On July 15th, the Minimum Wage Commission agreed to raise the minimum wage by 16.4 percent and the decision has become a much-talked about issue in Korean society. Optimists say the wage hike will help revitalize domestic consumption, while pessimists argue that there will be an increased burden on labor costs. To see what kind of effect the decision will have on the Korean economy, we’ll hear from Professor Choi Bae-geun of Konkuk University’s School of Economics. First off, let’s take a look at the background behind the decision to raise the minimum wage next year to 7,530 won per hour.

The biggest problem for the Korean economy is the period of low growth which has been continuing for some time. In the midst of this, there is an imbalance between the income growth of households and corporations. In other words, households are not growing as much as corporations, and the bottom 30% of households have seen their incomes decrease. Income redistribution has worsened recently and there has also been a decline in the number of good jobs. Meanwhile, the Korean economy has been led by exports but international trade slowed down since the 2008 global financial crisis, leading to negative growth for Korean exports in 2015 and 2016. These circumstances all show that in order to have a breakthrough, it must be through domestic demand and that must be done through strengthening household income, especially for low-income earners.

Korean society is currently faced with polarization and growing income disparity as well as sluggish domestic demand. As the first step to tackle these serious issues, the government has increased the minimum wage from the current 6,470 won to 7,530 won for next year. The hike of 16.4 percent was the biggest hike since the minimum wage was implemented in 1988, and the first time the amount was increased by over 1,000 won in one time. At this rate, President Moon Jae-in’s pledge to raise the minimum wage to 10,000 won by 2020 certainly seems attainable. With the decision, there are hopes that the increase in wage for laborers will alleviate social polarization and revitalize domestic demand.

Those who depend on the minimum wage are mostly in the low-income bracket so the move is likely to help increase their income. Also, the move is expected to help improve income distribution and boost spending, especially from the low-income bracket as they tend to spend more if their income increases. This, in turn, will increase the aggregate demand in the nation, which means individual businesses will start seeing more money flow in. That will help increase corporate earnings which will lead to more employment. When there is an increase in earnings, corporations will invest more in order to produce more. That will lead to increased corporate productivity. In the end, the move is expected to create a virtuous cycle where an increase in corporate productivity will lead to an increase in real wages.

The minimum wage is a legal safeguard to ensure that people enjoy a certain standard of living. As of last year, 26 OECD countries have the system in place. The system has been in the spotlight not just in Korea but around the world as a measure to help alleviate low growth and inequality. The minimum wage hike will increase the monthly wage for laborers to 1.57 million won, giving households more room to breathe. If this helps with consumption, especially from lower-income families, this could breathe new life into individual businesses and positively influence other sectors to revitalize the entire economy. However, in reality it is difficult to ignore the voices of small mom and pop stores who cannot afford to keep their employees due to the wage hike.

If it’s a business with labor costs accounting for a large portion of expenses, it will be a big hit. These are usually business with less than 5 employees which rely on low-wage workers to make ends meet. There are a lot in the manufacturing sector, with many re-subcontracted by SMEs. Labor inevitably accounts for a large proportion of these companies’ total costs and they cannot help but to rely on low-wage workers. Also, the wage hike might take away jobs from elderly citizens who work at gas stations or as caretakers at apartment complexes. They will be hit the hardest as their jobs can be replaced by others or automated systems.

According to the Korea Food Industry Research Institute, if the minimum wage increases each year to reach 10,000 won in 2020, the operating profit for businesses in the food sector will drop from 10.5 percent to 1.7 percent, while an estimated 276,320 employees will lose their jobs. The Korea Federation of Micro Enterprise also expressed concerns as 87 percent of minimum wage establishments are small businesses and mom and pop stores, so the move could lead to negative effects such as a decrease in employment and bankruptcy. As concerned voices grew louder, the government acknowledged these concerns with countermeasures.

The Moon Jae-in government announced it will provide short-term support for businesses suffering from the financial burden of the wage increase. The reason behind the counter measures is because it takes time for a virtuous cycle to be created with the minimum wage hike leading to revitalization of domestic demand. As such, smaller businesses will be hit during that transitional period and that can lead them to shut up shop. So, to have a soft landing, the government is promising to provide short-term support by shouldering some of the costs.

The support measures show that the government will directly support businesses with less than 30 full-time employees. For example, the government is promising to shoulder just over half of the cost of the minimum wage hike, while the business takes on the remaining amount. However, this measure has also been criticized for potentially causing confusion in the selection process and incurring an increased financial burden. As such, detailed plans are needed to counter the negative effects from next year’s minimum wage rise.

The 16.4 percent rate hike is a bold move. As such, the government must be detailed and meticulous in preparing institutional measures for a soft landing. In other words, there must be efforts to minimize negative effects. One such measure could be what presidential candidate Yoo Seung-min suggested during the presidential election earlier this year. He suggested that the government cover the costs for the four major insurances for laborers working at small businesses as that will reduce the costs for management. Along with this sort of measure, others must be put in place by the government in order to maximize the positive effects of the minimum wage hike while minimizing the negative effects.

All policies have strengths and weaknesses. In modern society where vested interests are complexly intertwined, no policy can fit everyone’s needs. However, if there is intense discussion on a complex issue and if implementation is preceded by well thought-out countermeasures, we can expect to reap the benefits while limiting the negative effects.