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SMEs concerned by populist labor pledges

By Korea Herald

Published : April 24, 2017 - 13:09

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Many small and medium-sized enterprises in the country worry their business will be stifled by populist labor pledges presidential candidates have competitively put forward ahead of the May 9 election.

Both of the two leading candidates -- Moon Jae-in of the Democratic Party of Korea and Ahn Cheol-soo of the People’s Party -- have promised to drastically reduce working hours and raise minimum wages if elected to the five-year presidency.
Moon Jae-in of the Democratic Party of Korea and Ahn Cheol-soo of the People’s Party (Yonhap) Moon Jae-in of the Democratic Party of Korea and Ahn Cheol-soo of the People’s Party (Yonhap)

They unveiled plans last week to shorten working hours to around 1,800 per year, heralding the strict implementation of a 40-hour work week.

Under the current law, an employee is permitted to work up to 68 hours a week -- 12 hours in overtime work and 16 hours in work on weekends and holidays in addition to 40 regular hours.

An agreement reached by a tripartite panel of representatives from the government, labor and management in 2015 called for cutting the maximum weekly working hours to 52 in a gradual manner over the coming four years.

Moon initially seemed to support the accord, but shifted his position closer to the more drastic proposal of his main rival Ahn.

Sim Sang-jeung, a candidate from the minor progressive Justice Party, pledged last week to set up a framework for implementing a 35-hour work week by 2025, if she became president.

Sim, a former labor activist, said the reduced work week would be a “realization of economic justice” and a “revolution in job culture.”

The three presidential candidates have also vowed to raise the country’s minimum wage, which is pegged at 6,470 won ($5.70) this year, to 10,000 won within their presidency.

According to estimates by the Korea Employers Federation, reducing weekly working hours from 68 to 52 would increase labor costs by 23.5 percent and a minimum wage hike to 10,000 won would lead to companies paying 5.7 trillion won more in wages in the first year of application.

Such increased burdens are seen to be felt more heavily by small and medium-sized enterprises than large corporations.

“Many SMEs may be driven into closing their business if presidential candidates’ labor pledges are put into practice,” said an owner of a small manufacturing company, who wished not to be named.

“They appear to have no idea of the reality faced by small and mid-sized firms,” he said.

Critics say presidential candidates and their economic advisers are locked in a dogmatic view that reducing working hours will lead to increasing employment, which in turn will help boost household income and consumption.

But shortened working hours will more likely result in widening the wage gap between SMEs and large companies and making it harder for SMEs to hire qualified workers.

Kim Young-bae, KEF vice president, said if working hours were shortened, unionized workers at large profitable corporations could gain an increase in wages to compensate for loss in payment through negotiations with management, while most SME employees would just be paid less.

In a lecture at the Korea Federation of SMEs earlier this month, Moon suggested enhancing labor productivity as a measure to ease or offset additional burdens reduced working hours would put on companies.

But SME owners dismissed his proposal as out of touch with actual business conditions, saying many small manufacturers in the country maintain their competitiveness through overtime work by a limited pool of skilled workers.

Corporate officials note the presidential candidates are pushing to reduce working hours too hastily over a relatively short period, compared to cases in other advanced nations.

Japan shortened its work week from 44 hours to 40 hours over eight years in the 1990s. It took France and Germany 16 years and 29 years to reduce their work week by four hours and five hours to 35 hours in 1998 and 1995, respectively.

Experts also say minimum wage increases proposed by presidential candidates will prove too steep for SMEs to absorb.

The country’s minimum wage has climbed at an annual rate of 6-7 percent over the past decade. The rate will have to accelerate to 15.7 percent or 9.2 percent if the wage floor is to be heightened to 10,000 won by 2020 or 2022.

Such rates outpace the country’s annual price hikes and deposit interest rates, which hover below 2 percent.

Yeon Gang-heum, economics professor at Yonsei University, said Korea needs to be patient in raising its minimum wage at a proper pace in accordance to productivity growth, though a minimum wage at 10,000 won would still be lower than those in other advanced economies.

A study by a local research institute predicted raising the wage floor to 10,000 won would result in a loss of up to 510,000 jobs mostly at SMEs suffering from a decline in sales and profits.

“The steep increase in minimum wages would also make more SME owners end up being offenders of the law, given more than 3 million employees are now paid less than the minimum wage,” said Chung Uk-jo, an official at the federation of SMEs.

By Kim Kyung-ho  (khkim@heraldcorp.com)