Wednesday, October 25, 2017

South Korea’s soaring minimum wage

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The Economist explainsSouth Korea’s soaring minimum wage

The government plans to raise the minimum wage 55% above its present level

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SOUTH KOREAN workers don’t often have cause for cheer. They slog for more hours than their counterparts in any other member of the OECD, a club of mostly rich countries, apart from Mexico. Yet the worst-off, at least, will soon be far better rewarded for their toil. Next year the country’s minimum wage will leap by 16.4% to 7,530 won ($6.65) an hour, the most vigorous hike since 2000. The government wants the lowest-paid to earn 10,000 won an hour by 2020—a total increase of 55%. That would mean the country’s minimum wage would be roughly 70% of its median wage, far higher than the level in other major economies. Why is it rising so fast?
Labour activists have long cherished the idea of a 10,000-won wage floor. One young campaigner invited photographers to a mock wedding, vowing that he would not actually marry his girlfriend until wages hit that target. Others demonstrated near a statue of Jeon Tae-il, a young South Korean who set himself alight in 1970 to protest poor working conditions. They argue that it is only fair that workers in the world’s 11th-biggest economy get a larger share of the riches. Their efforts paid off in May’s presidential election, when every major candidate pledged to meet the target, disagreeing only about how quickly to do so. Two said they would reach the goal by the end of their five-year term; the other three—including the eventual victor, Moon Jae-in—said they would do it by 2020.

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The higher minimum wage is the most striking component of Mr Moon’s plan to deliver what he calls “people-oriented growth”. Rather than relying on booming exports to prop up the economy, the left-leaning president hopes to boost domestic consumption by fattening paychecks. It ought to make the economy less dependent on trading partners such as China, whose consumers have recently boycotted South Korean goods in a row over the installation of an American missile-defence system. It will probably reduce inequality, too. According to a study by the International Monetary Fund in 2016, the best-off 10% of South Koreans receive 45% of total income, a significant increase on the number 20 years ago. Mr Moon also argues higher wages are good for their own sake, saying a 10,000-won minimum will give workers “the right to live like humans”. 
Small businesses claim the increase will force them to lay off staff. A survey by the Korea Federation of Micro Enterprise found 92.4% of respondents are considering cutting back on workers. This could pose a serious problem, since most people on the minimum wage work for smaller firms, not conglomerates such as Samsung. Chosun Ilbo, a conservative newspaper, grumbles that a 10,000-won minimum is a “disaster in the making” and claims that next year’s rise will leave workers “earning more money than the small business owners who employ them”. Economists generally find that modest increases in the minimum wage have no or very little effect on employment. (There is not much agreement concerning how big wage increases need to be to generate more substantial employment effects.) Even so, at a certain level employers could begin to cut back. Workers’ celebrations may yet turn sour.

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