"10 Years to 20 Years, Wages Soar" Deep-rooted Seniority System... History of Korea's Wage Structure [Wage 4.0 Era]

③ Amid Global Trend of Seniority System Weakening, Korea Moves Oppositely
Wage System Reform Essential for Retirement Age Extension

[Asia Economy Reporters Kang Nahum and Lee Seungjin] Wage-related disputes continue unabated across the industrial sector. Even in the gaming industry, which has been evaluated as having relatively high wages and a rational compensation system, the first-ever strike in history took place this year. The issue stems from the high seniority-based wage structure embedded within the annual salary system. Voices calling for reform of the outdated wage system, where employees with longer tenure may receive lower pay than senior staff despite good performance, are growing louder.

The History of Seniority-Based Wage System Rooted for Over 70 Years

According to the Ministry of Employment and Labor and others, South Korea's wage system has undergone changes through three distinct periods. These are broadly divided into the first period from the early 1960s when economic development began in earnest until the democratization movement in 1987, the second period from 1987 to the 1998 financial crisis, and the third period from the financial crisis to the present.

During the first period, the seniority-based wage system began to spread significantly from the early 1960s. Seniority pay, also called step pay, refers to a wage system where the main part of the wage is determined by years of service. It is common for higher wages to be paid according to longer tenure. Seniority pay was the dominant wage system in South Korea, and in the past, Japan also primarily used seniority pay as its main wage system.

The second period saw widespread application of the step wage system across the industrial sector. After 1987, due to labor union demands, the step wage system was widely applied to production workers, and the seniority aspect was strengthened. According to a survey by the Federation of Korean Industries, the proportion of workplaces applying a pure seniority-based wage system to production workers increased from 15% in 1987 to 25.8% in 1990. Notably, during this period, the practice of differentiated raises based on performance evaluations was significantly reduced, and uniform raises or promotions became common.

The most notable feature of the third period is the spread of the annual salary system starting with the 1997 financial crisis. According to the Workplace Labor Force Survey, the proportion of workplaces with 100 or more employees that adopted the annual salary system increased from 3.6% in 1997 to 74.5% in 2015. However, due to the long-standing foundation of the wage system being the step wage system, most companies use an annual salary system based on high seniority, showing little difference from the step wage system in practice.

Seniority-Based Wage Levels Among the Highest Worldwide

According to the report "International Comparison and Implications of Wage Gaps by Length of Service in Korea, Japan, and the EU" released last year by the Korea Employers Federation (KEF), South Korea's seniority-based wage system ranks among the highest in the world.

As of 2020, the average monthly total wage (excluding overtime pay) of workers with over 30 years of service in South Korea was 6.971 million KRW, which is 2.95 times higher than the average monthly total wage of workers with less than one year of service, which was 2.365 million KRW. In contrast, Japan's ratio was 2.27 times, and the EU average was 1.65 times as of 2018. Among the 15 EU countries, Finland (1.24 times) and Sweden (1.30 times) had relatively small wage gaps by length of service, while Austria (2.03 times) and Greece (2.09 times) had relatively large gaps.

South Korea's average monthly total wage for workers with less than one year of service was $2,744 last year, 14.7% higher than Japan's $2,392. Particularly, wages for workers with over 30 years of service were $8,089 in South Korea, 48.9% higher than Japan's $5,433. Compared to 2001, South Korea's wage levels increased significantly across all service length brackets by 2020, whereas Japan saw only slight increases in the low-tenure bracket and even decreases in the high-tenure bracket.

Advanced Countries like the US and Japan Weaken Seniority Through Wage System Reforms

Major advanced countries such as the United States and Japan are weakening seniority through continuous wage system reforms. They adjust by setting pay ranges according to job roles or by reflecting individual performance more significantly in wages.

In the United States, the current wage system is based on job-centered pay, where base pay increases occur according to individual performance and changes in the market value of the job, but wage increases based on years of service are almost nonexistent. A representative example is the 'broadbanding' method applied in major industries, which consolidates job grades to reduce their number and expands pay ranges to allow wage differentiation within the same job grade.

Japan, which has a wage system most similar to South Korea's, is expanding the introduction of job- and role-based pay (compensation based on the level of achievement of role grades set according to job content and performance ability) to mitigate seniority in the wage system. Although wage levels are set according to job roles, the reward system based on performance has been strengthened. Particularly, in performance-based promotions, the evaluated achievements are mostly individual short- and long-term accomplishments, and automatic promotions are almost eliminated to limit seniority.

Need to Weaken Seniority to Maintain Employment of Older Workers

The high seniority in the wage system acts as an obstacle not only to the dissatisfaction over fair distribution triggered mainly by the MZ generation but also to maintaining employment of older workers. Especially as the Yoon Suk-yeol administration is pushing to extend the statutory retirement age from the current 60 to 65, measures to weaken seniority are deemed necessary.

According to the Korea Economic Research Institute's report "Wage System Reform Measures in Response to Changes in the Economic Environment," seniority wages have pressured early retirement among older workers. When years of service increase from 10 to 20 years, wages increase by 15.5% solely due to the increase in years, causing a steep rise in labor costs for companies. OECD data also show a negative relationship between seniority and employment retention rates of older workers, indicating that higher seniority correlates with lower employment retention among older workers.

The report emphasizes that South Korea's step wage system is irrational for regular employee compensation due to its disconnect from productivity, and it negatively affects youth employment conflicts and older worker employment through early retirement. Therefore, it calls for wage system reform focusing on weakening seniority.

Illustration by Oh Seongsu gujasik@

Infographic by Lee Jinkyung leejeen@