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Report

The Labor Market Policy and Social Safety Net in Korea: After the 1997 Crisis

Introduction

Until November 1997, the Republic of Korea was widely regarded as one of the most remarkable economic success stories among developing countries. Since the financial crisis of November 1997, however, the economy has experienced a sharp downturn: A recent government report estimated that Korea’s per capital gross domestic product (GDP) fell to $6,823 in 1998 from $10,307 in 1997, retreating to the level of eight years ago; moreover, real wages are expected to decline for the first time in almost 20 years.

In light of these questions, the main purpose of this paper is to examine three questions. First, what has been happening in the Korean labor market and industrial and labor relations since the 1997 financial crisis? Second, what major government policies have emerged to cope with new developments, such as rising unemployment and labor disputes? Third, have these policies been effective? If not, would it be necessary to employ supplementary policies or to make a fundamental policy change? This paper examines these issues and makes alternative policy recommendations. Then it concludes by discussing the labor market outlook in Korea and drawing certain lessons from other emerging countries.

Chapter 1: Rising Unemployment and Policy Response

Overview

A rise in unemployment has been quite dramatic since the beginning of the economic crisis. The unemployment rate had been rather stable before the crisis, between 2% and 3%, but it rose sharply to 6.8% in 1998. The number of unemployed rose from about 560 thousand to 1.46 million, a net increase of about 0.9 million, as shown in Table 1-1.

The month to month increase is even more dramatic: In October 1997, one month before the economic crisis, the unemployment rate was 2.1%; by July 1998, it had risen to 7.6%; and in February 1999 to 8.7%. Nonetheless, these unemployment figures-also known as open unemployment-do not include discouraged workers or involuntary short-time workers, who are currently employed less than 18 hours a week despite their preference to work more. If these workers are included, the number of the underutilized (unemployed +discouraged workers + involuntary short time workers) will be about 2.26 million (1.46 + 0.61+0.19 force) as of 1998, equivalent to 10.5% of the total labor force.

One recent study calculated the severity of unemployment as a measure of social pain in Korea and compared Korea with other countries. It showed that the unemployment rate of 8.7 percent in February 1999 produced the same level of severity, as did a 13 percent unemployment rate in the United States and European countries. In other words, even the same unemployment rate generates more social distress in Korea than in other advanced countries primarily due to Korea’s underdeveloped social safety net and relatively low labor force participation rates of women even as secondary bread winners.

Author

The significance of unemployment trends lies in that the sharp rise in unemployment in 1998 was mostly due to the bankruptcy of small and medium-sized firms, not to the restructuring of large-scale firms. Small-sized firms have suffered disproportionately from the high interest rate policy imposed by the IMF as a conditionality of its rescue loans.

A further rise in unemployment is expected in 1999 as a byproduct of the downsizing and restructuring of the largest companies-especially the chaebol (family-owned large conglomerates) and the public enterprises.

The government’s recent efforts to boost domestic demand may temper the sharply rising unemployment; nonetheless, its rising trend will continue through most of 1999.

Major Features of Unemployment

The sharp rise in unemployment has not been uniform among various types of workers. Rather, there have been noticeable changes in the composition of the unemployed.

First, the changes in employment by occupation illustrate that technicians and unskilled workers are most severely affected, losing approximately one million jobs in a year.

Professional and managerial workers appeared to gain somewhat, but in fact, they also lost some jobs considering the recent trend of rising employment in those occupations. Clerical and service workers jointly lost about 291 thousand jobs. By contrast, agricultural employment increased by one million, reflecting the role of the agricultural sector in Korea in buffering the repercussions of changing labor demand.

Second, the rise in unemployment is sharper for household heads, as shown in Table 1-3, suggesting that the likelihood of middle-aged unemployment is rising more rapidly than that of young or older workers.

In addition, male unemployment shows a steeper increase compared with female unemployment, partly because women tend to give up their job search and withdraw from the labor force in times of unpromising job prospects.

Third, Table 1-4 shows that temporary and day workers account for the major portion of the unemployed.

These marginal workers represented about 62.3 percent of the unemployed as of 1998. And this trend has accelerated over time, indicating a strong tendency towards marginalization of the underemployed.

Fourth, Table 1-4 reveals that the current unemployment situation is driven more by an economic recession than by corporate restructuring. Because the corporate restructuring of large-scale industries has taken place only since late 1998, its impact has not been fully felt yet. In fact, most of the unemployment generated during 1998 resulted from bankruptcies of small and medium-sized firms spawned by the IMF’s high interest rate policy. Specifically, the high rates of unemployment in 1998 were mainly due to the economic recession triggered by the IMF’s inappropriate policy package-deflationary package-which included policies of high interest rates and fiscal austerity.

Table 1-5 supports this observation. Among the unemployed during 1998, only 5.7% represented those who left jobs from firms with 300 or more employees.8

Those from firms with less than 20 employees accounted for more than 74.2 % of the unemployed. Therefore, it can be concluded that the unemployment effect of the 1998 recession has most severely hit the workers in smaller firms.

