Minimum wage hike, rate rise pile pressure on small business owners

Small business owners and the self-employed, already struggling under sluggish domestic demand, are facing deeper hardship as a minimum wage increase and a benchmark interest rate hike land at the same time. Labor costs and other expenses are set to rise immediately, while higher borrowing costs and shrinking household spending power are fueling fears of a "triple burden" that could push many to the brink.

According to small business and self-employed associations, next year's minimum wage will rise 3.7 percent to 10,700 won ($7) per hour, driving up costs across labor, raw materials and logistics. The Bank of Korea's Monetary Policy Board raised the benchmark interest rate Thursday, making higher interest payments on nearly 1,100 trillion won in self-employed loans unavoidable. The Bank of Korea estimates that a 0.25 percentage point increase in lending rates for the self-employed would add 1.8 trillion won to their annual interest burden. Anxiety is also growing over the hit to household spending power that higher rates will bring.

Some are warning of mass closures. A 2024 paper by Jeon Hyun-bae, an economics professor at Sogang University, published in the Korean Economic Review — the English-language journal of the Korean Economic Association — found that the negative effects of minimum wage increases fall hardest on small business owners with fewer than five employees. Their productivity is lower and financial constraints greater than those of large and mid-sized companies, leaving them more vulnerable to economic shocks. Cutting workers and hours can provide some relief, the paper said, but it is only a stopgap — and some owners will have no choice but to shut down.

An official at the Korea Franchise Industry Association said the minimum wage increase adds tens of thousands of won a day to owners' labor costs, and that cascading cost increases at every stage of production and logistics ultimately fall on franchise operators. "In the short term, owners can respond by raising prices, but as declining sales erode profitability over time, the number of closures will grow," the official said.

An official at the Korea Convenience Store Industry Association also expressed concern, saying the minimum wage hike will push up staffing costs while sales fall. "If households cut spending to service higher debt, you get a vicious cycle of rising costs and falling consumption," the official said.

The Korea Federation of SMEs and Micro Enterprises issued a statement criticizing the decision, saying that when weekly holiday pay is included, next year's minimum wage amounts to 12,840 won per hour, or 2.24 million won per month. "For small business owners already weakened by an unprecedented crisis, this increase will be a heavy shackle — deepening labor cost burdens and worsening operating conditions," the statement said.

The minimum wage increase is also expected to cost jobs. Data from the Seoul Metropolitan Government's commercial district analysis service show that the number of franchise outlets in Seoul stood at 52,025 in the first quarter of this year, down 3,511, or 6.3 percent, from two years earlier. The number of outlets that closed in the preceding year was 1,966 — up from 1,545 the year before — meaning at least 5.3 franchise stores shut down every day. The decline in franchise outlets, which have long provided jobs for young people and middle-aged part-time workers, could further erode household spending power.

That is why calls are growing for a tiered minimum wage system that applies lower rates to micro businesses with fewer than five employees. Japan sets minimum wages by region, with major cities such as Tokyo and Osaka paying more than smaller provincial towns. In the United States, some states including New Jersey allow employers with one to five workers to pay a lower minimum wage.

A franchise industry official argued that the minimum wage should be differentiated by sector and business size, and that the composition of the Minimum Wage Commission should be reformed to better reflect the voices of small business owners. "If a blanket increase is pushed through regardless, the government should at least roll out measures to stimulate consumer spending," the official said.