The sharp increase in the hourly minimum wage for next year, part of President Moon Jae-in’s vow to raise it to 10,000 won by 2020, was seen by many as an advancement in workers’ rights.

The drastic increase, however, may also be a double-edged sword that squeezes the economy by discouraging cash-short business owners from recruiting, despite the government’s subsidy promises.

Small and medium-sized firms and the distribution and service industries will be most affected by the change, as they are all heavily reliant on low wage workers.

“There is likely to be a noticeable rise in the number of owner-operators who cannot deal with the minimum wage increase,” an official at the Financial Supervisory Service said Tuesday.

The financial watchdog will tighten the supervision on monetary institutions in response to the wage hike, out of concerns that loan delinquencies will increase as rising labor costs weigh on small businesses.

The loan balance by six of the top-tier local banks for private operators is already rising, standing at a total of 227.9 trillion won ($202.5 billion) as of the end of last month, up 8.7 percentage points from the previous month.

“The default rate may increase more rapidly for the self-employed (business owners) as their income is not as stable as those living on a payroll,” the FSS official added.

When pressed by diminishing profits, small businesses are mostly likely to cut back on the largest aspect of their costs that is under their control-- personnel expenses -- by reducing the number of employees altogether, observers predicted.

“The minimum wage hike may have come out of a good intention but may have the side effect of reducing the number of jobs,” said Kwon Tae-shin, chairman of the Korea Economic Research Institute and vice chairman of the Federation of Korean Industries.

Rep. Chung Woo-taik, floor leader of the conservative Liberty Korea Party, on Tuesday claimed that the wage hike plan would “boomerang on the labor market” causing widespread unemployment.

Some government bodies and anxious low-tier labor groups also voiced concerns.

The Small and Medium Business Administration on Tuesday admitted that the rise in wage will indeed burden upon small-scale businesses, though it did not agree with the estimate brought forward earlier by business lobbies -- 15.2 trillion won, according to the Korea Federation of Small and Medium-sized Enterprises.

The Korea Association of Convenience Store Industry predicted that a considerable number of convenience stores would be forced to close next year as the labor costs may rise up to 27 percent, leading to job losses for part-time workers.

The presidential office and the ruling party both recognized the possible consequences but placed more focus on support measures, including a government plan to subsidize the increase in wages for small firms.

Rep. Kim Tae-nyeon, chief policymaker of the liberal ruling Democratic Party of Korea, claimed that despite the immediate financial burden, the wage hike was essential to put the economy back on the right track.

“It is true that a fast rise in the minimum wage will put pressure on personnel expenses, but only by increasing the income of low-income workers may our economy enter a virtuous circle,” he said in a party meeting.

“One of the reasons for the small business owners’ suffering is that (the government) has so far failed to stop conglomerates from abusing their power.”

President Moon also said during his secretariat meeting on Monday that his vision to pull up wages would not only boost the nation’s economy in the short-term but also induce a sustainable growth momentum in the long-term.

“The 10,000 won minimum wage is not just an amount but a sign that everyone holds on to the right to live a decent life,” the state chief said.

A trilateral council of representatives from labor, management and the general public, in a last-minute deal late Saturday, agreed to set the nation’s minimum wage at 7,350 won per hour, up 16.4 percentage points from this year, marking the largest rise in 17 years.

Following the decision, the Ministry of Strategy and Finance came up with a blueprint to offer some 3 trillion won in subsidy so as to make up for the wage increase amount for small business operators.

The ministry explained that the subsidies may be continued for another year or more, if necessary, but the Fair Trade Commission chief Kim Sang-jo on Monday added that the financial aid program was temporary, in response to escalating concerns about the government’s fiscal soundness.

By Bae Hyun-jung (tellme@heraldcorp.com)