Falling Wages and Rising Income Inequality

After the crisis, the real wage level declined sharply from an annual growth rate of 2.4 percent in 1997 to a negative 9.3 in 1998, as shown in Table 1-6.

In terms of the quarterly changes during 1998, the wage level dropped precipitously until the third quarter of 1998 and then marked no further decrease.

Since the beginning of the economic crisis, it has been the third quarter of 1998 that most accurately illustrated the sharp reduction in wages before and after the crisis.

It shows that from the third quarter of 1997, nominal wages dropped by 8.1 percent and real wages plummeted by 14.2 percent. It exposes the degree of hardship that Korean workers have undergone during the year following the crisis. The reduction in nominal wages in 1998 has been unprecedented in Korea’s economic history since wage data became available.

Not only has the general wage level worsened but also household income distribution has deteriorated sharply since the crisis. In Table 1-7, household income reduction during 1998 by income group shows that the crisis hit the lowest income group most severely.

For those in the lowest 20% income group, nominal incomes dropped by 17.2% and real incomes by 23.7%. In contrast, the highest 10% enjoyed the least reduction in household incomes. Indeed, nominal incomes rose about 4% for the highest group even though real incomes declined slightly by 2.5%. Since the crisis, income inequality has become more acute.

Recently, the press has begun to discuss the dissolution of the middle class in Korean society. One study showed that following the crisis, 64 % or 3.84 million out of the 6 million middle-class households, experienced downward mobility, while only 6% (360 thousand) moved up to the upper class, and about 30% (1.80 million) still remained in a highly unstable situation.

Another study found that those people below the absolute poverty level was 4.1% (1.64 million) of the total population in the third quarter of 1997, but jumped to 11.6% (4.64 million) at the end of 1998.

Unemployment Insurance Coverage

Against this rising unemployment and worsening income inequality, the government’s major policy response has been a rapid expansion of unemployment benefits. The chief component of the policy has been an unemployment insurance program.

The government’s approach, however, contains a number of problems. First of all, even though unemployment insurance has undergone a series of expansions, unemployment benefits still cover only a small fraction of the unemployed. The current program, moreover, tends to benefit relatively well-off workers dismissed from large-scale firms rather than those workers laid-off from small and medium-sized firms.

Initially, the program applied only to the firms with 30 or more regular employees. This ceiling has been lowered three times: First, it was reduced to 10 or more employees; then to five; and finally, no restrictions have been applied since October 1998.

Still, the unemployed become entitled to benefits only after a minimum insured period of six months. Those workers laid off from small-scale firms, therefore, could begin to receive benefits only after April 1999; the full impact of the benefits expansion will be more visible later on.

The current unemployment insurance disproportionately benefits the relatively well-off unemployed. As shown in Table 1-4, temporary and day laborers account for the majority of the unemployed, but currently are not covered by unemployment insurance.

Table 1-3 reveals that non-household heads constitute 54.7% of the unemployed. Many are young workers, seeking jobs upon graduation from university or high school. These newcomers to the labor market also are not covered by unemployment insurance. As a whole, unemployment insurance coverage is still quite limited. As of June 1998, among the 1.5 million unemployed, only 7% (about 105 thousand) received unemployment benefits.

The duration of unemployment benefits is remarkably short, and the level of benefits is quite meager, especially for those who earned low wages before dismissal. The duration of benefits depends on the worker’s age at the time of unemployment and the length of his or her insured period. Although the average duration of benefits is only two months, the government granted special benefits between January and June of 1999, during which unemployed persons were entitled to a two-month equivalent of additional benefits. Similarly, the worker under the age of 25 who has been insured less than three years could receive only one month of benefits, but recently, the benefits have been extended to two months. The maximum duration of seven months is only available to those who have been insured more than 10 years and are over the age of 50.

This short duration can be extended for workers undertaking vocational training that has been approved by the government. But even their benefits are usually limited to three to six months.

Another problem with unemployment insurance lies in its minimum level of benefits. The level of benefits is set at 50% of the worker’s average earnings during the preceding 12 months, up to a maximum of 1.05 million won (roughly USD 900) per month and a minimum of 250 thousand won (USD 200) per month. The minimum level of benefits- currently equal to 70% of the minimum wage-is highly insufficient for social protection. As a mere one-quarter of the average earnings in Korea, the current minimum wage and benefits based on it can hardly provide adequate insurance for the unemployed.

In sum, the unemployment insurance scheme in Korea is still in its infancy and is skewed very much toward preventing the potentially negative impact of unemployment benefits on work incentives rather than genuinely reducing the hardship of the unemployed. The government had been reluctant to provide comprehensive social protection in fear of the European welfare disease.

Workers Excluded by Unemployment Insurance

The social safety net for those who are not qualified for unemployment insurance is extremely limited. Only a few of those workers are eligible for public assistance. Korea’s public assistance program does not require previous work experience, but does apply a stringent means-test. Regardless of their poverty, those who are classified as being able to work can not receive cash transfers and are eligible only for some in-kind transfers like medical and education subsidies and subsidized loans. In addition, to be qualified for public assistance, the beneficiary should not have income and assets exceeding a certain level and must not have family members capable of providing assistance.

