Ratio Changes
South Korea’s labor unions have proposed a 24.7% increase in the minimum wage for next year.
This proposition comes as the country’s minimum wage, which is already the highest in Asia, is set to exceed that of France, placing it among the top tier in Europe alongside the U.K., Germany, and the Benelux countries. Experts agree that not only in terms of international comparison of the absolute minimum wage amount, but also in the relative level compared to income, the minimum wage in Korea is excessively high.
The ratio of the minimum wage to median wage is commonly used as a standard to determine whether the minimum wage is excessive. According to the Organization for Economic Co-operation and Development (OECD), this ratio in South Korea reached 61.3% in 2021, marking a significant increase from under 50% up until 2016 and surpassing 60% for the first time in 2019.
In contrast, other countries like Japan, France, and the United States showed a less significant increase or even a decrease in this ratio. Japan saw an increase from 32.2% in 2000 to 44.9% in 2021, while in France, where workers have a strong voice, the ratio decreased from 61.6% to 60.9% in the same period. The U.S., which places emphasis on market principles in wages, witnessed a noticeable decrease from 35.7% in 2000 to 29% in 2021. On the other hand, South Korea saw an over twofold leap from 28.7% to over 60%.
A high ratio of minimum wage to median wage could be seen as a symbol of market distortion and economic backwardness. Among 30 OECD countries, only six -- Colombia, Turkey, Costa Rica, Chile, New Zealand, and Portugal -- have a higher ratio than South Korea.
There has also been criticism that the rate of increase is too steep. Comparing South Korea’s minimum wage increase over the past five years (2017-2021) with the Group of Seven (G7) countries, the former was up to 7.4 times higher. According to an analysis by the Korea Federation of SMEs, the economic growth rate over the last decade averaged 2.62% annually and inflation increased by 1.56%, while the minimum wage jumped an average of 7.25% per year.
Furthermore, there are growing cases of employers unable to pay even the minimum wage. Looking at the “minimum wage underpayment rate,” which refers to the proportion of workers who do not receive the minimum wage, one in ten workers overall, and a third of small businesses with fewer than five employees are earning less than the minimum wage.
According to the “2022 Minimum Wage Underpayment Rate Analysis and International Comparison of Minimum Wage Levels” released by the Korea Employers Federation, the number of workers who did not receive the minimum wage last year amounted to 2,756,000 with a minimum wage underpayment rate of 12.7%. The situation was particularly severe in agriculture, forestry and fishing (36.6%), and the accommodation and food service sectors (31.2%). Regardless of industry, small businesses with fewer than five employees also had a significant underpayment rate of 29.6%.
The number of self-employed individuals struggling due to increasing wage burdens is also on the rise. According to the National Tax Service, the annual average income of self-employed individuals dropped from 2,170,000 won in 2017 to 1,952,000 won in 2021. In particular, the annual average income of the bottom 20% of small-scale self-employed individuals plunged 55.0% from 1,869,000 won to 841,000 won over the same period.
The proportion of self-employed individuals without any employees, unable to afford the minimum wage, increased from 59.2% in 2018 to 64.8% last year. The number of self-employed individuals relying on debt to keep their businesses afloat has also become more common. According to the Bank of Korea, the outstanding loans of self-employed individuals jumped 45.7% from 700 trillion won (US$546 billion) in the first quarter of 2020 to 1,019.8 trillion won (US$796 billion) in the fourth quarter of last year.