South Korea Hits Brakes on Rapid Wage Gains as Economy Sputters

(Bloomberg) -- South Korea slammed the brakes on ambitious pay raises at the center of President Moon Jae-in’s growth strategy Friday as the vulnerability of an economy struggling with slumping exports and growing joblessness hit home.

Minimum pay for workers will rise by 2.9% to 8,590 won ($7.3) per hour in 2020, following hikes of 10.9% this year and 16.4% in 2018, according to Minimum Wage Commission chief Park Joon-shik, speaking on Yonhap TV.

Moon had pledged to raise the minimum wage to 10,000 won by 2020 when he ran for office two years ago, with a promise to stoke up domestic demand and wean the economy off its dependency on exports. The steep hikes in the first two years of his presidency largely backfired as data showed a widening income gap and job losses in some sectors.

The sharply lower minimum wage gain for 2020 shows the government switching to a much more cautious stance as it views an economy that is just too vulnerable to forge ahead with higher pay as exports continue to plunge and popular support for raising the minimum wage continues to weaken.

“It shows the government is worried about the economy and has come to grips with reality,” said Park Jeong-woo, an economist at Korea Investment & Securities.

Business representatives had initially demanded a 4.2% cut, while their labor counterparts sought a 19.8% rise. In an apparent struggle to reach middle ground, the commission missed a legally set deadline of June 27 to submit the wage proposal. Within the commission, the so-called public-interest commissioners -- appointed by the president and labor minister -- usually hold sway when labor and businesses disagree.

The decision comes with South Korea’s economy showing signs of strain. The economy contracted in the first quarter, with a dismal run of falling exports extending to seven months in June. The unemployment rate has now hovered around a relatively high 4% for the longest period in almost two decades.

The outlook doesn’t look much better. The trade war between the U.S. and China is exacerbating slowing global growth and a tech slowdown is continuing to batter Korea’s chip and smartphone makers. A trade spat that erupted this month with Japan also threatens to crimp production of some of South Korea’s key chip and panel products.

Faced with criticism that aggressive wage hikes are deterring businesses from hiring more people and making lay offs inevitable, the government has admitted the economic fallout from fast increases. The president appeared to have stepped back from his goal in May when he said it wasn’t necessary to reach the figure by 2020.

--With assistance from Michelle Seoh.

To contact the reporter on this story: Sam Kim in Seoul at skim609@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul Jackson, Jiyeun Lee

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