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Employment Effect of Minimum Wage Increase

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● Author
– Kyungsoo Choi, Fellow

● Go to related report
– Issue Analysis, Employment Effect of Minimum
Wage Increase.(http://bit.ly/2Hig5x0)

● KDI Website
– http://www.kdi.re.kr/kdi_eng/main/

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.

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