Even as the US market remains flat... Root companies on the brink are shaken to their core

Overlapping Challenges Like 52-Hour Workweek and Raw Material Price Hikes... "Need to Reduce Workforce or Production"
Minimum Wage Increase Rate Over Last 5 Years 7.79%... '3.6 Times' Economic Growth Rate
10% Minimum Wage Increase Could Cut 300,000 Jobs... Concerns Over 'Jobless Growth'

Representatives from 14 small and medium-sized enterprise organizations, including the Korea Federation of SMEs and the Korea Federation of Micro Enterprise, announced a joint position on the 2022 minimum wage on the 5th at the Korea Federation of SMEs building in Yeouido, Yeongdeungpo-gu, Seoul. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporters Kim Heeyoon and Lee Junhyung] "Since the minimum wage increase this year was not significant, it seems likely to rise by at least 10-15% next year. However, because the annual salaries of those not receiving the minimum wage must also be raised to a similar level, labor costs will become a considerable burden going forward. Root manufacturing companies are already struggling to hire production workers, so if labor costs rise like this, they will have to reduce either manpower or production volume." (CEO of Root Manufacturing Company A in Hwaseong, Gyeonggi Province)

"With the 52-hour workweek system already causing production to decrease as the factory shifted from two shifts to three shifts, the price of pig iron has risen 52% in half a year, causing a double burden due to raw material risks. If the minimum wage also rises sharply, it feels like the company is being told to shut down." (CEO of Foundry Company B in Changwon, Gyeongnam Province)

As discussions on next year's minimum wage are set to be decided by mid-month, concerns and worries among small and medium-sized enterprises (SMEs) and small business owners over the level of the minimum wage increase are deepening. The SME sector argues that after a sharp decline in production due to the forced 52-hour workweek and a management crisis caused by rising raw material costs, an increase in the minimum wage would be tantamount to being told to close down.

Minimum Wage Increase Four Times Economic Growth Rate

The minimum wage has increased by an average of 7.9% annually over the past four years. This is 0.55 percentage points higher than the 10-year average annual increase rate of 7.35%. In particular, in 2018 and 2019, it rose sharply by 16.4% and 10.9%, respectively. Business owners unanimously said, "The shock on the ground at that time was very large," adding, "The perceived impact of the increase is even greater due to difficulties caused by COVID-19."

It is pointed out that the minimum wage increase level exceeds the economic growth rate. According to the Korea Federation of SMEs and others, the average annual economic growth rate over the past five years was 2.18%. In contrast, the minimum wage increase rate during the same period was 7.79%, about 3.6 times the economic growth rate. Last year, despite the economic growth rate recording a negative figure due to the COVID-19 impact, the minimum wage still increased by 1.5% compared to the previous year.

6th Highest Minimum Wage Among OECD Countries

Currently, South Korea's minimum wage is high even compared to advanced countries. Among 29 OECD countries last year, Korea's minimum wage level relative to the median wage (the upper limit of an appropriate minimum wage level) was 62.4%, ranking 6th.

This is much higher than the average of the Group of Seven (G7) countries, which was 48.6%. Last year, the minimum wage levels relative to median wages in the G7 were: France 61.3%, United Kingdom 57.1%, Canada 50.0%, Germany 48.1%, Japan 44.3%, and the United States 30.7%.

Despite South Korea's minimum wage exceeding the average of major countries, labor productivity is declining. According to the Korea Employers Federation, while the minimum wage increased by 53.9% over five years since 2016, labor productivity per person increased by only 1.7% during the same period. Especially in the service industry, where many minimum wage workers are employed, labor productivity growth per person was only 0.8% during the same period.

Biden Administration’s Minimum Wage Increase Stalled

In response, labor groups argued that due to worsening economic inequality and polarization caused by COVID-19, the minimum wage should be significantly increased to boost income and consumption. In line with this, at the 6th plenary meeting of the Minimum Wage Commission on the 29th of last month, worker representatives referred to the Biden administration’s 37% increase in the federal contract workers’ minimum wage.

Earlier, the Biden administration announced an executive order in April to raise the minimum wage from $10.95 (12,375 KRW) per hour to $15 (16,953 KRW) per hour, but it was effectively abandoned after being blocked in Congress. Instead, state-level increases are reportedly being pursued.

A manufacturing factory located in Gimpo, Gyeonggi.
Photo by Lee Jun-hyung

Company representatives on the front lines responded that this is "adding insult to injury." The increasing business burdens from not only the minimum wage but also the 52-hour workweek system and the Serious Accident Punishment Act are significant. Root manufacturing companies, which suffer from chronic labor shortages, are expected to face worsening production worker supply. A CEO of a root manufacturing company in Hwaseong, Gyeonggi Province, lamented, "We have 10 employees, and the additional labor costs next year alone will be at least tens of millions of won," adding, "Since the annual salaries of employees not receiving the minimum wage must also be raised to a similar level, the labor cost burden is substantial."

Concerns Over ‘Jobless Growth’

There are also concerns about ‘jobless growth’ due to job losses. According to the Korean Labor Economics Association, approximately 300,000 jobs disappeared each time the minimum wage increased by 10%. This employment shock was especially concentrated in SMEs. In a ‘Survey on Employment Difficulties and Minimum Wage Opinions of SMEs’ conducted by the Korea Federation of SMEs and the Korea Employers Federation in May, 41% of SMEs cited employment reduction as a response to minimum wage increases. In a survey conducted last month targeting job seekers, 73.2% of young job seekers in their 20s reported experiencing difficulties in finding jobs and reduced working hours due to minimum wage increases.

In fact, self-employed businesses with employees have been declining for 30 consecutive months. According to Statistics Korea, in May, the number of self-employed businesses with employees decreased by 67,000 compared to the previous month. In contrast, the number of self-employed without employees increased by 53,000 during the same period.

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