If Minimum Wage Increases by 1%, Consumer Price Index Rises by 0.07%

Source: Korea Economic Research Institute

[Asia Economy Reporter Changhwan Lee] A study has found that raising the minimum wage also leads to higher prices. The analysis showed that the increase in the minimum wage had a significant impact on price rises, including dining-out costs.

On the 15th, the Korea Economic Research Institute (hereafter KERI) announced these results through a report titled "The Impact of the Minimum Wage on Prices," commissioned to Professor Song Heonjae of the University of Seoul.

Professor Song analyzed the correlation between the minimum wage and prices over 30 years from 1988, when the minimum wage was introduced, to 2017. The results showed that a 1% increase in the minimum wage leads to a 0.07% rise in the Consumer Price Index.

Professor Song stated, "Applying the analysis results to the 2017 situation, the price increase rate due to the minimum wage hike (7.3%) at that time can be seen as 0.5%. Considering that the consumer price inflation rate in 2017 was 1.9%, about one-quarter (26.3%) of the inflation rate then can be explained by the minimum wage increase."

The report divided workers affected by the minimum wage into three groups: those whose hourly wage in the current year is below the next year's minimum wage, those below next year's minimum wage but above the current year's minimum wage, and those below the current year's minimum wage. It then analyzed the impact on price increases according to the rising proportion of these workers.

The study found that as the proportion of workers affected by the next year's minimum wage increase rises among all workers, the Producer Price Index and major dining-out prices increase.

When the proportion of workers earning below next year's minimum wage increases by 1 percentage point, the Producer Price Index rises by 0.89%, and major dining-out prices increase by 0.17% to 0.81%. When the proportion of workers below next year's minimum wage but above this year's minimum wage increases by 1 percentage point, the Producer Price Index rises by 1.68%, and major dining-out prices increase by 0.30% to 1.23%.

When the proportion of workers earning below the current year's minimum wage increases by 1 percentage point, the Producer Price Index rises by 0.77%, and major dining-out prices increase by 0.11% to 0.98%.

The annual average increase in major dining-out prices and contribution rates due to the minimum wage hike were 6.3 to 21.9 KRW (7.0% to 24.3%) for Naengmyeon, 15.0 to 57.0 KRW (10.4% to 39.6%) for Bibimbap, 8.9 to 36.7 KRW (9.6% to 39.6%) for Jajangmyeon, and 32.7 to 93.0 KRW (13.1% to 37.4%) for Samgyeopsal.

These figures are much larger than the 0.8% to 3.0% impact of the minimum wage increase on the Producer Price Index rise reported in the study. Professor Song explained, "Compared to the Producer Price Index, the impact of the minimum wage on dining-out items was greater. Among dining-out items, Bibimbap, Samgyeopsal, and Jajangmyeon were most affected by the minimum wage, while Samgyetang and Naengmyeon were relatively less affected."

KERI argued that since a rapid increase in the minimum wage can cause side effects such as inflation and job losses, the minimum wage should be raised gradually while improving compliance rates.

Furthermore, to mitigate the side effects of the minimum wage, it is crucial to apply the minimum wage differentially by industry to expand reemployment opportunities for low-wage workers dismissed due to the minimum wage and to abolish the weekly holiday allowance to increase industry acceptance.

This content was produced with the assistance of AI translation services.