The third edition of Collins dictionary defines that the minimum wage is the lowest wage that an employer is allowed to pay an employee according to a law or agreement. South Korea introduced the minimum wage in 1988 with “the purpose of stabilizing low-paid workers’ living and improving the quality of the labour force, thereby contributing to the stable development of the national economy.”(Minimum Wage Act, Article 1, 1986)
Since then, South Korea has have one national minimum wage which covers the whole of South Korea, even though there are various exceptions which are not applied, such as any businesses employing only families or relatives who are living together, those who are hired for household works, seamen who are subject to the Seamen Act, trainees who are doing on-the-job training during the first 3 months and workers with disabilities who can be paid sub-minimum wages pursuant to a certificate issued by the Ministry of Labour.
The minimum wage in South Korea in 1988 was 462 won (KRW, a proxy 0.37 dollar at the current exchange rate: 1$=1,240 KRW), the minimum wage in 2009 is 4,000 won (a proxy 3.23 dollars at the current exchange rate). In case of the US, the US federal minimum wage in 2009 is 7.25 dollars and that of 1988 was 3.35 dollars. (U.S Department of Labor, 2009) If we compare two countries with 2008 minimum wage which South Korea’s minimum wage was 3,770 KRW(3.41 dollars, at the 2008 average exchange rate: 1$=1,105 KWR) and the US federal minimum wage is 5.85 dollars. Considered the gross national income per capita in 2008 which of South Korea is 21,530 USD and that of the US is 47,580 USD The World Bank, 2009), the level of the minimum wage in South Korea is not low, and furthermore the average increasing rate during the past 10 years in South Korea, which is over 10%, is much higher than that of the US.
But because of the recent economic depression, while the Minimum Wage Council (MWC) which is established in the Ministry of Labor to deliberate the minimum wage and other related matters, which is composed of three part representatives – workers’ representatives, employers’ representatives and the public representatives, deliberated the minimum wage in 2010, there was a big gap between workers’ representatives and employers’ representatives, even employers’ representatives who have offered a slight increase during the last two decades made a suggestion that the minimum wage should be frozen or should be dropped. After the long deliberation, the minimum wage of the next year fixed at 4,110 KRW which is the lowest increase level during the past 10 years.
Furthermore on 18th Nov. 2008, 31 members of the National Assembly from the ruling party (Hannara-party) submitted the revised minimum wage bill, in which included the introduction of a regional minimum wage and exception to the over 60 years old people. They claimed that the present minimum wage level is quite high, becomes a burden to small businesses, and ultimately causes the low-skilled workers’ unemployment. (The National Assembly, 2008)
The proposal of amending the minimum wage act provoked the criticism from the Labour Unions and some social organizations. In this research, I will review one aspect of the revised bill, the regional minimum wage introduction into South Korea.
The economists’ perspectives of the minimum wage
According to conventional supply and demand curves, the price of the product is fixed at the equilibrium point, theoretically the labour market is the same. The price of the labour market i.e. the wage settles at the equilibrium point (Figure 1, at We) where supply and demand meet together, therefore there is no unemployment. But the minimum wage is settled at the certain level which is mostly higher than the equilibrium (figure 1, at Wm) with the certain social and political purpose, for example, the stabilization of vulnerable workers’ livelihoods and income redistribution.
Economists say that the minimum wage reduces employment in the sectors which it targets to cover and the decrease of employment outweighs the wage increase leading to lose low-skilled workers’ jobs. In figure 1, if the minimum wage settles at Wm, then it causes the unemployment (G-D) and the amount of employed workers reduces from F which is the amount of the employed when the government does not intervene in the labour market to D. This is the basic theory that most economists use when they mention the negative effects of minimum wage
George Stigler (1946, p358) points out in his article that the popular objective of minimum wage legislation-the elimination of poverty-was not debatable and a minimum wage could not guarantee the low-wage members of wealthier households. He claims that the program of increasing income must be supplemented by a program of education-in diet, in housing, in education. (Stigler, 1946, p365) It is commonly agreed in the field of economics that the minimum wage is not an effective device for eliminating poverty.
The brief history of the Minimum Wage
The minimum wage was first introduced in New Zealand in 1894 in response to so-called sweat shops workers’ strikes. (Starr, 1981) Now most countries in the worlds including the US, France, Canada, Japan, China and the UK have the minimum wage regulation. Still there are a few countries which do not have the minimum wage regulation such as Germany, Italy, Swiss, Sweden and Denmark.
In case of South Korea, the minimum wage act enacted in 1986 on the grounds of the Constitution. Since the enforcement in 1988, reflecting the economic and social change, amendment has been made. But the assessment about the minimum wage is different among people. Employers complain that the present minimum wage policy does not reflect the current businesses situation and the change of the labour market (MWC, 2008). In contrast, labour unions argue that the current minimum wage is a very low level and does not carry out the objective of minimum wage effectively. The debates about its effects are still going on.
