The Impact of Minimum Wage Increase on Labor Cost, Employment, Performance and Coping Strategies

Abstract

[Purpose] This paper intends to analyze the impacts and corporate responses to minimum wage reform in South Korea to present proper approach for sustainable minimum wage system. In 2018, the minimum wage is increased by 16.4%, which is highest increase rate since 16.6% in 2001. Therefore, it became mandatory for firms to raise the minimum wage because the minimum wage rule applies across all industries and sizes. In this study, we examine how rapid increase of minimum wage affect firms’ labor cost, employment, performance and their coping strategies. [Methodology] We examine the impact of 2018 minimum wage increase on firms’ labor cost, employment, profitability and coping strategies compared with prior periods. In addition, to analyze whether the impact of the minimum wage increase is different by firm size, we divide the sample into two groups: small firms and non－small firms. [Findings] Using data of Korea manufacturing firms between 2014 and 2018, we find that minimum wage increase contribute to greater labor cost growth, less employment growth and operating performance for small firms compared to non－small firms. In addition, the result shows that labor－ intensive jobs are being replaced by machinery and capital investment especially for small firms. [Implications] This study has following contributions: First, this study analyzes the effect of the minimum wage increase on firms’ employment, performance and their coping strategies based on firm size. Second, this study provides several policy implications regarding the current minimum wage discussions in terms of sustainable level of minimum wage. Lastly, this study presents an initial attempt to examine the impact of 2018 minimum wage increase on firm’s performance and coping strategies as well as labor cost and employment, providing insights for follow－up studies.