Factory owners jittery over salary dispute between North, South Korea

Salary dispute between North and South Korea
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Story highlights

  • The disagreement started in late February
  • North Korea demanded a pay increase; South Korea's working on a response

(CNN)A salary dispute between North and South Korea has sent jitters through factory owners operating at an industrial complex that is supposed to be a symbol of cooperation for the divided Korean peninsula.

The disagreement started in late February, when the North Korean government demanded an increase of around $8.60 a month for North Korean employees working in the Kaesong Industrial Complex.
    South Korea is working on a response to the demands, leaving factory owners worried about the threat of a factory shutdown.
    "I'm already nervous about the situation because of the traumatic experience in 2013 when the North closed down the complex," said Yoo Chang-geun, the South Korean head of an automobile parts manufacturer that employs 400 North Koreans in Kaesong.
    Yoo's company, SJ Tech, operates out of Kaesong, which is just north of the Demilitarized Zone in North Korean territory.
    He was referring to North Korea's monthslong closure of Kaesong in 2013, during a period of heightened tension on the peninsula.
    About 125 South Korean companies operate out of Kaesong, employing more than 50,000 North Korean workers.
    An official from the South Korean government's Unification Ministry, who according to policy spoke to CNN on condition of anonymity, says companies at Kaesong pay their North Korean workers an average of $155.50 a month.
    North Korea is demanding an increase of roughly 5.5%, to an equivalent $164.10 a month.
    The South Korean government argues that the salary hike is a breach of an existing agreement for the industrial park, which first opened in 2004.
    The official called the North's request a "one-sided demand." The official did not rule out the possibility that penalties could be imposed on South Korean companies if they individually agree to raise employee salaries.
    Manufacturers in Kaesong rely on the government in Seoul to represent them in negotiations with Pyongyang.
    "It feels like we're entering a very difficult phase where innocent corporations are being beaten up by political fights between the North and South," Kim Seo-Jin, the director of Corporate Association of the Kaesong Industrial Complex, said Wednesday.
    Experts say this isn't the first time the North and South have butted heads over employee salaries in Kaesong.
    The industrial park was established as a symbol of cooperation at a time when a previous government in South Korea was pursuing a "Sunshine Policy" of friendship with its northern rival.
    South Korean companies benefited from the extremely low cost of North Korean labor. Meanwhile, North Korea gained a valuable stream of hard currency revenue by appropriating an undisclosed amount of salary from its citizens working in Kaesong.
    South Korean employers also made a practice of giving small food bonuses to some hungry employees.
    For a time, this came in the form of "Choco Pies," a packaged South Korean dessert. The snacks reportedly became highly-prized items on the black market in the communist North's rigidly controlled economy. Eventually, employers transitioned to giving workers instant noodles, as one former Kaesong factory owner told CNN in 2014, "in order to provide a more substantial snack."
    "The whole project is built with an understanding that North Korean wages should and will continue to rise," says John Delury, associate professor at Yonsei University's graduate school of international studies in Seoul.
    But one factory owner said the communist regime's most recent approach to the salaries is problematic.
    "The amount of the pay raise demanded this time is small," said SJ Tech's Yoo Chang-geun.
    "But having this kind of precedent may lead to losing control of the operation in the complex."
    Experts say Seoul and Pyongyang's approach to the Kaesong salary dispute will serve as an important barometer for the direction of future relations between the rival governments.
    "Kaesong is the last living legacy of the Sunshine Policy," says professor Delury of Yeonsei University.
    "If something like wage disputes lead to the shutdown or freezing of Kaesong, that would be a major blow."