Update : 2019.06.07  Fri  No : 503
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Cover Story
The Ills of Overinflated Minimum Wage

As the minimum wage for next year is set at 8,350 won (US$7.43), university students are showing mixed reactions. On one side, there is a positive response in that they can use the remaining time for leisure or study because the increased minimum wage allows them to make the same amount of money as before but in less time. On the other hand, however, there is a negative assessment that a rising minimum wage has made it even harder for university students to find part time jobs because of fewer job openings.

There are also many management troubles, like conflicts between franchise headquarters and franchisees in society. The Argus analyzed the social problems caused by the rapid increase of the minimum wage, and tried to find out the causes and solutions.

Violation of the right to survival of small business owners

A sharply increased minimum wage adds the burden of small business owners and diminishes their right to survive. As the government implements an increase in the minimum wage in a short period of time, self-employed workers are worried about whether they can continue to run their stores, because operating expenses rise while their sales remain unchanged.

The owner of “Real Ramen” in Imun-dong said, “There was no burden from the increase in wages because originally I hired only one part-time worker. Even so, I was forced to raise food prices because of the higher cost of ingredients.” According to him, since many business suppliers have raised the overall price of supplies due to raised labor costs, he had to increase food prices.

In addition, in the manufacturing industry, which is South Korea’s main field, the burden of expenses including labor costs has continuously increased, leading to a contraction in employment. According to a survey by the Bank of Korea on July 31, “Depress of domestic demand (20.9%),” “A manpower shortage, rise of labor costs (14.2%)” accounted for the majority of manufacturers’ problems. In particular, the ratio of rising labor costs rose 2.2 percentage points from a month ago. This situation is expected to be even more serious for small businesses.

Taking a part-time job like getting blood out of a stone

There is growing anxiety among college students due to the decrease in part-time employment caused by the rising minimum wage rate. Internet job sites are filled with postings by workers complaining that there are fewer jobs than before, or expressing concerns that they could be fired at any time at the current job.

For example, there are numerous postings saying that they look for a part-time job, but that they cannot find any openings, even in the part-time job board of “Every time,” a famous community app used by university students. College students earn their living expenses and tuition mostly by working part-time jobs. It is reasonable to say that a decrease in the number of part-time jobs eliminates their biggest source of income.

The minimum wage increase, originally aimed at “increasing the income of employees, including the part-time workers” is now leading to a contradictory situation of an increase in unemployment.

Deepening conflict between franchisor and franchisee

As the minimum wage hike increased the burden on franchise owners, the complaints to the head office that does not care about this situation have increased and the conflict between the two sides is getting worse.

For example, the National Association of Convenience Store Franchises held a press conference at the office of Bomun-dong on July 16. They called on the administration to rectify the unfair trading practices by the headquarters. They said, “It is true that labor costs have increased significantly due to the steep rise of the minimum wage. However, the head offices’ unfair business transactions are fundamental problems.” They requested lowering royalty fees and cutting credit card fees.

An anonymous shopkeeper who runs a convenience store near HUFS said, “I was forced to work over 15 hours a day because I had to cut workers due to the minimum wage increase, which makes life difficult for me.” Also, “If the royalty fee is reduced by only 1 to 2  percent, the minimum hourly wage of 10,000 won (US$8.91) can be met.”

In addition, the Korea Franchisee Union urged the franchise headquarters to minimize essential items and negotiate for royalty fee reductions at a press conference on July 26. However, the headquarters’ position is that this situation is embarrassing and does not make sense.

Governments’ insufficient consideration for small business owners

The minimum hourly wage, which stood at 6,470 won (US$5.76) in 2017, is set to rise to 8,350 won  (US$7.43) by 2019. The wage increase rate will reach 29 percent over a two year period. The government policy, which requires a wage increase of as much as 30 percent, is being criticized as being excessive and lacking in consideration about situation of small business and self-employed people.

It is because of the wage floor decision, coupled with the recession, that life has been made difficult for small businesses and self-employed people to afford labor costs. Moreover, the situation for small business owners is getting worse every day as the economic downturn lasts longer. Excessive increases in the minimum wage in a short period of time could add to their burden.

According to the Korea Small Business Institute, the average annual income of small businesses in Seoul (for lodging and restaurants) was 18.45 million won (US$16,409) in 2015. It is slightly above the minimum living cost of 16 million won (US$14,408) for a three-person household. Further, this amount is just under 27 million won (US$23,657) for workers working in the same industry. Also, 68 percent of small business owners earn less than their workers. This shows that the side effects of the minimum wage increase can be serious.

Franchise stores to reduce part-time workers

Franchises, which historically used part-time workers the most, are increasingly cutting part-time positions in order to cut labor costs. Especially, the decrease in recruitment of franchise stores is a problem because more than 300,000 franchises nationwide take up a big portion of the job market. The restaurant franchise alone accounts for one fifth of the entire Korean restaurant market. This fact is why such job cuts can have a huge social impact.

