Agenda for the Reform of the Minimum Wage System
The income gap in Korea is worsening despite the marked recovery in the economic indicators. One significant feature of the recent change drawing the social attention is the alarming increase in the number workers engaged in various form of atypical employment. The wages and income of these categories of workers are below the level capable of supporting minimum livelihood. A "new class of poor" is being created. While the "Law on the National Basic Livelihood Guarantee" should be implemented in its fullest intent to provide the minimum livelihood for low income people, the "minimum wage setting system" needs to be brought in line with the reality to set a meaningful basic wage standard for low wage/income workers. The KCTU has undertaken, with the support of the Fridriech Ebert Stiftung (Seoul Office) of Germany, an in-depth study of the "minimum wage system" with a view to drawing the reform agenda to resurrect the ossified system into a meaningful instrument for workers. The need for this study arose -- not only because of the urgency of the issue -- but because of the opportunity for the KCTU to participate in the Minimum Wage Review Board for the first time following its "legal recognition" in November 1999. The study was undertaken with Kim Yoo-seun (Deputy Director, Korea Labour & Society Institute) as the chief researcher. This book is the result of this study. The analysis, the issues, and the recommendations of this study is intended to form the backbone of the KCTU's "strategy" in participating and addressing the Minimum Wage Council. The study found that the current minimum wage system is near meaningless in terms of its institutional mechanism and the level of proposed minimum wage. The study, therefore, makes recommendations for the reform of the minimum wage setting system and appropriate level of minimum wage. The study concludes that the "minimum wage" as envisaged in the current Minimum Wage System should apply to all workplaces. Furthermore, the current exclusion of workers in 'security monitoring occupation' (ranging from private security workers to apartment security employees) and those workers employed "intermittently" from the application of minimum wage should be lifted. In terms of the desirable level of minimum wage, the study recommends the current level of minimum wage to be brought up to at least the 50% level of the average wage of all workers.
The minimum wage system was introduced in Korea in 1988. However, the coverage of workers in its application has always been very limited. Furthermore, the level of minimum wage set by the system has always been extremely low, to an extent it has become meaningless. In order to resurrect the system into a meaningful instrument of social security, its institutional features -- as outlined in the law -- need to be reformed. First, minimum wage should be applied to all workplaces regardless of industries and size of workplaces. Second, there must be efforts to guarantee the neutrality of participating "public interest representatives". Third, the entire system must be complemented by the establishment of regional minimum wage councils. Fourth, the current exclusion of the "security service employees" and "intermittently engaged employees" and disabled persons, trainees, and apprentices must also be covered by minimum wage system. Furthermore, minimum wage set by the Minimum Wage Council must also apply to "home workers", possibly through the enactment of a new legislation covering "home work". Another important supplementary reform measure to bring the current minimum wage system lies in creating the mechanisms for extending the application of collective agreement (through an amendment of the Trade Union and Labour Relations Adjustment Act).
Currently, the level of minimum wage (compared to the average national wage) in Korea is the lowest among the OECD member countries. In France, the minimum wage is set at 68.5% of the average wage of all workers in the country -- twice as high as the level found in Korea, which stands at 30.6%. An international comparison finds the western European countries have relatively higher level of minimum wage (benchmarked against the overall average wage) with 55.9 to 68.5% compared to Anglo-Saxon countries where the level hovers around 43.3 to 47.4%.
In terms of number of workers benefiting from the minimum wage setting, Korea's record is the lowest, with only 1.1% workers eligible to benefit from the societal intervention. Mexico with 17.6% of workers affected and France with 11.0% have the highest rate of application. The level in the Netherlands, Hungary, Poland, Portugal, and the U.S. range between 3,8% to 5.1%. In the United Kingdom, which introduced a minimum wage system in April 1999, 8.3% of workers are positively affected by the minimum wage setting. On average, 4 to 5% of workers benefit from minimum wage system where they exist among the OECD countries.
The minimum wage in Korea is also extremely deficient in meeting the average cost of living. A comparison of the level of minimum wage with the "cost of living for a three-person household" as found by the National Statistical Office reveals the sorry state. In 1988, in the first year of its introduction, minimum wage was able to meet 27.8% of the needs as identified in the average cost of living. Its capacity to service the average cost of living declined steadily to 20.3% in 1997. It arose to 23.1% in 1998 (when the nominal and real wages decreased due to economic crisis, and cost of living declined due to severe spending restraint), only to fall again in 1999.
