Minimum wage rise: medicine or poison?

Walmart hires the largest number of employees in America. Having been criticized as a representative company that pays low wages to its staffs, Walmart announced in February that it would increase the minimum wages to 9 U.S. dollars, which is higher than the federal minimum of 7.25 dollars from April and to 10 dollars from February 2016. Paul Krugman, New Keynesian economist, acclaimed Walmart’s decision in his column titled “Walmart’s visible hand” in the New York Times dated on March 2, saying that the decision would reduce income disparities and increase middle-class in the country.

In the State of the Union Address in January 2015, U.S. President Barack Obama said, “If you truly believe you could work full-time and support a family on less than $15,000 a year, try it,” putting much emphasis on minimum wage increase. It appears that Walmart has taken lead in responding the keynote message of the Obama administration. There are, however, opposite analyses that stress the importance of invisible hand. They say that Walmart took the early start in a fierce hiring competition as American economy is turning around.

On Wednesday, Deputy Prime Minister for Economic Affairs and Minister of Strategy and Finance Choi Kyoung-hwan said, “Korea increased its minimum wages by 7 percent in 2014 and the year 2015 plans to see even faster increase,” urging Korean business to raise employment wages. It sounds that he is encouraging Korean companies to do the same as Walmart now that the Korean government has decided to do the same as the Obama administration. On Tuesday, a day after Minister Choi’s comment, the Korea Employers Federation, however, suggested the proper wage increase rate for 2015 at 1.6 percent or lower, which was the lowest since the mid-1970s when the federation began to suggest the proper wage increase rate.

Unlike the U.S economy that has begun to show an apparent and strong recovery, Korean economy is still fumbling in the dark. Under the circumstances, conglomerates have enough resources to withstand against additional financial burden of wage increase while small and medium sized companies or self-employed businessmen are highly likely to reduce their employment. In that case, the increase of consumption and investment that the government expects to attain with the wage increase can’t be expected, or it would get even worse. Korea should come up with the proper level of wage increase that is suited to Korean economy. Following what America does without questioning could bring about side effects.

pisong@donga.com