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Financial Economics


Changes in the Relative Importance of the Minimum Wage, Income Support and Employment Support Programs

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  • Author YUN. Heesuk
  • Date 2016/09/08
  • Series No. KDI FOCUS No. 71, eng.
  • Language English
SUMMARY □ Because there is a significant mismatch between low wage and low income, policies tackling the poverty issue must focus on low income households rather than low-wage workers and emphasize the EITC or labor market policies that support low income households rather than the role of the minimum wage system that supports low-wage workers.

- Household income is determined by the number of employed members, wage, market income other than earned income, and government transfers. The presence of an employed member is critical to the conditions of falling into poverty.

- Only 21.7% of low-wage workers are poor.

- 30.5% of the below-minimum wage workers are poor, and 69% of the below-minimum non-poor workers were found to live above the poverty line due to other household members’ earned income.

- In order for a four-member household with a single minimum-wage worker not to fall into poverty, the wage needs to be raised by 53.6% while the addition of an extra income earner working three hours a day could help them stave off poverty if the EITC coverage expands slightly.

- Unemployed members in the low income class are mostly seniors and the less educated. The higher income the household has, the lower the age of its unemployed member and higher its education level is.

- Among the able-bodied poor, only 9.4% participated in employment support programs, while 68.2% benefited from income support.

- Concrete targets are important when designing a combination for the minimum wage program and EITC for income security, for example ‘to secure the income of households with 1.5 income earners with two children to help them stay above the poverty line.’

- Anti-poverty policy for households with the ability to work should focus on enhancing their economic activities.
KDI VOD Report
Household living standards cannot be assessed through wage level without an examination into the number of employees per household and spending patterns.

The minimum wage has long been a hot debate topic for economists. Although the main policy aim is to protect low-wage workers by setting a minimum level of wage, the policy''s impact on employment has been a constant source of concern and new interest has been mounting over the actual beneficiaries of the support programs.

This is because the traditional structure of "one household one earner" is changing, and wage and household income no longer conform as more women enter the labor market and higher education, and more part-time jobs become available.

Currently, 70% of minimum wage earners in Korea belong to the middle- and high-income brackets. And the majority have more than one income earner in the household.

In short, the group that suffer the most is not the low-wage earner but those from households with no or only one income earner. At present, one in five households in the bottom 10% have an income earner while only 2.8% of households with an income earner belong to this income bracket. This implies that the minimum wage system as an anti-poverty tool is significantly inefficient.

Then, what would be an efficient policy tool?

Take for example, a four-member household; a couple with two children. if the household has one earner on minimum wage, an additional 675,000 won a month would be needed for the household to escape poverty. This would mean a 53.6% increase in the minimum wage.

However, such a leap may have adverse effects on the economy and prove even more ineffective as the benefits would be spread across a larger group of low-wage earners, including those who do not live in poverty.

Therefore, in order to enhance efficiency, an accurate assessment of household income must be conducted and support must be provided accordingly. But, this would entail an additional fiscal burden of having to raise 8.1 million won a year through taxes.

On the other hand, if there is another income earner who works at least three hours a day, the required additional income to escape poverty would fall to 2.1 million won per year. This could be made possible by a slight expansion of the current EITC system.

Ultimately, the focus of support must be placed on the level of household income and not on individual wages. And, in order to ensure sustainability, it is important to establish labor policies that are aimed at enhancing employment capabilities to increase the number of earners per household.

But, in reality, existing anti-poverty policies are more focused on income support. In fact, 68% of the poor population have received cash support while only 9.4% have participated in employment support programs.

Low wage does not equate low income. If households living in the severest conditions are those without an employed member, the focus of anti-poverty policies must shift to prioritize employment support, which should be supplemented with income support.

Here, income support must be based on household income, much like the EITC system, rather than wage control, and motivation to find employment must not be stunted. Specifically, although the minimum wage system is a recognized countermeasure to poverty, this perception must evolve to reflect the changes in the labor market and household structures.
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