South Korea Sets 5% Minimum Wage Raise Amid Inflation Concerns

Sam Kim, Bloomberg News

A customer looks at vegetables at a Hanaro Mart supermarket, operated by the National Agricultural Cooperative Federation (Nonghyup), in the Seocho district of Seoul, South Korea, on Thursday, May 14, 2020. To shield the economy, the government has pledged more than 240 trillion won ($196 billion) in spending. The focus has been on helping businesses survive and keep workers, while families have been given cash handouts to spend at smaller stores. , Bloomberg

(Bloomberg) -- South Korea will bump up its minimum wage by 5% next year in a decision closely watched by policy makers concerned about the possible emergence of an inflation-income spiral.

The decision came early Thursday morning in a vote in which all nine business representatives abstained, according to a statement from the labor ministry. Four negotiators from a labor union also boycotted the vote, the ministry said.

Nine government-appointed members voted in favor of their proposal to raise the pay level to 9,620 won ($7.40) per hour, joined by some representatives from another labor union, the ministry added.

The rate of increase in the minimum wage carries implications across many sectors of the economy that rely heavily on labor. After a 10.9% rise in 2019, Korea has kept increases below double digits amid worries larger gains could put pressure on small businesses already buffeted by the pandemic.

With inflation running higher than forecast for this year, Finance Minister Choo Kyung-ho has asked businesses to refrain from raising pay competitively. The Bank of Korea is also worried a fast pickup in wages may lead to stubbornly high inflation becoming entrenched.

Korea’s Finance Minister Warns Wage Increases May Fuel Inflation

Business representatives sought a 1.86% increase while the labor side demanded a 10.1% raise in their final offers in the talks that began in April. With no compromise reached, the two sides asked the government mediators to step in, the ministry said.

The final proposal came by adding this year’s 2.7% economic growth forecast and 4.5% inflation projection and then subtracting it by the expected 2.2% increase in employment, according to the ministry.