[Minimum Wage Solution]③ "Raising Minimum Wage by 10% Increases Prices by 0.4%... Improving Compliance Rate is More Effective"

One Bowl of Naengmyeon Costs 11,000 Won... "Raise the Minimum Wage"
Business Community: "Rapid Increase Harms Prices and Economy"
Fierce Conflict Until Minimum Wage Is Set, Then Let Go... "More Thorough Impact Analysis Needed"

The tension between labor and management over next year's minimum wage is intensifying. Labor groups argue that "in an era where even naengmyeon costs over 10,000 won," the minimum wage should be raised to 12,000 won. However, management contends that a steep increase in the minimum wage will raise rents, service, and food prices, thereby increasing the burden on small business owners and ordinary citizens.

Experts say it is natural that a rapid increase in the minimum wage negatively affects prices, and that a compromise at an appropriate level is necessary. They also advise that after deciding the minimum wage, it is important to analyze how the increased wages specifically impact prices, employment, and the economy, and to use this data as a basis when setting the minimum wage for the following year.

Menu of 'Eulji Myeonok' in Jung-gu, Seoul, famous for Pyongyang Naengmyeon

Research on Minimum Wage Shows "Clear Impact on Price Inflation"

On the 20th, both management and labor sectors identified the minimum wage as a key variable influencing next year's prices, employment, and the economy in South Korea. Especially since the hourly wage is likely to surpass 10,000 won for the first time ever next year, the Bank of Korea and economic authorities prioritizing price stability are closely monitoring the situation.

Opinions differ between economists and labor groups regarding the impact of the minimum wage on prices.

According to a 2015 report titled "The Impact of Minimum Wage Increases on Prices" by Kang Seung-bok, a senior researcher at the Korea Labor Institute, a 10% increase in the minimum wage raises the average wage of all workers by about 1%, and prices increase by approximately 0.2 to 0.4%.

A 2020 report by Song Heon-jae, a professor at the University of Seoul, and Jeon Byung-hil, a professor at Hankuk University of Foreign Studies, also found that a 1% increase in the minimum wage results in a 0.07% rise in prices. Professor Song explained in the report, "A rapid rise in the minimum wage can cause side effects such as price inflation or job losses. It may be more effective to raise it gradually while increasing compliance rates to boost wages for workers affected by the minimum wage."

Similar results were found in foreign studies on the correlation between minimum wage and prices. A 2010 report by Jonathan Wadsworth, a professor at the University of London, showed that industries with many low-wage workers, such as restaurants, takeout food, and hotel services, experienced price increases 0.5 to 2 percentage points higher annually compared to other industries after the introduction of the minimum wage.

Additionally, Sarah Lemos, a professor at the University of Leicester, reviewed and compared existing studies analyzing the impact of the minimum wage on prices in 2008. Most studies found that a 10% increase in the U.S. minimum wage raised food prices by over 4% and the overall price level by less than 0.4%.

Citizens shopping at a large supermarket in downtown Seoul [Image source=Yonhap News]

Labor Groups: "Can't Even Buy a Bowl of Naengmyeon After Working an Hour"

On the other hand, labor groups argue that the claim that the minimum wage negatively affects prices is a 'frame' created by management.

At a press conference held on the 4th at the Francisco Education Center in Jung-gu, Seoul, the Korean Confederation of Trade Unions and the Federation of Korean Trade Unions stated, "Many studies have found that when the minimum wage rises by 10%, the impact on price inflation is around 0.4 to 1%. In 2018, when the minimum wage increased by the largest margin in history, the inflation rate was actually the lowest."

In fact, looking at trends, years with high minimum wage increases did not necessarily have high annual consumer price inflation. In 2018, when the Moon Jae-in administration pushed for a "10,000 won minimum wage" and the increase rate reached 16.4%, the consumer price inflation rate was only 1.5%. The following year, with a 10.9% increase in the minimum wage, the inflation rate was low at 0.4%.

Labor groups emphasize that the minimum wage increase rate should be determined considering the livelihoods of low-wage workers. Han Sang-jin, spokesperson for the Korean Confederation of Trade Unions, said at a press conference on the 18th urging the resignation of Kwon Soon-won, a public member of the Minimum Wage Commission, "I ate a bowl of naengmyeon that cost 11,000 won. Pyongyang naengmyeon is even more expensive. You can't even buy a bowl of naengmyeon after working for an hour. Honestly, a 25% increase (to 12,000 won) is still insufficient."

Experts explain that while various factors such as interest rates, exchange rates, and oil prices affect prices, wages are also an important variable.

Choi Young-gi, a visiting professor at Hallym University and former president of the Korea Labor Institute, pointed out, "It is basic economics that wage increases affect prices. Considering the entire economy, mutual restraint is necessary, but currently, distrust between labor and management is too severe."

Professor Choi added, "Next year, prices are expected to cool down compared to this year, and growth rate will remain in the 1% range, so difficulties will persist. Labor groups will likely demand a significant increase due to the recent price rises, while the Korea Employers Federation hopes for restraint, so I worry whether cooperation can be well achieved."

On the 4th, union members affiliated with the two major trade unions held a press conference announcing the labor sector's minimum wage demand for 2024 at the Francisco Education Center in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

Is Setting the Minimum Wage the End? "More Thorough Impact Analysis Needed"

The Bank of Korea also holds the view that steep wage increases can negatively affect prices and the economy. In a report titled "Review of the Relationship Between Prices and Wages in South Korea" published last July, the Bank explained, "Recent years' inflation rates show a strong correlation with the following year's wage increases, and wage increases are reflected in prices with a lag, especially in the personal service sector where labor costs are high."

The growing burden on small and medium-sized enterprises and self-employed individuals due to high interest rates and economic downturn is also problematic.

The volume of non-performing loans held by domestic banks in the SME sector increased by 41% in one quarter to 1.7 trillion won in the fourth quarter of last year, and loans to self-employed individuals exceeded 1,000 trillion won as of the end of last year. Management is concerned that a rapid increase in the minimum wage could worsen employment and consumption, accelerating the economic downturn.

Experts explain that detailed data collection and analysis are crucial to determine an appropriate minimum wage increase rate suitable for the current economic situation.

Im Mu-song, an invited professor in the Department of Sustainable Management at Inha University, said, "In South Korea, fierce conflicts occur until the minimum wage is decided, but once set, it is often forgotten. It is necessary to scientifically analyze how the minimum wage actually affects employment of low-wage workers or job seekers, whether total working hours or income have decreased, and so on."