Criteria for setting minimum wages
Each country has its own organizations and minimum wage deciding procedure. Factors which affect the minimum wage vary from countries, in spite of the varieties; we can generally classify them into three main factors, which are the needs of workers, ability to pay and the requirements of development. (Starr, 1981) Gerald Starr mentions that defining meaningful criteria is the main key to ensure the objectives of minimum wage. (Star, 1981)
In South Korea, the minimum wage act article 4 states that a minimum wage shall be set after considering the workers’ living cost, labour productivity and the ratio of income distribution and it can be set differently by the industry. There is a controversy whether criteria are meaningful or not, and how each criterion can be measured precisely is also a concern. Despite of the other arguments about the minimum wage policies, I will not talk about them here.
The introduction of a regional minimum wage into South Korea
As I mentioned in the introduction, the revised bill by Hannara-party is pending at National Assembly. This revised bill includes several debatable issues. The regional minimum wage introduction is one of them. Hannara-party claims that the minimum wage has contributed to the low-paid workers’ livelihoods ; meanwhile the recent financial crisis causes financial pressure to small companies, makes them violate the law and consequently is taking the job opportunity from the vulnerable working class. They say that there exists a gap to the living cost and between provinces. That is the main reason to suggest the revision. (NA, 2008)
Under the present acting law, there is no ground that Ministry of Labour can set a different minimum wage according to geographical areas. On the minimum wage act article 4, Ministry of Labour can set a minimum wage differently according to industries. But until now, Ministry of Labour has never set the minimum wage differently by industries.
As soon as Hannara-party turned the bill in, Korean Confederation of Trade Unions (KCTU) made an announcement that Hannara-party’s suggestion is a threat to the basic role of minimum wage. The regional minimum wage introduction will cause the society to widen the social and economic gaps between the provinces and to deepen the emotional diversion. KCTU argues that the revised bill will make workers who work at the small companies where the minimum wage is comparatively low move to the higher areas i.e. Seoul or the other big cities. In the long run, the regional minimum wage will not help small companies in the local and rural areas but will destroy small companies. Furthermore, it will devastate the national economy. Federation of Korean Trade Unions (FKTU) which is the other major associated union organizations also expressed the same position about the revised bill with the KCTU.
In contrast to KCTU’s arguments, the Korea Employers’ Federation expresses an agreement about a regional minimum wage introduction. KEF says the cost of living and the average wage in each city and each province is different. The price in local provinces or rural areas is relatively low, compared to Seoul and Kyeonggi province-so-called metropolitan cities. But the present system-one national minimum wage- does not reflect this cost living difference, the wage gap and the structural difference in the labour market. Considered the purpose of minimum wage which is to protect the low-paid workers, setting a regional minimum wage which workers can live with rather than establishing one national minimum wage is effective to the national economy. They claim that the law should be revised and minimum wage can be set differently according to geographical areas. They argue that a regional minimum wage is more appropriate to the objective protecting the low-paid workers. Through reflecting the price difference and applying differently to the areas, the regional minimum wage will also help small companies from the labor shortage. But they say that the process to determine the minimum wage should be reformed first, they express their worries if the authorities to determine the minimum wage are given to each province and then the disputes between employers and workers will worsen.
KCTU argues that KEF’s idea is unarguable and the Hannara-party revised bill is a retrogressive bill under the recent economic crisis, even it is against the Constitutional principles.
Two major associated labor unions’ organizations say that they will continuously do street rally in major cities throughout the county, and will show their protestation against the revised bill, furthermore do every efforts to protect the lower-class and to gain a “Living Wage” until the Hannara-party and the government will withdraw the pending bill.
Concerning this aspect, Uh soo-bong, a professor at Korea University of Technology and Education, said in the conference hosted by MWC in November 2008 that the regional minimum wage introduction could be considered if there is a significant gap between minimum living costs according to regions. But he added that there is no objective evidence for that until now.
Some countries have the regional minimum wage, for example, the US, Canada, Australia and Brazil. (MWC, 2009) In case of the US, the minimum wage first was adopted by Massachusetts in 1912 to cover women and children before the federal minimum wage was adopted. Since then, several states also adopted the minimum wage legislation. The Fair Labor Standards Act, passed in 1938, is the first federal minimum wage regulation. The President at that time, Roosevelt, said that “The law was the most far-sighted program for the benefit of workers ever adopted. Wages must ensure a ‘minimum standard of living necessary for health, efficiency and general well-being,’ the act stipulated without substantially curtailing employment.”
Ever since, even in the US, critics and supporters have disputed over the minimum wage: some say it destroys jobs by making it too expensive to keep workers. Other economists note, however, that because a majority of minimum-wage earners work in outsourcing-resistant service jobs, businesses will have a hard time dismissing the workers massively. Researchers at the University of California at Berkeley found that after an 80-cent New Jersey minimum wage increase in 1992, employment in the state’s fast-food restaurants rose slightly faster than in Pennsylvania, where the minimum wage did not change. (Card and Kruger, 1995) Instead of killing jobs, minimum wage supporters argue, the wage floor increases productivity and boosts consumer purchasing power.
