[Aftermath of the Wage Peak System] 'Missed Both Retirement Extension and Youth Hiring... Only Growing Dissatisfaction'

Increase in Non-Regular Employment Over 6 Years of Implementation
1 in 10 Retirees Who Reached Age 60
Additional Cost of 15.9 Trillion Won if Age 65 is Promoted

On the 8th, officials from the Public Institution Business Headquarters held a press conference in front of the Presidential Office in Yongsan-gu, Seoul, urging the abolition of the wage peak system guidelines and demanding labor-management negotiations. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporters Kim Hyung-min and Gong Byung-sun] The confusion arising at the scene over the Supreme Court ruling is the result of a complex interplay of the inherent limitations and doubts about the effectiveness of the wage peak system, along with accumulated dissatisfaction after six years of implementation. While the government and business circles argue for the validity of the wage peak system, the legal community points out that recent court rulings differ from previous ones and say it "should not be overlooked." It is noted that overcoming the controversies and conflicts surrounding the wage peak system, which is tailored to the era of a 60-year retirement age, is necessary to prepare for the public debate on extending the retirement age to 65.

A Smooth Start, Inherent Limitations

The wage peak system was partially introduced mainly in the financial sector during the 1998 foreign exchange crisis and was first adopted by the Korea Credit Guarantee Fund in 2003. It spread to all sectors after the retirement age of 60 was legislated in 2013. The wage peak system was a compromise product that allowed workers to work longer while reducing the burden on employers. Surveys at the time showed that workers generally welcomed it. At the end of 2010, the average retirement age was 57.4 years, but the actual retirement ages were 53.8 years for men and 50.1 years for women. After legislation, by June 2019, the average retirement age had risen to 60.2 years.

The wage peak system involves changes to employment rules. The Labor Standards Act requires majority consent from workers when employment rules are changed to their disadvantage. However, even if the majority did not consent or individuals opposed, changes were possible because the government changed administrative guidelines. But administrative guidelines are not binding and conflicted with the binding Labor Standards Act, raising constitutional concerns. Recently, the Supreme Court ruled that "even if employment rules changed to the disadvantage of workers receive collective consent, they do not take precedence over existing individual employment contracts that set more favorable working conditions." This differs from the 2008 ruling that "if the workers' group consents, the change in employment rules takes effect even if individuals oppose." There were also rosy forecasts. Initially, the Korea Employers Federation claimed that 182,339 youth jobs would be created (2016?2019), and the Korea Economic Research Institute argued for 26 trillion won in labor cost savings and 310,000 new hires. These were based on unrealistic assumptions that all companies would adopt the wage peak system or that all workers would work until the retirement age of 60.

Minimal Hiring Effect and the Era of Retirement at 50

According to the analysis by Nam Guk-hyun, research professor at the BK Project Team of the Department of Economics, Pusan National University (July 2021, Journal of Vocational Competency Development, "The Impact of the Introduction of the Wage Peak System on Employment and Labor Productivity"), the hiring effect was contrary to expectations. Between 2011 and 2015, the new hiring effect of the wage peak system implementation decreased by 64.5%. Regular employment hiring dropped by 67.5%, while non-regular employment hiring increased by 65.6%. Companies with labor unions had about 40.7% fewer new regular hires compared to companies without unions. Professor Nam said, "Companies that introduced the wage peak system reduced regular employment and replaced it with non-regular employment, which has a relatively lower labor cost burden, as labor costs for older workers increased." Although the era of a 60-year retirement age has lasted over a decade, Statistics Korea's survey shows that most people retire from their main jobs around age 50, and fewer than one in ten retire at the official retirement age. Even among public institutions that have adopted the wage peak system 100% as recommended by the government (announced by the Ministry of Employment and Labor in February 2022), which have an annual youth employment obligation of over 3%, only 385 out of 445 institutions complied. Sixty institutions, including the Korea Development Bank, Korea Investment Corporation, LH, and Korea Gas Corporation, did not meet the obligation.

[Image source=Yonhap News]

Another Shock at 65

Law firm Taepyungyang predicted, "The labor sector is likely to initiate multiple planned and collective lawsuits aiming to abolish the wage peak system itself," and "As the perception that the wage peak system is invalid spreads, companies operating voluntary or honorary retirement programs will also face difficulties." If the wage peak system is invalid and wages do not decrease, the incentive to choose voluntary or honorary retirement significantly diminishes. Companies that have pursued policies to maintain appropriate personnel or increase new hires through intermittent or regular voluntary or honorary retirement programs are expected to face considerable difficulties in workforce management. Following the controversy over ordinary wages and the ripple effects of the wage peak system, along with the public debate on the four-day workweek and extending the retirement age to 65, the National Assembly and labor-management-government tripartite should hasten the reform of the wage system. The Korea Economic Research Institute analyzed that extending the retirement age from 60 to 65 would cost about 15.9 trillion won for additional employment of those aged 60 to 64. The direct cost savings of 2.5 trillion won from the wage peak system could employ approximately 86,000 additional young workers.

Yoo Jin-seong, a research fellow at the Korea Economic Research Institute, said, "If companies are mandated to extend the retirement age, the legal provisions for mandatory wage system reform plans should be specified clearly and explicitly in the law," adding, "When introducing retirement age extension, wage system reforms such as job-based pay or the wage peak system should be implemented simultaneously to alleviate the burden on companies." Professor Kim Tae-gi of Dankook University's Department of Economics said, "The political sphere should act, but with many pending issues and the wage peak system being a hot potato, they will likely avoid touching it." He added, "Companies will respond by encouraging voluntary or honorary retirement as much as possible, but this will also be a significant burden for them."