South Korea’s gross domestic product (GDP) will fall by 1.33 percent and the consumer price index (CPI) will go up by 6.84 percentage points if the country’s minimum wage is set at 12,210 won ($9.3) as proposed by the labor circle, a report showed Friday.

According to a report released by the Korea Economic Research Institute (KERI) under the Federation of Korean Industries, the sharp rise in the minimum wage may threaten the domestic economy.

The report is based on calculations of economic indices from the Bank of Korea, Statistics Korea and the Korea Institute for Health and Social Affairs, using a model of Computable General Equilibrium.

Assuming that the wage is maintained at the current 9,620 won per hour next year or raised to 10,000, 11,000, or 12,210 won per hour, the study examines potential economic impacts of each level on the country‘s 19 industrial sectors.

A greater level of rise in the wage poses a greater threat to the economy, the study suggested.

In a scenario where the wage is maintained at the current rate, the GDP falls by 0.12 percent and the CPI rises 0.63 percentage point. If the legal wage rises to 10,000 won per hour, the GDP falls 0.19 percent, and the CPI rises 1.05 percentage points.

KERI said that the minimum wage should be varied based on different industries to mitigate the negative impact of a rise.

The study utilized data on workers paid less than the minimum wage by industry.

In a scenario where the economy has different rates of the minimum wage by industry, the study found that a minimum wage of 12,210 won per hour reduces the GDP by 0.73 percent and raises inflation by 3.1 percentage points.

The institute said that low income households are most vulnerable to the minimum wage hike.

According to the study, the income of the lowest bracket falls by 10.7 percent in a minimum wage of 9,620 won per hour, and by 27.8 percent in a wage of 12,210 won per hour.

Households with higher income are less affected.

The report recommended avoiding a rise in the minimum wage in order to mitigate its negative repercussions on the economy. It also proposed different rates of the minimum wage, specific to each industry, to minimize the economic impact resulting from a rise.

“To alleviate the adverse effects of the minimum wage hike and minimize the hardships faced by low-income earners, it is essential to introduce a differentiated minimum wage system starting in 2025,” said Cho Kyeng-yeop, a senior researcher at the KERI. “Considering the current economic downturn, it would be prudent to maintain the minimum wage at its current level next year and closely monitor the economic situation.”

By Pulse

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