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Doubts about Policy Impact of Wage Peak System in Korea
Wage Peak Misgivings
Doubts about Policy Impact of Wage Peak System in Korea
  • By matthew
  • October 23, 2015, 07:15
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From left: Chairman of the Korea Employers Federation Bahk Byong-won, Chairman of Economic and Social Development Commission Kim Dae-hwan, President of the FKTU Kim Dong-man, and Minister of Employment and Labor, Lee Ki-kweon (right) on Sept. 13.
From left: Chairman of the Korea Employers Federation Bahk Byong-won, Chairman of Economic and Social Development Commission Kim Dae-hwan, President of the FKTU Kim Dong-man, and Minister of Employment and Labor, Lee Ki-kweon (right) on Sept. 13.

 

On Sept. 13, a tripartite commission consisting of Minister of Employment and Labor Lee Ki-kweon representing the government, Chairman of the Korea Employers Federation Bahk Byong-won representing business, and President of the FKTU Kim Dong-man representing labor reached an agreement on labor reform. The key point of the agreement was the wage peak system. It was first time that the Korean political scene saw a similar feat since the 1998 financial crisis. With the extension of the retirement age to 60 taking effect in companies with more than 300 employees in 2016 and less than 300 employees in 2017, the management side of local companies and organizations are being forced to face an increase in personnel expenses. Against this backdrop, the wage peak system is emerging as an essential part of labor reform to provide job security for older workers, relieve employers of additional costs related to extended employment, and boost the competitiveness of Korean corporations in the export market.

The wage peak system refers to a policy of introducing reduced salaries to workers nearing retirement age, i.e., retirement age minus 5-7 years. Wages tend to increase steadily over a worker's lifetime, because the traditional wage system is based on seniority. The premise is that the system would free up wage-money, which then could be used to hire younger workers and retain older workers.

However, the wage peak system that the Korean government has recently adopted represents an imperfect policy measure with loopholes. The peak system takes a form of administrative guidance rather than legislation. For instance, the revised Employment Promotion for the Aged Act stipulates that employers have to get consent from a majority of their employees when introducing the wage peak system. However, the procedural process is not legally enforced or clear as a provision, which creates the potential for more conflict between management and labor. Moreover, whether the money saved from reducing salaries for old workers is going to be used for more jobs for young people is uncertain.

Coping with Extending the Retirement Age to 60

The subject of the wage peak system started to surface in the policy scene in Korea in the early 2000s, as the national economy relying on the manufacturing industry started experiencing declining competitiveness in the export market. Nevertheless, management couldn’t easily broach the topic, facing strong resistance from labor unions, that refused to accept reduced salaries in exchange for an extended period of employment. The management side also thought at the time that there is little benefit to be derived from reduced wages in return for an extended retirement age. In the last couple of years, the consensus has shifted towards adopting a wage peak system, as the majority of large corporations have come under increasing financial burdens, with many employees pushing their 50s.

The system gained additional urgency with the passage of the Act on the Prohibition of Age Discrimination in Employment and Aged Employment Promotion (hereinafter the Employment Promotion for the Aged Act) at the National Assembly in April 2013, which stipulates that the mandatory retirement age be raised to 60 or above. Companies with more than 300 employees have to implement the wage peak system beginning in 2016.

Proponents of the wage peak system – mainly management and government officials – argue that the system would increase job security for both old and young workers. Opponents – mainly unions – argue that the system is just a pretense to decrease real wages and instead say that the wage-savings will be retained by employers as excess profits.

Korean Version of Wage Peak System: Political Middle Ground?

With the extension of the retirement age to 60 legally guaranteed by the Employment Promotion for the Aged Act, unions have been refusing to come to the negotiating table for the compromises that they have to make regarding wages.

However, youth unemployment is emerging as a prominent social issue, as the jobless rate of people between 15 and 29 has hit a record high, standing at 9.4 percent in July, much higher than the 3.7 percent tallied for the entire country. In this light, the issues surrounding the wage peak system have become increasingly politicized in the political scene, and unions are forced to accept the introduction of the wage peak system.

Against prolonged political disagreement and difficult negotiation processes, in many ways, the newly-adopted wage peak system in Korea features political compromises with glaring policy loopholes.

No Legal Provision: More Room for More Conflict

Given that the wage peak system takes the form of an administrative guideline rather than legislation, critics point out that the government is creating room for more conflict than resolution as far as labor-management relations are concerned.

For instance, the revised Employment Promotion for the Aged Act does not include any specific provisions or details such as adjusting wage levels and introducing a wage peak system, but only vaguely refers to “wage system improvement.” Although maintaining cooperative relations with trade unions is critical for successfully reforming the existing wage system, there is, however, no dispute settlement process to resolve conflicts arising from labor-management disagreements. Therefore, more worrisome is the event where employees oppose the introduction of a wage peak system.

Some say that a labor dispute with a trade union at the workplace can be settled through mediation by the National Labor Relations Commission (LRC), but the effectiveness of NRC mediation is in doubt, because their proposals go into effect only when both labor and management accept them.

In order to avoid potential confusion and conflict, the government plans to develop and disseminate guidelines on the wage peak system and provide consulting.

Creating More Jobs for Young Workers?

According to the Federation of Korean Industries and the Korea Economic Research Institute (KERI), the extension of the retirement age will incur 107 trillion won (US$95 billion) by 2020.

Deducting 10 percent of the salary every year beginning with workers aged 55 will save a total of 25.91 trillion won (US$23.00 billion). Researchers at KERI claim that businesses can create 80,000 to 130,000 jobs with that money from 2016 to 2019. However, all of the wage-money saved should be used to employ new recruits in order to see these kinds of results, and the concern is that some businesses won’t use all the savings to hire new recruits.

Other experts say that the wage peak system will have little effect, since the average time that a South Korean regular worker spends at a company is only 85 months (7.08 years).

For some professions and situations where layoffs and voluntarily resignation happens more often, extension of the retirement age and introduction of a wage peak system has little impact on companies’ labor costs and workers’ job security. Moreover, as for the prospect of creating jobs for youth, many raise doubts. “Companies have been restructuring to steadily reduce their workforce, but new hiring of young people has not increased proportionally,” said Kim Seong-hee, a research professor at the Graduate School of Labor Studies at Korea University.