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| ▲ A graph of the wage peak system. | ||
The 13th largest economy in the world and a proud member of the Organization for Economic Cooperation and Development (OECD). These are just a couple of the glamorous titles that South Korea has rightfully earned through decades of hard work. However, such titles are increasingly losing their shine as the economy struggles to get back on its feet. Against such a backdrop, will the wage peak system be a saving grace of the Park administration that has been nothing but a disappointment?
In an attempt to kickstart South Korea’s ailing economy and sluggish growth, the government has been pushing forward a sweeping reform in the labor sector since last year. As such a monumental reform is not a matter to be decided overnight, the lengthy negotiation process involves the Ministry of Employment and Labor (MOEL), the Federation of Korean Trade Unions (FKTU) and the Korea Employers’ Federation (KEF). However, the negotiating table was off to a rough start and has faced numerous hiccups along the way due to a critical lack of compromise to find common ground.
What is the Wage Peak System?
Yet, at the heart of the meager progress that the tripartite negotiation committee has managed to produce so far is the highly controversial “wage peak system.” This is a government- proposed system in which workers’ wages start to plateau and slowly decline as they near the retirement age. More specifically, workers at the age of 55 and onwards will see their wages start to reduce by about 10 percent annually.
As of February, more than 90 percent of state-run corporations and 11 major conglomerates, namely Samsung and LG, have adopted the wage peak system and the number is rising. In fact, starting in 2017, firms with less than 300 employees are scheduled to implement the system as well. On top of this, the government is seeking to incentivize more companies to introduce the system by doling out additional subsidies.
Why Now?
The government’s rationale for taking this initiative at such troubled times is twofold: lower youth unemployment and higher job security for older generations. The soaring youth unemployment rate has reached a record high of 9.5 percent as of January. They are holding onto the belief that the labor costs that are saved through the system could be reserved for new hires, thereby remedying the unemployment crisis.
On the other hand, the extension of retirement age from 55 to 60 with the recent passage of the Employment Promotion for the Aged Act is another key factor. As South Korea has entered the phase of a full-blown aging society, extending the retirement age was deemed necessary. However, because such a measure will inevitably incur tremendous costs on the part of the management, the government expects the wage peak system to alleviate some pain. Therefore, the government is essentially aiming to kill two birds with one stone with this ambitious policy. such a measure will inevitably incur tremendous costs on the part of the management, the government expects the wage peak system to alleviate some pain. Therefore, the government is essentially aiming to kill two birds with one stone with this ambitious policy.
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Predictions – A Wishful Thinking?
However, such data provided by the government is far from conclusive and fails to look at the larger picture. There is a plethora of experts and concerned parties who remain skeptical about the effectiveness of the wage peak system. “The problem lies in the fact that the reduced wages will not necessarily translate into more vacancies for new hires,” says Professor Ham Gi-Young (Economics). In that case, he warns that this will further aggravate the challenges that are already on our hands.The Park administration has been promoting the system based on the claim that it could be a “win-win” for both
workers and employers, reviving the overall economy in the process. For instance, the Ministry of Strategy and Finance (MOSF) forecasted that state-run organizations are expected to hire 4,400 additional workers this year, thanks to the savings from the wage peak system.
Even if everything plays out according to the government’s blueprints, they should not rule out a potential side effect of this system, according to Professor Ham. “Given that 22 percent of Baby boomers in Korea are not registered in the national pension, on top of a hefty college tuition and marriage fund for their children, a smaller income could deal a serious blow to their quality of lives,” he said.
Won Jun Yeon, an executive director at ISU Chemical that is well-known as a leading chemical manufacturing firm, also reinforced these doubts about a “lack of logic” in the government’s policy. He says “Companies are already under crushing pressure in terms of labor costs with the extension of the retirement age.” In this sense, the wage peak system is “a tool that is designed to partly alleviate such pressure, not hiring more people,” he added.
Room for Improvement
It seems quite obvious that the wage peak system is an overly ambitious policy that requires further scrutiny. According to Professor Ham, one way to do so is to coordinate the national pension with the wage peak system so that “the Baby boomers can reap the benefits of both systems simultaneously.” In other words, the national pension should be scheduled in a way that retired workers can receive their pensions the moment their wages start to go downhill.
Moreover, “Rather than imposing the same rate of wage reduction across the board, applying different rates in different industries based on each sector’s wage situation seems to be a prudent approach,” he added. He also suggested that the income level could be another criteria when determining the rate of wage reduction, like the progressive taxation. This way, the government can cushion the blow on the deteriorating quality of life and appease the disgruntled workers in their 50s approaching the retirement age.
As for its impact on the youth unemployment, the government should oversee companies’ use of the saved labor expense to assure that the money is spent to boost the labor market by hiring more workers, instead of fattening their own pockets.
By all appearances, the government-proposed wage peak system seems to be a policy that is designed specifically for addressing the ever-worsening aging phenomenon. What they need to do at this point is to dial down the expectations and aim for one specific target. Rejuvenating a stagnant economy is a long and arduous task that requires patience and caution.