Wage hikes give Korean small businesses a headache
The Moon Jae-in regime has decided to boost the minimum wage for a second time by a large amount, after also slashing working hours
While South Korea’s economy braces for collateral damage from the intensifying China-US trade war, job growth remains slow and the government is facing criticism from employers for raising the minimum wage for two consecutive years.
Last week, faced with a multi-directional storm of risk, the Bank of Korea pressed the “prudent” button, freezing the benchmark interest rate. It also adjusted its growth forecast for 2018 down by 0.1 percentage point to 2.9%, while downgrading its estimate for 2019 by 0.1 percentage point to 2.8%.
With youth unemployment a growing social problem, the Moon Jae-in administration has vowed to create jobs. However, it is not delivering. In January-June this year just 142,000 new positions appeared – the weakest level of job growth since the global financial crisis of 2008-9, according to the Bank of Korea.
Policies by the labor-friendly government could be contributing to the low rate of job growth.
Last week, the Minimum Wage Council decided to raise the minimum wage for next year to 8,350 Korean won (US$7.40) per hour – a jump of 10.9% from this year. It will mark the first time Korea’s minimum wage has exceeded 8,000 won. And it is not the first rise of late. This year, Seoul has increased the minimum wage to 7,530 won, up by a whopping 16.4% from 6,470 won last year.
The government’s goal is to lift hourly pay to at least 10,000 won by 2020, in order to lead a domestic economic expansion and close the gap between well-paid and poorly-paid workers. But the policies have been dragged over the coals by domestic media for pressuring small firms.
Following the news of next year’s wage hike, the Korea Federation of Micro Enterprises said in a statement: “Small-business owners are at a crossroads where they cannot help but choose either business shutdowns or staff cuts.”
Small businesses provide a lifeline for many elderly Koreans who lack pensions, so they invest their retirement payments in a family business.
A further issue for employers is the slashing of Korea’s (notoriously long) working hours from 68 to 52 per week. The law came into effect on July 1, so is too early to assess. But this move, too, has faced criticism from businesses.