The job portals Job Korea and Albamon surveyed 368 employers and found that 54.9 percent of respondents said that they reduced employment due to the higher minimum wage. Among them, a relatively high percent of franchise stores (60.2%) replied that they had decreased their employment this year.
Meanwhile, as minimum wage increased by 29 percent over two years, more and more franchisees are planning to introduce “electronic kiosks” in their stores. If the unmanned machines are used, they can cut monthly labor costs by 90 percent. Many franchises including McDonald’s have already introduced machines. Out of 420 McDonald’s stores nationwide, more than 250 have introduced the kiosk. Lotteria, KFC and Dunkin Donuts are also increasing kiosks in their stores.

Exploitation of the franchise headquarters

Some franchise store owners point out that the real cause of the problem is the exploitation by the headquarters. This is because the headquarters’ supply and distribution margins vary from one firm to another, and their demands have changed at irregular intervals without clear standards. This was caused by the abuse of the relationship between the company and the franchisee. At present, however, there is no clear and compelling regulation to resolve this problem.

In the “Tear Stop - Unfair Transaction Damage Counseling - Franchise Consultation” bulletin of the economy and job site operated by the Seoul Metropolitan Government, the complaints of the franchise owners suffering from the harshness of their headquarters are constantly raised. The most common of these appeals is the “excessive demand for interior construction costs” and “excessive control of purchasing essential items”, which are designated and enforced by the head office, such as spatulas at restaurants. In one case in particular, when the store owner purchases essential items voluntarily, the headquarters visited the store in the name of a hygiene check, and threatened to refrain from renewing the store’s license.

To solve this problem, the Seoul Metropolitan Government has set up procedures to allow the merchants who suffered from unfair damage to report on their headquarters. If they report on the “Tear Stop” page, corrective recommendation, mediation, and arbitration will proceed. However, shopkeepers say that this is not enough to correct unfair practices, as the result is only tiny penalties for the headquarters.


Setting a bill to protect small and self-employed people

To protect the survival rights of small businesses, the government should create alternative regulatory measures and clear standards, and impose such measures forcefully.

On July 25, the government announced a credit card service charge reduction policy. It is intended to reduce the card fee that small self-employed people have to pay down to zero percent. Currently, the small stores? card fee is 0.8 percent. The government expects this policy to reduce the burden caused by the minimum wage increase on small business owners.

In addition, according to the increase of the minimum wage, the government declared on July 16 that it would protect the commercial rights and the right to survival of the tenant by restraining the rise of rental fees, which is one of the difficulties small enterprises had. This is one of the safeguards that can help overcome problems that may arise from higher wages.

However, the debate between the stakeholders under the new policy has been a constant, making it difficult for the legislation to be realized properly. Nonetheless, a clear measure to protect small businesses must be prepared in Korea, where the rate of small businesses is 26 percent, which is higher than the OECD average of 16.5 percent.

Providing job-related benefits to employers, including franchise owners

In order to prevent drastic workforce reductions at small and medium-sized businesses including franchisees, the government should provide effective and clear incentives to help employers to avoid sharply cutting jobs.

For example, a system such as a “job stabilization fund” should be expanded to mitigate the management difficulties of store owners and to support employers to maintain the employment. The system is currently being promoted by the government as a measure to supplement the adverse effects of the minimum wage increase.

However, according to a survey conducted by the Korea Small Business Association, only 54 of the 255 small businesses were seeking job stabilization funds. The reason for this is that the application procedure is overly cumbersome and takes a long time for the examination to be conducted. In addition, there is a problem of limiting the selection of the subjects due to the limited budget range. Hence, it is not a complete supplementary measure.

With the development of science, the spread of unmanned machines replacing people in various workplaces is naturally increasing. However, it is pointed out that the unreasonable policy, which does not consider social trends, has encouraged the acceleration of unemployment. Therefore, the government should provide incentives for employers not to make radical job cuts.

Strengthening monitoring and regulations on franchise headquarters

The government needs to pass a regulation to force the franchise headquarters to engage in fair practices and keep an eye on such headquarters. For example, different royalty ratios at the head office may be collectively fixed, and a cap on the inconsistent distribution costs can be established. In addition, by minimizing the requirement for a franchisee and publishing item price, transparent transactions can be promoted.

In a related move, Kim Sang-jo, chairman of Korea Fair Trade Commission announced on July 16 that he would step up investigations into the unfair practices of the franchise industry. In particular, he emphasized that he will check upon such alleged actions like forcing owners to buy items unrelated to maintaining the unity of the business, exaggerating advertisements and promotional expenses, among other areas.

The anticipated effect of this is that large corporations have become cautious about unfair practices and have eased such wrongful pressure on their franchisees. In addition, it is expected that such action will prevent further damage by legally clarifying the authority of the franchisee.

The government made a formal apology on July 16 for failing to keep its promise of a minimum wage of 10,000 won (US$8.91) slated for 2020, and announced that it would thus implement the pledge more slowly by making thorough long-term plans.

In other words, since the minimum wage increase policy is not yet over, it is time to deeply discuss it. Therefore, young people should be more interested in and make rational judgments as a member of society that is closely related to the minimum wage policy. This will enable us to create a better society by studying ways to promote the public interest without harming the interests of all members of society. 

By Kim Tae-young
Staff Reporter of National Section

2018.09.03  No : 496 Kim Tae-young soso50x@hufs.ac.kr
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