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(Yonhap Feature) Wage pressure is a stress test for Korean economy

2017/12/15 09:00

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By Park Sang-soo

SEOUL, Dec. 15 (Yonhap) -- Kim Sung-chul (an alias) works at a convenience store in southern Seoul nine hours every day, and his wife sometimes helps out.

Kim, also the owner of the small corner store, says he had earned a decent income when he first started his business four years ago but recently there is not much profit due to a rise in costs and stiffer competition.

"Hiring more part-time workers is unthinkable," Kim says. "I once hired two part-timers in the past, but I can't deal with the cost anymore," he grumbles.

Kim is among the owners of over 30,000 neighborhood stores in the country, and like other ordinary self-employed workers, he is ever mindful of high running costs and hiring of help. Kim currently has just one part-time worker.

Recently, he has had another hang-up, as he seriously contemplates running his business without any help, as the country is set to brace for a sharp hike in the minimum wage starting in 2018.

In July, the country's commission for the minimum wage decided to increase the minimum wage by 16.4 percent to 7,530 won (US$7) per hour, the sharpest hike since 2001, giving President Moon Jae-in's economic agenda -- centered on income-led growth -- a boost.

The new government is determined to further raise the minimum wage in Asia's fourth-largest economy to at least 10,000 won by 2020 on the belief that it is time to break the economy away from an export-dependent growth path. Policymakers have emphasized that the average household should earn more and the government must strive to offer quality jobs with good pay.

Many workers' associations welcomed the wage hike drive, claiming it is only fair that workers should be "reasonably" compensated and the 10,000 won is the lowest level that helps many underprivileged workers lead a life with a "minimum of dignity."

   In a nutshell, associations are saying it is time for ordinary workers to get a bigger piece of the large pie that in the past only benefited major firms and a small group of high-income earners.

Many experts, on the other hand, point out that the employee-friendly measure will be definitely painful for many companies, smaller ones in particular, as they will be forced to bear increased labor costs and find ways to lift productivity to offset the impact.

In fact, higher wages herald a rise in inflation and production costs for the South Korean economy, which still heavily relies on outbound shipments for its expansion. That in turn means that private spending may actually be hurt, conflicting with what the government is hoping for. Some have even expressed concern the corporate spending may decline under such circumstances.

Among other things, increased minimum wages paradoxically could lead to a drop in job offerings, the top policy priority sought by the Moon administration.

The country's business circle strongly opposes such a drastic hike, claiming that the move will hurt their profitability and could lead to layoffs.

According to a June survey by the Korea Federation of SMEs, smaller firms should bear an additional 81 trillion won worth of labor costs should the minimum wage be increased to 10,000 won as planned.

The survey also showed that some 42 percent of firms said they will reduce workers, with 29 percent responding that they may have to close down their businesses.

Experts say that the minimum wage hike will hit labor-intensive sectors, such as delivery services, restaurant chains and retailers especially hard.

Some small shop owners, faced with increased competition, are already struggling to work at night and during the day in order to trim outlays. Some convenience stores are mulling moving away from 24-hour operations, reducing hours or cutting store numbers, while implementing a labor-saving system, such as automatic and unmanned cash registers.

A member from the Korean Confederation of Trade Unions, the smaller of two major labor umbrella groups in South Korea, holds up a banner calling for an increase in the minimum wage to 10,000 won (US$8.68) per hour, as he takes part in a rally in the southwestern city of Jeonju on May 1, 2017, to mark the Labor Day holiday that fell on the same day. (Yonhap) A member from the Korean Confederation of Trade Unions, the smaller of two major labor umbrella groups in South Korea, holds up a banner calling for an increase in the minimum wage to 10,000 won (US$8.68) per hour, as he takes part in a rally in the southwestern city of Jeonju on May 1, 2017, to mark the Labor Day holiday that fell on the same day. (Yonhap)

The Organization for Economic Cooperation and Development (OECD) said earlier that raising the minimum wage is expected to boost household income and consumption, but at the same time, cautioned the measure could weaken South Korea's competitiveness if not accompanied by productivity gains.

"The wage hike could have a limited impact on underprivileged households," said Kim Yong-sun, a senior researcher at the state-run think tank, the Korea Development Institute. "There is the possibility of boosting private spending if income distribution improves, but domestic spending is largely affected by a variety of factors."

   The researcher said it may take longer than expected to determine whether income-led growth really works.

The plan also raises the question of what will happen in the future, since the government has only set aside dedicated state funds to cover extra hiring-related costs for next year. Earlier, the government announced a set of measures to set aside 3 trillion won to ease the financial load of small-sized firms, with Finance Minister Kim Dong-yeon saying Seoul will do its utmost to help micro businesses recruit more people in the face of a higher minimum wage.

The government has said it will keep tabs on any change or problem stemming from the wage burden to come up with a subsequent plan.

According to the National Assembly Budget Office (NABO), the increase in minimum wage could sap corporate investment expenditures and private spending by increasing production costs and inflation.

Next year's minimum wage hike could reduce private spending growth by 0.2 percentage point, and the planned rise in the minimum wage could trim domestic consumption by 0.55 percentage point in 2019 and 0.92 percentage point in 2020.

"We need to take appropriate measures to cushion rising labor costs," said Shin Yoo-ran, an economist at the Hyundai Research Institute. "Steps targeting most affected sectors, such as retail, should be crafted quickly."

   sam@yna.co.kr

(END)

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