturing industry, including the automobile and shipbuilding sectors, and there has not been a noticeable decrease in jobs for people who tend to receive the minimum wage, including the 15–24 age group, women in their fifties and the elderly.”

What is even more concerning than a reduction in employment, the report said, is that continuing to raise the minimum wage could result in the disruption of the wage system in the labor market. Allowing the ratio of the minimum wage to the median wage to increase does more harm than good, the report argues. “That is why France stopped increasing the minimum wage after it reached 60 percent of the median wage in 2005,” Choi explained.

Around this time, France saw a decline in the number of low-wage jobs in the service industry, while it became harder for low-skilled workers to find work. As wages stopped increasing over the course of their career, workers lost their drive to improve their status. The government was forced to massively boost subsidies, while labor unions’ influence was curtailed.

Adjusting minimum wage according to median wage

“We need to consider ways to adjust the speed of raising the minimum wage to the level of France, in which the relative level of the minimum wage is effectively the highest in the OECD,” Choi said, referring to the Organization for Economic Cooperation and Development. While South Korea’s minimum wage stands at 55 percent of the median wage this year, the report presumes that that will increase to 61 percent next year and then to 68 percent in 2020.

After Minister of Strategy and Finance and Deputy Prime Minister Kim Dong-yeon suggested that the government slow the rate of increase of the minimum wage, a government think tank has now basically made the same argument.

Questions regarding study’s credibility

Experts have expressed different views about whether the KDI report represents a credible way of analyzing the minimum wage’s effect on employment. One response is that the analysis is not suitable given its use of overseas research findings. According to a study from Hungary cited in the report, the effective level of the minimum wage was raised by 60 percent between 2000 and 2004, which caused employment of wage workers to decline by 2 percent. In effect, this means a decrease of 0.35 percent in employment for each 10 percent increase in the minimum wage.

“The decrease in employment was estimated on the assumption that Korea’s minimum wage and employment would behave as they do in the US and Hungary, but there are no grounds for assuming so. There are hundreds of foreign papers about the minimum wage, and I’m not sure whether it’s appropriate to take two of them and apply those figures exactly to wage workers in Korea,” said a spokesperson for the Korea Labor Institute (KLI).

That institute recently published a report stating that the recent increase in the minimum wage had not caused employment to decline between January and March.

Kim Yu-seon, director of the Korea Labour and Society Institute (KLSI), raised the possibility that the report had overestimated the decrease in employment: “Previous research is not sufficient to accurately determine what effect there will be given changes in the minimum wage’s range of application.”

“Since the [Korean] minimum wage has never been increased by a substantial amount, there are limitations to using past data. That’s presumably why overseas examples were referred to in the report,” said a representative for another government think tank, who considers the KDI report as having taken a pragmatic approach.

“Foreign research was cited because South Korean data cannot be used to conduct a precise analysis,” Choi explained.

Another variable that the KDI report did not take into account is the fact that the minimum wage will be applied to a wider range of industries next year.

“We are regarding this as the research findings of one researcher at a government think tank,” said a senior official at the Blue House, emphasizing that this is just the analysis of an individual analyst. The Blue House appears concerned about the potential ramifications of a government think tank basically calling for the minimum wage increase to be slowed.

By Jeong Eun-ju and Bang Jun-ho, staff reporters

Please direct comments or questions to [english@hani.co.kr]

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