Employers circumvent minimum wage burdens by reducing hours and benefits, report shows

No. of migrant workers part of the Justice Ministry's foreign seasonal workers program

Some workers even saw pay decrease after minimum wage hike

No. of migrant workers part of the Justice Ministry's foreign seasonal workers program

An increase in the minimum wage resulted in hourly wages increasing last year for the bottom-earning 10-20% of workers, but a comparison in terms of monthly income showed an actual decrease in wages from the year before, an analysis shows. While the situation involved a complex range of factors including a short-term increase in jobs amid government policy measures, observers are insisting on the need for institutional improvements to address the side effect of employers splitting up working hours.

On Jan. 5, the Korea Labour and Society Institute (KLSI) published its “Report on the Effects of the 2018-2019 Minimum Wage Increase in Reducing Wage Inequality.” According to the report, the 2018 and 2019 rates of increase for the first and second deciles accounting for the lowest hourly earnings totaled 8.3% and 8.8% respectively, which exceeded the 0.6-8.2% increase for the fifth to 10th deciles. But an observation of monthly wage changes over the same period showed the rates of change for the first and second deciles to amount to 4.1% and 2.4%, respectively.

This stood in contrast with the rise in monthly wages for all other deciles apart from the seventh and eighth, where slight declines of 0.1-0.2% were observed. The result’s analysis was based on supplementary economically active population census data by employment type from Statistics Korea (figures as of August for each year). Amid policies by the Moon Jae-in administration to raise the minimum wage, the hourly minimum pay rose by 16.4% to 7,530 won (US$6.43) in 2018 and by another 10.9% to 8,350 won (US$7.13) in 2019.

The report noted that employers seeking to reduce the burden from the higher minimum wage have been responding by reducing working hours, taking advantage of their freedom from obligations under the Labor Standards Act. By splitting working hours down to less than 15 a week, employers are able to avoid having to offer paid weekly holidays, annual leave, or severance pay and are not obligated to enroll in employment insurance, the national pension, or health insurance. Indeed, weekly working hours for the first and second deciles as of August 2019 were down by 2.8 and 3.1 hours, respectively, from the year before. For the first decile, the proportion of “extra short-term” workers rose from 33.7% in 2018 to 41.9% in 2019.

The result has been that while the first decile showed a higher rate of increase in hourly income than other deciles over the two years (2018 and 2019) since the minimum wage began rising in earnest -- rising by 19.9% between 2017 and 2019 -- the average rate of increase in monthly pay was the lowest, amounting to 1.9% over the same period. In connection with this, changes in the percentage of workers from the low-income demographic represent another noteworthy trend. The number of “low-income” workers receiving less than two-thirds the median for monthly wages had previously dropped from 4.1 million (20.5%) in 2017 to 3.59 million (17.9%) in 2018, but increased all the way to 4.44 million (21.6%) last year. A comparison of pay disparity (wage inequality level) based on the boundary values for the top-earning and bottom-earning 10% showed a trend of decline for hourly wages -- with the difference dropping from 4.13 times in 2017 to 3.75 times in 2018 and 3.59 times in 2019. By month, however, the disparity rose back up to 5.39 times after previously dropping from 5.63 times to 5.04 times over the same period.

“While an increase in the minimum wage generally has a positive effect in terms of rising wages for low-income workers, we should also note how monthly pay has fallen as working hours have decreased,” said Kim Yoo-sun, chairman of KLSI and author of the report.

“Some of the factors include economic fluctuations and increases in short-term positions for senior citizens and platform labor, but proactive institutional improvements appear necessary for the side effect of employers responding by splitting up working hours to reduce the payment burden,” he advised.

The proposed improvements include upholding the principle of time proportionality for extra short-time workers by guaranteeing paid weekly holidays and annual leave according to the Labor Standards Act and instating mandatory enrollment in the four major forms of insurance.

By Hwangbo Yon, staff reporter

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