The recent announcement that the government plans to raise the minimum wage by 11 percent to 8,350 won ($7.40) next year has sent shock waves through the business community. Small business rallied to protest the move, saying that it would put them out of business. The government plans to raise the minimum wage to 10,000 won an hour by 2020 in the hopes of promoting economic equality and stimulating consumption.
Korea is not the only country to face a debate over the minimum wage. In the 2016 US presidential election campaign, Bernie Sanders argued for more than doubling the minimum wage to $15 an hour from the current level of $7.25. In recent years, states have increased the minimum wage, and San Francisco became the first city this year to mandate a $15 minimum wage. New York, Washington, and many other cities in California have $12 minimum wages.
The debate over the minimum wage is particularly important in Korea because small businesses with up to 99 workers employ about 50 percent of workers. The smallest businesses with one to 19 workers employ about 20 percent of workers.
Among Organization for Economic Co-operation and Development countries, Italy, Greece and Japan also have more than 50 percent of their workers employed in small businesses with up to 99 workers. Business organizations argue that a wave of small business failures will result in an increase in unemployment that will dampen consumption, which will lead to more business failures and unemployment. A weak economy this year has already forced many small businesses to close their doors.
The government’s plan to increase the minimum wage reflects a broader push to improve social welfare in Korea. President Moon Jae-in and his core supporters have long looked to the European social model that uses government intervention in the economy to promote economic equality and social stability. This contrasts with the neoliberal model of market efficiency and limited government that has dominated US economic policy for almost 40 years. This model became dominant in Korea after the 1997 economic crisis but began to fall out of favor as economic growth slowed in the 2010s.
But what should be done? The government’s goal of improving economic equality and moving Korea toward a European social model is laudable. Korea already has a health care system that provides affordable and accessible health care. Improvements in the national pension system and other social welfare initiatives, such as free day care and free higher education would move Korea closer to the European model.
The problem, of course, is that all these goodies cost money and that money has to come from somewhere. The government has little choice but to raise taxes to pay for better pensions, free day care and free higher education. Raising the minimum wage is an indirect tax because it increases the cost of goods and services. Workers making the minimum wage will see their gains eroded by increased costs.
Korea has developed as a low-tax economy. The tax burden on workers is a little over 20 percent and ranks fifth lowest among the OECD countries. By contrast, workers in most European nations are taxed over 40 percent; in France and Germany, taxes approach 50 percent of income. To move toward a European social model, politicians need to be honest about the need to increase taxes. At present, few Korean workers earning an average income would be willing to see their taxes double.
For all the interest in the European social model, one of the most important aspects has been largely ignored: social housing. During the boom years, Korea faced a chronic housing shortage and the government worked with construction companies to increase the supply and the quality of housing. In more recent years, the government has tried to fight real estate speculation through taxes and market controls.
The government has done little to reduce the cost of housing, which is becoming a greater burden on Korean families. Instead of trying to control real estate speculation, the government should focus on improving affordability and developing stronger protection for tenants. For ideas, Korea should look toward Japan where supply keeps a lid on prices and tenants are protected from unreasonable rent increases. Likewise, European nations focus on supply through building public housing and have strong tenant protection.
In the end, raising the minimum wage far beyond the rate of inflation does little to move Korea to the European social model that the current government so admires. To do so, the government needs to show how that model creates greater security for individuals and society. Showing how government intervention in the housing market can improve affordability and protect tenants is a great way to start.
Robert J. Fouser
Robert J. Fouser, a former associate professor of Korean language education at Seoul National University, writes on Korea from Pawtucket, Rhode Island. He can be reached at robertjfouser@gmail.com. -- Ed.
