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KDI FOCUS
Employment Effect of Minimum Wage Increase

June 04, 2018

  • Author Kyungsoo Choi
  • Series No. KDI FOCUS No. 90, eng.
  • Language English
PDF
KDI FOCUS
Employment Effect of Minimum Wage Increase

June 04, 2018

PDF
    Ⅰ. Effects of Minimum Wage Increases up to Now

    Ⅱ. Impact of the Minimum Wage Increase on Employment

    Ⅲ. Employment Decline Effects in 2018

    Ⅳ. Impact from Continued Increases in the Minimum Wage

    Ⅴ. Summary and Policy Implications
KDI Report VOD
The objective of a minimum wage system is to guarantee a stable income level for workers.

The Korean government has made consistent efforts to raise the minimum wage.
In 2018, it has increased the wage by a large margin with a goal to achieve the 10 thousand won mark by 2020.

So what would be the consequences of such a sharp increase?

A higher minimum wage pushes up not only wages at the bottom but also those near the bottom, narrowing the wage gap and improving income distribution.

During the last five years, Korea has seen a gradual increase in the minimum wage and a narrowing of income disparity as wages at the bottom are pushed up with the minimum wage increase.

On the other hand, higher wages mean higher costs for business owners.

In response to minimum wage increases, businesses may raise product prices or reduce working hours or cut benefits.
If wages continue to increase and the cost rise becomes unbearable, businesses will reduce their employees.

Then, will an increase in the minimum wage actually lead to job losses in the future?

KDI examined the anticipated job losses inferring from economic theories and experiences from overseas.

In the U.S, a 10% rise in the minimum wage generally resulted in a modest 0.15% job decrease.

But the minimum wage is higher in Korea than in the U.S.
as a ratio to the median wage.
Consequently, the negative effect is likely to be larger in Korea.

Hungary has raised its minimum wage by a surprising 60% during the four years since 2000.
The result was a large decrease of jobs, as much as 2% of total number of jobs.

In France, the minimum wage is set as high as 61% of the median wage.
In this case, wages are leveled out, and workers experience no wage rise in their first 10 years of career, weakening their work incentives.

Korea’s minimum wage increased by 16.4% in 2018 from the previous year.

If we apply the estimates from the U.S., the rise would involve a job loss of 36 thousand workers.
If Hungary’s case is applied, the job loss would be 84 thousand workers.

These figures correspond to 0.2 and 0.4% of total employment,
and are not considered as big numbers.

In fact, up to April, the employment statistics have not shown
any significant decline of jobs among the youth under age 25
or women in the fifties, who are the major minimum wage worker groups.

Further, there is no clear evidence that wholesale and retail jobs
and restaurants and lodging jobs have reduced due to the minimum wage increase.

This could be owing to the government’s subsidies which has been provided to buffer the shocks.

Then, what would happen if the minimum wage is to increase by 15% in 2019 and again in 2020?

It is expected that workers affected by the minimum wage hike will increase from 8.7% in 2017 to 28% in 2020.

Also, the minimum wage will reach 68% of the median wage by 2020.

Indeed, if the impact from the minimum wage increase expands,
businesses may have to cut down their labor significantly.

An estimation of the job loss using Hungary’s example reveals that
job loss figures would mark 84,000 in 2018, 96,000 in 2019, and 144,000 in 2020.

These figures do not take the government’s wage subsidies
and possible institutional changes into consideration,
and the actual size of job loss may not be as pronounced as anticipated.

[Interview with the author]
Despite the existing concerns over a sharp rise in the minimum wage, up to now the minimum wage increase seems to be settling down with little side effects. The government seems to be succeeding in attaining its original goal of raising the income of low-wage workers.
However, the impact of minimum wage increase depends upon how quickly it is increased and how large the size of the affected minimum wage workers is.
In order to attain the 10,000 won mark by 2020, the minimum wage must be increased by 15% next year, which is 60% of the median wage. And a further rise would mean an even higher ratio. Then, this may result in a larger loss than the gain. As such, a slowdown in the speed of the minimum wag rise would be preferable in reaching a higher minimum wage level ultimately.
□ The objective of a minimum wage increase is to improve the quality of low-wage jobs and to narrow wage gaps. The sharp minimum wage increase in 2018 has so far produced no significant declines in employment. However, if drastic increases continue in the next two years, the level of the minimum wage as a ratio to the median wage will exceed those in other advanced economies and employment growth will likely exhibit a large drop distorting the wage structure. Thus, an adjustment in the pace of minimum wage increases is required.

- The purpose of theminimum wage increase isto guarantee the wagelevel of the low-paid, thenumber of which isgrowing as personalservice jobs increase.

- The share of below-minimum wage workers was 7.6% in the MOEL's 2016 Wage Survey and 13.4% in Statistics Korea's 2017 Economically Active Population Survey.

- Other than cutting employment, there are several options available to employers to respond to the minimum wage increase such as raising prices, shortening working hours, reducing employee benefits/allowances and strengthening labor intensity.

- Unlike individual companies facing their wage increase, a rise in the legislated minimum wage applies to the overall economy, meaning that companies can adjust prices to spread out the impact.

- The majority of job loss resulting from an increase in the minimum wage is observed in the manufacturing industry while the impact has been weak in services sectors.

- The higher the minimum-to-median wage ratio, the smaller the impact from the minimum wage increase. In 2016, the ratio marked 35% for the US and 50% for Korea.

- Hungary raised the minimum wage by 60% in 2000-2004 in real terms, commensurate with Korea’s planned increase. The employment of wage workers retreated by approx. 2%.

- If Hungary’s estimate is applied, Korea is estimated to see a decrease of 84,000 in employment after the minimum wage increase in 2018. If the US’ is applied, the decrease is estimated to be 36,000. As such, Korea’s decline in employment is expected at between 36,000 and 84,000.

- Growth in employment in April 2018 was smaller by 180,000 than January, but the decrease was more influenced by January’s high growth, slowing population growth and manufacturing restructuring than by the minimum wage increase.

- If the sharp increase in the minimum wage is repeated in the next two years, the share of minimum wage workers will rise and impact on employment will grow.

- The employment effect of the minimum wage increase is estimated to be a decrease of 96,000 in 2019 and 144,000 in 2020, when the effects of the job stabilization fund is not considered.

- France experienced other side effects with a very high minimum wage such as disruption of the wage order, etc. Accordingly, France ceased additional minimum wage hikes after reaching 60% of the median.

- Germany adjusts its minimum wage level every two years, as evaluation of the impact of the hike takes two years.

- Measures must be sought to minimize the unexpected negative impact while efforts are made to maximize the positive.
 
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