[Insight & Opinion] Now We Can Discuss the Truths and Myths of Income-Led Growth

[Asia Economy] Discussions on income-led growth, one of the biggest policy issues of the previous administration, do not seem to have cooled down yet. No one would oppose the ideal of income-led growth, which aims to boost domestic consumption through the real income increase of workers and households and to pursue economic growth momentum through this virtuous cycle.

Some may still say that income-led growth is a valid policy, but due to timing issues?such as the global conditions following the financial crisis, the coronavirus pandemic, and inflation?it has yet to show its true potential. However, this in itself is a mistake. Economic growth policies should not be fragile policies applied only in controlled, laboratory-like assumed conditions. A robust economic growth policy that can navigate uncertain futures and various economic changes is the true future policy.

The recent sharp rise in the won-dollar exchange rate further reveals the vulnerabilities of income-led growth. South Korea is not a country with a key currency. When the exchange rate rises, prices increase steeply, and as a non-key currency country, there are limits to monetary policy, making it difficult to guarantee the real disposable income level of households. Inflation leads to a contraction in consumer sentiment, causing a vicious cycle rather than the virtuous cycle of income-led growth. Some may stubbornly insist that income-led growth will return if inflation is not steep or if the exchange rate stabilizes and conditions improve.

However, the reality is that the economy is like a living animal that can move unpredictably, and it is not something that policy makers can freeze in their desired state.

Guaranteeing and raising the minimum wage is an important policy to sustain workers' lives in itself, but it is an indispensable part of income-led growth. In the United States, the Biden administration’s proposal to raise the federal minimum wage to $15 per hour has been a recent topic of debate, but many companies and businesses have already voluntarily raised wages to a considerable level, and with rapid inflation, the minimum wage increase has lost its effectiveness and is no longer a subject of discussion.

In contrast, we need to review the effects of the sharp minimum wage increases in 2018?2019, which were linked to income-led growth. A steady increase in the minimum wage that guarantees the stability of real income is desirable. However, the timing and speed are important issues. According to the author’s recent research, the minimum wage increase during that period led to a decrease in employment, an increase in wages and labor costs, and a rise in labor productivity. An important point is that a significant amount of employment shifted from low-productivity businesses to high-productivity businesses. This movement of resources between companies can statistically appear as a positive sign of improved productivity for the entire country.

However, considering that the productivity of small businesses with poor labor conditions was generally low, a side effect may occur where the income of these workers actually decreases. In other words, the minimum wage increase for income-led growth brought harm by reducing the income of workers under poor conditions. Additionally, during the same period, the number of companies relocating production bases overseas through offshoring to reduce labor costs increased significantly, creating a paradoxical situation where jobs were lost abroad.

Recently, we are facing a zero-sum economic situation with rapid inflation, exchange rate instability, excessive household debt such as mortgage loans, and an unavoidable interest rate inversion between Korea and the U.S. As policy makers, it may be difficult to move forward immediately. However, these difficulties also provide an opportunity to reflect on past policies. Not repeating wrong policies?that itself becomes the first step.