This Year’s Minimum Wage Season Is About to Begin

The season for setting the minimum wage for 2024 is about to begin. This year’s minimum wage season will start with the first plenary meeting of the Minimum Wage Commission on April 18 and is expected to conclude after roughly three months of deliberation. There is only one key question.

Will the Yoon Suk Yeol administration, which took office amid controversy that even included calls for abolishing the minimum wage, be the first to break through the psychological Maginot line of 10,000 won—a threshold that even the Moon Jae-in administration, launched under the banner of the 10,000 won minimum wage era, failed to cross amid numerous social controversies?

It is indeed a highly ironic situation that the 10,000 won minimum wage era, which was not realized even under the Moon Jae-in administration that embraced income-led growth and foreshadowed steep minimum wage hikes, is now expected to be realized under the Yoon Suk Yeol administration, which criticizes income-led growth.

Economics offers a very simple textbook interpretation or judgment of the minimum wage. If the minimum wage, a type of price floor, is raised above the market equilibrium wage, it causes an oversupply of labor and a surge in unemployment. Yet the reason the minimum wage repeatedly emerges as one of the hottest social issues is not because there exists some other economic logic that fundamentally contradicts this textbook interpretation—that an oversupply of labor and a rise in joblessness result from the minimum wage.

A theory has been proposed that under very limited conditions—such as in certain wage ranges within a monopsonistic labor market—an increase in the minimum wage could actually raise employment. But the likelihood that such labor markets actually exist is extremely low, and even then such cases are confined to a few industries.

Behind the fact that social debate over the minimum wage always becomes a hot-button issue lies a political cause: some very vocal groups are able to appropriate for themselves the gains from changes brought about by minimum wage hikes. Raising the minimum wage is by no means a policy that harms every member of society.

Some employees may benefit from a higher minimum wage by increasing their income or job security, while some employers may use it as an opportunity to select only certain groups they prefer as employees and to weed out potential competitors.

For example, a minimum wage increase can be a welcome opportunity for some employees whose jobs are already secure to raise their income. The claim that one’s wage is not much different from the minimum wage is highly favorable news for regular workers with guaranteed employment, allowing them to gain an advantageous position in wage negotiations. In addition, a high minimum wage undermines the competitiveness of young people just entering the workforce who need to build practical experience, thereby further entrenching the rents—or vested interests—enjoyed by existing employees.

Employers can also use a minimum wage hike as an opportunity to hire based not on workers’ productivity but on other social characteristics such as race or region of origin. If they must pay high wages to everyone anyway, employers’ discriminatory hiring behavior based on their own prejudices will only intensify. A high minimum wage also functions as a barrier to entry that prevents potential competitors without sufficient capital from entering the market.

The biggest problem with the minimum wage is that, whether for employers or employees, it can come back like a poisonous boomerang against the vulnerable groups it was originally meant to protect. The higher the minimum wage, the more employers with limited capital—namely small business owners—will ask family members for help instead of hiring part-time workers to do the job. For employers with ample capital, a high minimum wage is not really a major problem.

Although there are differences across industries, many tasks currently performed by employees can be replaced in various ways through capital investment. These employer responses to minimum wage hikes ultimately mean the disappearance of day labor and part-time jobs. The harmful effects of rapid minimum wage increases fall only on small self-employed employers and on day laborers among employees who do not possess specialized skills.

Controversy over the minimum wage does not arise because there are diverse economic interpretations and judgments about it. What lies behind the minimum wage’s emergence as the hottest issue among many social debates is the enormous political power of certain groups that can use minimum wage hikes as an opportunity to advance their own interests.

Debate over what next year’s minimum wage should be, or whether it should be differentiated by industry or region, is by no means a fundamental solution that can resolve social controversy over the minimum wage. The Yoon Suk Yeol administration should begin thinking about transforming the Minimum Wage Commission, which will deliberate over next year’s minimum wage for the next three months or so, into a political decision-making system that properly reflects the views of vulnerable groups who may actually be harmed by the minimum wage and that cannot be exploited by certain groups.

Sangho Yoon, Research Fellow, Korea Institute of Local Public Finance

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Original title: 올해의 최저임금 시즌이 곧 시작된다

Author: Sang-ho Yoon

Date: 2023-04-19

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=25549