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Now is the time for companies to respond

Posted April. 16, 2014 01:40,   


“That’s because companies are greedy.”

An incumbent minister said to the question “What is the cause of bipolarization?” The answer from a minister of the Park Geun-hye administration was a little puzzling but not groundless. Korea Institute of Finance also said in its recent report, “The income tilted towards companies is the cause of low growth.”

The corporate cash assets have exceeded 500 trillion won (480 billion U.S. dollars) for four consecutive months. The corporate savings ratio was 21.5 percent of last year’s, which is the second highest among the member countries of the Organization for Economic Cooperation and Development (OECD), following Japan. Meanwhile, household debts amount to 1,000 trillion won (960 billion dollars), and the household savings rate is a meager four percent.

There is a reason why companies are rich and households are poor. The corporate income jumped 19.1 times from 2005 to 2010, while the household income rose only 1.6 times. The labor share of the national income fell from 75.8 percent in 1997 to 68.2 percent in 2011. Employees’ real income has remained flat for six years since 2008. The “growth without payrolls” leads to the low household income and interrupts the recovery of domestic demands.

It is understandable that companies prepare for the uncertainty in the business environment and global competitions. If they just set aside cash, however, this would only worsen their earnings like a boomerang. The Korea Institute of Finance said, “If policies do not encourage companies to pay more to employees or hand out dividends, Korea could face a long-term recession like Japan.”

The U.S., the U.K., and Japan are not much different. They chose raising payrolls as a measure to stimulate their domestic economy. The U.S. government proposed a bill that raises the minimum wage by 40 percent from 7.25 dollars per hour to 10.1 percent dollars to the Congress. In the U.K., the Confederation of the British Industry (CBI), the country’s largest employers’ group, said, “All citizens should enjoy the fruits of economic recovery. Give more wages and opportunities to workers.” The two countries took the opposition direction, however. Under the leadership of former U.S. President Reagan and British Prime Minister Thatcher in the 1980s, they believed that higher wages would cut employment.

Japan has taken a step further. Japanese Economics Minister Akira Amari said, “If a company makes profits but does not raise wages or payments to subcontractors, it will be recognized as a ‘shameful company’.” Large Japanese companies such as Toyota, Honda, Toshiba, and Hitachi increased employee’s payrolls. The Financial Times said that if companies release money to the market by raising payrolls, a large part of them will return to their coffer through consumption.

The Korean government tries to create jobs by increasing investments by companies through regulatory reform. Easing regulation, however, cannot stimulate domestic demands at a time when households are almost dying. As the economic situation has changed now, the government needs to take various economic stimulus packages aside from regulatory reform.

Lee Byung-chull, the late founder of the Samsung Group, had a management philosophy that companies contribute to society with businesses. Chung Ju-yung, the late founder of the Hyundai Group, said, “We can be better off when the country is better off.” Can conglomerates neglect the domestic economy just because they have more revenues from the global market? In Germany, large companies that generate 64.5 percent of the nation’s wealth create 40 percent of the country’s jobs. Korean conglomerates generate 62.3 percent of the country’s wealth but creates only 13.2 percent of the country’s jobs.

It does not need to be a pay raise. Companies should not just set aside cash, but make more efforts to vitalize the economy by making investments, helping subcontractors, or hiring young people. Although they may look like costs at first, they will eventually help their long-term growth. The government tries to create a better business environment and the people are responding to it. Now is the time for companies to respond.