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KEI Spotlight

Can income-led growth succeed?

February 10, 2020

Income-led growth is at the heart of President Moon Jae-in’s economic policy: an effort to boost economic growth by stimulating consumer demand via wage increases. Pursuing this policy, the Korean government increased the minimum wage by 16.4 percent in 2018 and an additional 10.9 percent last year.

The policy has been widely scrutinized by people who point to the orthodox economic analysis of the relationship between wages and employment – that raising the cost of doing business would reduce the number of jobs available to the very people in society who are most in need of employment. But KEI Senior Director Troy Stangarone believes that the answer to whether South Korea’s income-led growth strategy will or will not be successful is more nuanced.

Stangarone finds that broadly, minimum wage hikes may not be as harmful to job creation as many economists originally believed. Studies examining minimum wage increases that have taken place at state and local levels in the United States found that the number of overall low-wage jobs remained essentially the same while workers on the lower end of income distributions saw modest gains. Some studies also highlighted additional benefits of wage hikes such as increased productivity and lower rates of suicide.

Stangarone does point out that Korea’s wage hikes have been sharper than the ones seen in the United States; and, therefore, could experience consequences that were not observed in previous case studies.

Importantly, Stangarone also noted that minimum wage increases accounted for only a small percentage of the overall growth in workers’ incomes in the United States – here, the continued economic expansion may have played a more significant role in increasing wages. Overall, Stangarone sees minimum wage hikes as an important tool for the Korean government, but recognizes the need for other complementary drivers of growth to truly buttress people’s standard of living.

Read Troy Stangarone’s analysis here.