Now many states in the US have minimum wage laws. Therefore an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages.
Even though the federal government for almost 10 years from 1997 to 2006 did not increase the minimum wage, each state has increased the state minimum wage independently according to their own decision. Despite of the unchanged federal minimum wage, the states’ minimum wage increase did positive role in improvement for workers. As you can see figure 2, the number of the states which do not have state minimum wage is 5 which lie mostly in southern area, for example, Louisiana, Tennessee, and Mississippi. The number of states which have the lower state minimum wage is 7 and that of states which have the higher minimum wage is 12.
Canada has only the states’ minimum wage, Canada does not have a national or federal minimum wage. In 1918, the state of British Colombia established the minimum wage first, and then Ontario, in 1920. Each state in Canada has the authority to decide the minimum wage independently.
From the stage of the minimum wage introduction, South Korea and the US were quite different. In case of the US, Massachusetts first adopted the minimum wage, and a federal minimum wage was first set in 1938. Even though the national minimum wage does not change, the states set own minimum wages. The period 1997-2007 is the longest period during which the federal minimum wage has not been changed. Many states have departed from the federal minimum wage. Washington’s minimum wage is 8.55 dollars as of January 1, 2009. California and Massachusetts currently have minimum wages of 8.00 dollars, meanwhile the federal government has minimum wage of 7.25 dollars.
There are lots of researches about the effects of minimum wage, but there are not many articles about comparison to a regional minimum wage and a national minimum wage. David Card and Alan B, Kruger published ‘Myth and Measurement: The New Economics of the Minimum wage’ in 1995. This book contains the cross-state comparisons. The study of employment in the fast food industry after the 1992 increase in the New Jersey minimum wage shows that employment was not affected adversely. In comparison to New Jersey and eastern Pennsylvania where the minimum wage remains unchanged, conducted before and after the increase in the New Jersey, they found that the employment in New Jersey actually expanded with the increase minimum wage. Secondly a cross-state analysis finds that the 1990 and 1991 increases in the federal minimum wage did not affect teenage employment adversely. They mentions most economic discussions of public policy are concerned with questions of efficiency: in other words, where a particular policy generates more benefits than costs. In their research, they claim the minimum wage might raise the efficiency. In their views, the minimum wage is mainly a distributional issue. (Card and Kruger, 1995)
They come to a conclusion that minimum wage does not have any negative effects to the employment. Their works rekindled the disputes among the economists. Kevin M. Murphy and Finis R. Welch, at a seminar in Washington in 1995 held by the American Enterprise Institute, claim that their research was prejudged and therefore, biased. Murphy and Welch also point out that systematic differences in state labor markets can obviously bias cross-state comparisons of employment as measures of minimum wage effects. (Murphy and Welch, 1996) Card and Kruger’s book has a different view from the commonly agreed idea, but ignores the potential effects of an increase in the minimum wage on cost of living. They study an aspect of the cost side of a higher minimum wage – its effect on firms’ profitability, but they do not have the satisfying outcomes for the distribution side.
Introducing a regional minimum wage into South Korea is another story from the US. Each state of the US rules independent politically and socially. It has own laws which have settled from the long history. As you can see the difference scale in two countries, the system of two countries is the more important aspect.
Are there any needs to introduce a regional minimum wage into South Korea? Is the difference of cost living between provinces big enough to consider a regional minimum wage introduction? While Hannara-party and employers claims that the cost living and the price of commodities in local areas are relatively low, consumers’ price index shows that there is no difference between provinces.
Furthermore, according to the result of the regional wage and working hour survey by the Ministry of Labor, Seoul, Ulsan, Taejeon and Kyeong-gi are the highest provinces in the monthly wage, Jeju and Jeonbuk is the lowest area. Jeju and Jeonbuk are considered as a low area of cost living, Seoul is considered as the most expensive city to live in. If a regional minimum wage is introduced for small companies in local provinces, the minimum wages of small provinces will be likely to lower than that of big cities, which will cause the gap of wage bigger. We can say that table 3 demonstrates the present wage reflects the cost living and the price of commodities.
The ultimate goal of minimum wage is for the stabilization of low-paid workers, not for the benefits of businesses. Even under one national minimum wage, the gap of the average wage between provinces is big. The average wage in so-called local provinces which assume that the cost living is rather low is the lowest level. The introduction might lessen the financial burden in the short run, but in the long run, economic polarization will deepen. And South Korea has a different political system from the US. Each province is not separate in politically and socially. That is the other aspect which makes the introduction difficult. Card and Kruger said minimum wage has no effect to the employment through the empirical research of New Jersey and Pennsylvania, but they did not consider each state’s cost living. As Stigler said in his paper, for small companies, the direct subsidy rather than minimum wage might be a better solution. (Stigler, 1946)
George J. Stigler The American Economic Association Vol 36, No 3 (Jun.,1936) pp 358~365
David Card, Alan B, Krueger Myth and Measurement the new economic of the minimum wage, Princeton university press Princeton, New Jersey,1995
The effects of the Minimum wage on Employment ,