SEOUL (Reuters) - South Korea plans to raise its minimum wage 16 per cent next year - the biggest jump in nearly two decades - as President Moon Jae In looks to spur domestic spending and generate more balanced growth in Asia's fourth-largest economy.

The increase to 7,530 won (S$9.14) per hour will affect nearly one in four South Korean workers, the Minimum Wage Commission announced over the weekend after an agreement between labour, business representatives and the government.

The pay hike, the largest since 2001, is part of a multi-pronged strategy by President Moon to encourage more private consumption and help narrow income inequality.

Moon has pledged to raise the minimum wage to 10,000 won by 2020, which would require pay hikes of about 15 per cent every year in the next few years, compared with average annual gains of about 7.3 per cent since 2010, government data shows.

Stronger and more sustainable domestic demand would help balance the economy's traditional heavy reliance on exports, while translating into higher consumer inflation.

Although private consumption accounts for about half of gross domestic product, it rose just 0.4 per cent in the first quarter from three months earlier, while the overall economy grew 1.1 per cent, the fastest jump in six quarters The 2018 increase will leave minimum wages in South Korea at about 90 per cent of those in the United States and Japan, according to Kwon Young-sun, an economist at Nomura Securities.

The government said it will spend about 3 trillion won from next year's budget to help compensate small businesses for the higher labour costs.

"The government will directly fund small businesses so that they can keep their workers even as minimum wage is rising," the ministry said in a statement, and added that details of the fiscal support will be released after further policy discussions.