Wages have two significant effects on the national economy.
Not only are wages a factor that determines competitive power in
the international market, but they are also a source of consump-tion
that determines the size of domestic demand. The issue of
appropriate wage level has important implications for both labor
and management, and the national economy as a whole.
The Korean economy underwent severe difficulties following
the request to the International Monetary Fund for bailout loans
in late 1997. Numerous companies and workers felt as if they
were walking on thin ice everyday; they were suffering from
bankruptcies and employment instability, respectively. Wage
issues, including level and structure, have been at the core of dis-cussion.
Until late 1997, the Korean economy had enjoyed rapid
growth based on excellent and cheap human resources. However,
excessive expansion of companies and high consumption con-tributed
to bubbles within the economy such as the soaring prices
of housing and drastically increased wages. As a result, the com-petitiveness
of Korean companies weakened greatly in a short
period of time due to rising production costs, rigid wage struc-tures,
low productivity and inefficient management.
However, the Korean economy is entering the era of advanced
industrial technology following an era of high wages. In addition,
faced with the challenge of introducing knowledge management,
companies are paying more attention to the rationalization of
wage management, which can be a determinant of managerial
So far, the international competitiveness of Korean goods has
been derived mainly from low prices, and wage levels in Korea
were relatively lower than those of competing nations until 1987.
Since then, however, Korea’s wage levels have been the highest
among newly emerging Asian competitors, including Taiwan,
Singapore and Hong Kong, as a result of continued wage hikes
that exceeded increases in productivity. In terms of quality, the
comodity rejection rate is slightly higher than that of Japan due to
decreased willingness to work. For these reasons, the prices and
qualitative competitiveness of Korean export goods are plunging.
Therefore, it is necessary not only to rationalize the management
of wages but also to manage them so that productivity is raised
through maximization of worker motivation.
Wage determination systems, the criteria that determine indi-vidual
worker’s wages, has emerged recently as an important
issue. In Korea, the basis of the wage determination system has
been a seniority-based pay system in which individual worker’s
wages are determined by personal properties such as schooling
and length of service. However, many problems related with the
seniority-based pay system, including difficulty to induce worker
motivation, are pointed out. In order to eradicate rigidities in the
seniority-based pay system, efforts have been made in many
areas. These efforts, which include exploring ways of introducing
job-capability-based pay systems, diffusion of annual salary sys-tems
and gain-sharing systems, might be important in this con-text.
Another important issue is the wage composition system,
which reflects the content of items and proportion of each item
that constitute wages.
The wage system in Korea is very complicated due to vari-ous
kinds of allowances, and is based on seniority-linked pay,
which makes it difficult for wages to accurately reflect a worker’s
capability, contribution, and business performance. Complicated
wage composition, in which the share of basic wages is low and
many different kinds of allowances are included, is an important
factor that produces difficulties in the management of wages. As
a result, the fundamental purposes of wage management, includ-ing
enhancement of productivity and motivation of workers, are
The current seniority-based wage system is the result of the
past low-wage era, when securing living wages was given priority,
and of the unique cultural tradition which emphasized seniority.
Even though the seniority-linked wage system was deemed rea-sonable
in the past, it faces growing challenges today as a reason-able
management culture is emerging due to advanced industri-alization.
Korea has to choose whether it will allow its companies
to succeed and grow further by improving the current wage sys-tem
at a time when new changes, i. e. paradigm shifts, are taking
place, or allow them to fail by doing nothing.
It is inevitable for companies to change the seniority-based
wage system into a performance-based one, increasing the effi-ciency
of the wage system amid new trends in personnel man-agement
systems. A wage system that can bring about high
worker productivity will enhance productivity of companies by
enabling long-term efficient utilization of human resources.
In terms of the promotion of international competitiveness
through enhanced productivity and the induction of foreign
direct investment in Korea, wages are a very important factor that
influences the competitiveness of not only Korean companies but
of the entire nation. We will look at general wage issues in the
areas of labor laws, wage levels, wage systems and types of
wages. We also will explore ways to promote efficient wage man-agement
by examining the current status and problems of wage
management. In particular, we are going to focus on the realities
and uniqueness of wages in Korea by explaining the labor market
and working conditions.
