The impact of a sharp increase in minimum wage

“This is the first time that my company has gone into the red for two quarters in a row since its foundation 46 years ago.” The voice of Mr. A, CEO of a small business, sounded weak, even frustrated. His company weathered the storm during the 1998 Asian financial crisis when South Korea accepted a bailout package from the International Monetary Fund. He said the situation is much worse now than then.

He took out a piece of paper that showed the total amount paid to some of his employees who received minimum wages. Although the hourly wage was 8,350 won, the company had to pay a worker 16,800 won an hour including paid vacations, bonuses, four social insurances, pension, and other benefits.

Business owners are experiencing more difficulties as the minimum wage has soared by 29 percent for the past two years. Mr. A had to raise the wages of both new recruits and the existing employees due to an increase in the minimum wage. As a result, the total amount paid to employees has gone up by 500 million won a year, from 5 billion won to 5.5 billion won. His company had an annual profit of between 500 million won and 1 billion won two years ago.

A CEO of a large business shared a story of why his company decided to convert to automation while constructing a large factory. “We felt the need to reduce management risks when the incumbent administration raised minimum wages sharply,” the CEO said. “So we purchased more automation equipment instead of hiring more employees.” It is hard to lower a minimum wage once it has been raised. Moreover, business environment changes every year due to political issues while the amount needed to buy more automation equipment is easy to predict, thereby guaranteeing sound management of business operations. Lost employment opportunities like this do not even show on statistics.

The increase of minimum wage is not an old issue because once a minimum wage is raised, it doesn’t impact just for one year. The Minimum Wage Council has yet to set next year’s minimum wage. As above stories show, the power of profit is immense in a capitalist society and this should “normally” be reflected in setting a minimum wage.


jameshuh@donga.com