[Seungseop Song's Financial Light] Is It Always Good When It Goes Up? ... The Paradox of Minimum Wage

Next Year's Minimum Wage at 9,860 Won per Hour
Debates Surrounding the Effects of Minimum Wage
"Increase in Unemployment" vs "Correction of Market Failure"

The minimum wage for next year has been set at 9,860 won per hour. This is an increase of 240 won (2.5%) from this year's 9,620 won. Considering the weekly holiday allowance, the monthly salary for 209 hours of work is 2,060,740 won. Whether the minimum wage would surpass 10,000 won was a matter of unprecedented interest, but the Minimum Wage Commission adjusted the rate of increase citing economic difficulties. How does the minimum wage system, which causes conflicts and controversies every year, affect the economy?

The minimum wage system is a form of market regulation where the state intervenes in the wage determination process between employers and workers. It sets the minimum wage level and mandates that wages must be paid at or above this level. The purpose is to guarantee a minimum wage to ensure workers' livelihood stability, improve the quality of labor, reduce wage disparities, and promote fair competition. The first minimum wage system started in New Zealand in 1894, and Korea introduced it in January 1988.

Resolution rally urging the freeze of the minimum wage held on the 21st of last month at Seoul National Assembly Station
[Image source=Yonhap News]

Has the minimum wage system actually benefited workers? Economists known as the "neoclassical school" argued that the minimum wage system intended for workers actually harms them. According to them, wages are naturally formed by companies (demand) and workers (supply). This wage is called the "equilibrium price (equilibrium wage)." The minimum wage is naturally set higher than the equilibrium wage. When wages are artificially set, the demand for labor decreases accordingly. This means employment decreases and unemployment rises. Workers who receive the minimum wage benefit, but those who do not may lose their jobs and face worse conditions.

However, economists classified as "post-Keynesians" presented the opposite view. They refuted the idea that the market where companies and workers freely decide wages is a reality. Instead, they argued that most labor markets are dominated by "monopoly (oligopoly) firms." They believed that monopoly firms force wages as low as possible. For example, if a company monopolizes a mine and offers low wages, workers who want to work in the mine have no choice but to accept the offer. Therefore, they thought that government intervention to set a minimum wage is necessary to guarantee workers a minimum standard of living and to correct market failures.

On the 24th of last month, the 'National Workers' Rally for the Resignation of the Yoon Seok-yeol Administration' was held near Hyehwa Station in Seoul. [Image source=Yonhap News]

The impact of the minimum wage on prices is also viewed differently. The neoclassical school argues that raising the minimum wage increases production costs for companies. Naturally, companies raise the prices of their products, which leads to an increase in consumer prices. They expressed concern that continuously raising the minimum wage during inflationary periods would cause excessive inflation. Post-Keynesian economists acknowledged price increases but focused on how this leads to increased consumption by workers. When wages and prices rise moderately, purchasing power increases, leading to higher production output by companies.

Economic policies vary greatly depending on how politicians treat the minimum wage. In 1979, Margaret Thatcher of the UK Conservative Party abolished the minimum wage system after becoming prime minister. The rationale was that the minimum wage system weakened the UK's international competitiveness and increased unemployment. This was the first such move in 70 years since the minimum wage system was introduced in 1909. Along with this, she implemented strong labor market flexibility policies, which were credited with resolving the UK's welfare state problems that no one had solved before. However, critics pointed out that the poverty rate in the UK doubled compared to neighboring countries after the abolition of the minimum wage.

In Korea, former President Moon Jae-in attempted a strong minimum wage increase policy early in his administration under the value of "income-led growth." His presidential campaign promised to reach 10,000 won within his term, and at the 2018 National Fiscal Strategy Meeting, he stated that "90% of the effects of raising the minimum wage are positive." As a result, the first year saw the highest increase rate ever at 16.4%, followed by a 10.9% increase in the second year. Due to this policy, the minimum wage rose rapidly from 6,470 won in 2017 to 8,350 won in 2019. However, it faced strong backlash from small business owners and SMEs who felt the increased labor costs burdened them.

The 8th plenary meeting held on the 27th of last month at the Minimum Wage Commission meeting room in the Government Sejong Complex. Ryu Ki-jung, Executive Director of the Korea Employers Federation, representing the employers (left), and Ryu Ki-seop, Secretary General of the Korean Confederation of Trade Unions, representing the workers.
[Photo by Yonhap News]

Regarding the 2024 minimum wage decision, the positions of the business and labor sectors were completely opposed. The Federation of Korean Industries criticized the decision to raise the minimum wage, saying, "Small-scale micro-enterprises and self-employed individuals will face increased management difficulties due to the additional labor cost burden from the minimum wage increase." The Korea Federation of Small and Medium Business also warned that "this will deepen the solo management of small business owners and ultimately cause a significant loss of workers' jobs."

On the other hand, the Korean Confederation of Trade Unions (KCTU) issued a statement saying, "The Minimum Wage Commission, whose life depends on fairness and neutrality, has lost its raison d'?tre, and we are angry and condemn the decision to set the lowest minimum wage level in history." Ryu Gi-seop, Secretary-General of the Federation of Korean Trade Unions (FKTU), expressed concern that "the minimum wage for next year was set below the growth rate and inflation rate, which is tantamount to a cut in real wages."

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