There is also an alarming trend of decline in terms of the "relative level of the minimum wage compared with the average wage". The minimum wage which amounted to 38.4% of "normal wage" and 26.6% of "total wage" in 1989 decreased considerably to 31.7% and 20.8% respectively in September 1999. The sharp decrease in the "relative level of the minimum wage compared with the average wage" has led to the contraction of the number of workers benefiting from the system and the rate of application. In the period from 1989 to 1993, 200,000 to 390,000 workers (4.5% to 10.7%) benefited from the system. In 1994 to 1998, the numbers and the rate decreased to 100,000 to 130,000, hovering around 2% of the workforce. Since September 1998, the number dropped to 20,000 to 50,000 -- that is, statistically insignificant rate of 0 to 1% of workers benefited from the system.
The Organisation for Economic Cooperation and Development (OECD) defines relative poverty as the income level that is below 2/3 of the median range wage of permanent employees. Western European countries, such as, France, the Netherlands, Belgium, and Luxembourg define relative poverty (or low wage) by 1/2 to 2/3 of the median range wage of permanent employees. On the other hand, countries like the U.S., Canada, and Japan define minimum wage at the 40 to 50% level of the median wage of permanent employees. In Korea, however, the minimum wage level has declined from 32.6% in 1992 to 26.6% in 1997 in comparison with the median rage wage of permanent employees. The situation has improved during the time of economic crisis and the IMF prescribed restructuring programme in the aftermath of the financial crisis at the end of 1997 due to the general decline in the wage levels. However, the actual rate remains below 30% of the median range wage by 1 %.
In order to re-invent the efficacy and significance of the minimum wage system, it is necessary to raise the level of minimum wage. The basic criteria for determining the minimum wage should be "the relative level of minimum wage compared with the average wage". However, the appropriate level should also be informed by the consideration for the rate of application, direct wage cost, the average rate of wage increase for the beneficiaries of the minimum wage system, and cost of living. The study found that 50% of the average wage was the most appropriate level of minimum wage. Such a rate does not have any significant negative impact on macro-economic trends while contributing to the resolution of the problem of low wage and narrowing the wage gap. The minimum wage set at 50% of average wage brings the application rate to 11.4%. This means that 11.4% of all workers receive wage increase due to the increase in the level of minimum wage. The average rate of wage increase among the beneficiaries of the minimum wage amounts to 22.2%. The total amount of money corresponding to the increase is 0.9% of the total wage income of all workers. This will bring an improvement in the life conditions of low waged workers and easing of the wage and income gap in the society. The chief researcher and author of the current study is Kim Yoo-seun, the Deputy Director of the Korea Labour & Society Institute. This research and the publication of the book on the result of the study were made possible by the kind assistance and cooperation of the Friedrich Ebert Stiftung (Seoul Office). The KCTU would like to thank Dr. Peter Mayer, the Representative of the FES Seoul Office for his consistent commitment to the capacity building efforts of the KCTU.
KCTU was invited to participate in the Minimum Wage Council as a representative of the labour in 2000 following its legal recognition at the end of 1999. The Council is composed of 27 persons: 9 labour representatives, 9 employer representatives, and 9 so-called "public interest" representatives. It begins its deliberations in April every year and adopts the proposal for minimum wage rate, in July, for recommendation to the Minister of Labour. The Minister of Labour is required to proclaim the minimum wage rate unless there is some major objections. The minimum wage rate is applied to all workers for one year period, from September 1 to August 31 the next year. KCTU drew up its demand and proposal for minimum wage rate on the basis of the study and conclusion of the current study. KCTU had called for the minimum wage to be set at 50% of the average wage of all workers. This is translated into 2,706 won per hour or 21,648 won per day. Apart from the proposal for wage rate, the KCTU also called for institutional changes. This was also informed by the conclusion and recommendation arrived at by this current study.
The reform measures the KCTU had called for includes, the application of the minimum wage system for all workers in all workplaces, lifting the current exclusion of the workers who perform security services, those employees who are engaged intermittently, and workers with disabilities. In order to provide support to the employers who may have difficulties in meeting the requirement of the minimum wage rate, the KCTU also called for taxation assistance to small or micro- enterprises which are required to comply with minimum wage requirement. The KCTU proposed the establishment of a special committee to reform the minimum wage system to review the overall reform and improvement of the system.
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