It has weakened firms' appetite for investments in the country.
Korean president Moon Jae In’s target to increase minimum wage fiscal spending on social safety net, and taxation for larger corporates seem to have backfired as the country’s hiring demand drops further specifically in tradable sectors such as manufacturing.
This has wobbled down investment in the country, according to Natixis emerging Asia analyst Trinh Nguyen.
“Although part of this is driven by the downturn of the trade cycle, it also reflects higher production costs forcing firms to invest elsewhere,” she explained.
Nguyen noted that South Korea’s overseas’ direct assets sustained its growth which indicates that their growth opportunities have been growing outside their country.
In addition to the slump in hiring, South Korean firms are also hit by a heated competition with its neighbouring countries such as China and Japan. Nguyen noted that trade war uncertainties, tax cuts, and incentives have also made US investments relatively more competitive.
“Whilst large Korean corporation cope with this by offshoring and having high research and development, which make them competitive in global markets, smaller, labour-intensive and domestic-oriented firms have a harder time as they cannot easily reorganize business operations to reduce costs,” the analyst explained.
Moon has responded to the trend through his call for an income-led growth strategy as worsening labour market data requires an acceleration of policy support rather a slowdown.
“The question is whether the rise of nominal minimum wage can offset the negative impact of higher labour costs, which disproportionately hurt small and medium enterprises (SMEs) and the poor as larger firms accelerate offshoring,” Nguyen noted.
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