Workers view wages as a means of living income. For com-panies,
they represent a part of production costs. Considering
other fixed production costs such as raw materials, interest and
land, wages and profit are bound to conflict with each other-if
one increases, the other decreases. The distribution of wages and
profit is the fundamental problem between labor and manage-ment,
and the view that wages and profit are in conflict with each
other is prevalent. It is clear that the issue of distribution is an
important side of labor relations; however, that is so only during
times of distribution such as collective bargaining.
Both labor and management can benefit from an increased
share of the pie when the competitiveness of companies is pro-moted
by enhancing productivity through labor-management
cooperation and development of workers’ capabilities. When
taken from the productivity angle rather than just from the dis-tributive
view, wages are a useful means of promoting productiv-ity
and securing superior manpower through the motivation of
workers. When wages are seen as total reward system to moti-vate
workers, and are not considered just in terms of amount, the
effectiveness of wages increases.
The world is now entering the era of “economic war without
weapons”, to quote rhetoric from journalism. In order to survive
this severe competition, it is essential for an economy to strength-en
its international competitiveness, which is possible only
through the promotion of productivity. Productivity can be
enhanced by promoting a fair wage system, efficient wage man-agement
and a wage system conducive to the development of
workers’ capabilities. Only when wage payments are linked to
the characteristics of jobs, workers’ capabilities and business per-formance,
will they be able to function as the means for motivat-ing
workers and efficient management by companies.
Wages are defined as, according to Article 18 of the Labor
Standards Act, “wages, salary, and any other payment to a work-er
from an employer as remuneration for work, regardless of the
designation by which such payment is called.” Various terms
such as wages, salary, and allowances are in use but the meaning
of the terms is the same. Sometimes, however, the term “wages”
is used for the remuneration of manual and factory workers,
while the term “salary” is reserved for the remuneration for office
workers. That is, the former is deemed as remuneration for blue-collar
workers in which overtime work is strictly calculated with
fixed working hours as a unit of calculation, while the latter is
remuneration for white-collar workers calculated on the basis of
the total labor provided for a certain period of time, with over-time
work not included. In any event, manual labor and mental
labor is included in term “labor” by the Labor Standards Act, and
are not dealt with differently in the implementation of labor laws
in Korea. No exempt-clause exists in Korean labor laws.
Since wages are the only means of living for workers, they
should be defined as clearly as possible in the labor laws.
However, there are few cases where international labor agree-ments
and laws of other countries provide a detailed and clear
definition of wages. It is not easy to define wages clearly because
the payment of wages is carried out in various forms. The above-mentioned
legal provision gives an abstract definition of wages,
stating that “wages” are any kind of payment to a worker from
an employer as remuneration for work, regardless of the designa-tion
by which such payment is called. Whether or not money and
other valuables paid to a worker constitute wages may be decid-ed
in accordance with case-by-case interpretation of the legal pro-vision
on the definition of wages.
In sum, Korean management practices surrounding wage
issues are now in a stage of transition. The most direct driving
forces lie in the foreign-exchange crisis of late 1997. Traditional
methods of wage management were forced to change in the wake
of overall reform measures that took place in the Korean econo-my
after the International Monetary Fund bailout loan. In retro-spect,
the wage level in Korea was very low before 1987 and the
wage competitiveness of Korean goods was highly evaluated in
the international market. However, this scenario changed after
1987 when democratic reforms were implemented. Since then,
monetary wages increased at a rate exceeding 10 percent per
annum up to 1996. Many people became concerned about the
hyper-increase of wages, and many companies went abroad to
find low-wage areas.
However, the foreign exchange crisis in 1997 changed all
aspects of the Korean economy. Wage increases froze or
decreased, and an annual salary system is being implemented
instead of merely being discussed. Concerns about employment
made employees accept wage-freezes, and concession bargaining
is commonplace in many negotiations. The wage-raising effect of
trade unions has been minimal due to the weakening of unions,
and employment security came up as a first priority issue in
union strategy. Facing these situations, worker-protection laws
are blamed for being still very rigid and not able to reflect social
changes. It is fair to say that overall economic circumstances
made every economic agent in Korea, including employers, trade
unions, workers and the government, think twice about econom-ic
practices of the past.