Even for those who can receive cash transfers, the amount is extremely meager-122,000 won (about USD 100) per month, equivalent to less than 9% of the average monthly earnings. As of June 1998, about 8.8 % of the unemployed (about 143,000) were receiving public assistance. However, most were eligible for in-kind support only because they were classified as able to work.

Another example clearly illustrates the extreme underdevelopment of the social safety net in Korea. In September 1998, the Korean government conducted a survey to examine the structure of Korean unemployment. In that survey, the government asked how the unemployed household head was providing for his or her family. Table 1-8 reveals that as of September 1998, only 2.4 % of the unemployed lived off the social safety net, either by unemployment insurance or public pension or by public assistance.

It should be further noted that September 1998, the time in which the data was collected, was almost a year after the crisis. Even then, the social safety net covered only 2.4 % of the unemployed household heads. The remaining 97.6 % of the unemployed were all managing their livelihood through private safety nets. Among them, 52.5% were dependent on personal savings, 27.0% were living off the income of other family members, and 9.7% were receiving support from relatives and friends. Even those living off the loans from private sources constituted 7.0% of the unemployed, a much higher percentage than those covered by the social safety net.

As previously mentioned, about 7% of the unemployed were covered by unemployment insurance and about 8.8 % by public assistance programs as of June 1998. These figures were calculated based on the official government plan. On the contrary, the data directly collected from the unemployed reveals that even in September 1998, only 1.4% of the unemployed had received unemployment insurance and a mere 0.7% had received some kind of public assistance.

The inconsistency between the two findings indicates that there is still a substantial gap between what the government promised to do and what is actually taking place, between legal eligibility and practical implementation of social safety net.

The social safety net in Korea is still in its inception, and the majority of the unemployed rely private sources now more than ever before.

The insufficiency of public assistance puts tremendous strains on a private safety net. At the same time, the private source of support will be depleted eventually as joblessness continues. At issue is what should be done for those who are not covered by any kind of social safety net. There is a huge “blind spot” or “dead zone” of social safety net for the people that are covered by neither the unemployment insurance scheme nor public assistance programs. Faced with the enormous challenge, the government should give the highest priority to minimizing this blind spot as soon as possible.

Proposed Changes

To minimize the gap between legal eligibility and the actual implementation of social safety net, the following policy package bears serious consideration. First, policymakers should accelerate the expansion of unemployment insurance coverage and extend the duration of the benefits up to at least six months.

Second, policymakers should relax the restrictive conditions of the current public assistance program in order to help a broader range of people in need. Moreover, the benefit level should be raised to the poverty line, either one-half or one-third of the median income, depending on the poverty line used. These two policies will contribute to narrowing the gap between policy and practice.

The absence of an adequate social safety net renders direct job creation by the public sector ever more indispensable. Having recognized the importance of public job creation, the government initiated a large expansion of public works programs for the 1999 budget.

Still, the government’s effort to expand public works programs should have the following features in order to be fully effective:

(1) Public works programs should focus on constructive works, such as environmental clean-ups, community service, and infrastructure development. Moreover, the programs will be more effective if they are geared toward improving the living conditions of the poor. Priority should be given to the cleaning up and rebuilding of social infrastructure, such as roads and sanitation, especially in the residential areas of the urban poor;

(2) The programs should target the workers who are genuinely unable to find work elsewhere and especially the workers with long-term unemployment records. In this regard, determining the level of wage rate at the public works programs is very important. If it is too high, approximate to the wage level of unskilled workers, substitution of employment will be likely to occur. Some workers, already employed, may leave the unskilled labor market and seek jobs in public works programs simply because the programs are rather loosely managed. Specifically, unskilled agricultural workers may want to switch to the urban public works. In this scenario, public works programs only generates a loose labor market in the agricultural sector without creating any additional employment in the economy as a whole. While the wage level should not be too low, it should be maintained at the level sufficient to make the programs unattractive to the non-poor workers. On the other hand, if it is too low, the very meaning of helping the unemployed poor gets lost;

(3) The programs should include some training features wherever possible, no matter how basic the skills the programs provide. Furthermore, it will be desirable if the training helps the participants become more attractive in the private sector;

(4) A formidable challenge facing Korea is whether the Korean government has the administrative capacity to carry out these policies effectively. Because high unemployment is a new phenomenon in Korea, the government lacks its capacity to formulate policies as well as to implement them. Especially, the government’s insufficient administrative capacity to carry out anti-unemployment policies is more difficult to overcome in a relatively short period of time: The necessary components of improving the administrative capacity of the government encompass new institutional building and human capital investment that could take a considerable time to take effect. The final chapter of this paper will reiterate the issue of insufficient administrative capacity and will recommend policy alternatives to overcome this problem.

Active vs. Passive Remedies

How should Korea tackle the problem of rising unemployment? Determining an appropriate labor market policy to reduce unemployment requires knowledge about what type of unemployment is currently dominant in Korea. Different types of unemployment necessitate different solutions.

In theory, there are three types of unemployment. The first type of unemployment is structural unemployment, which takes place when there is a skills mismatch between the job and the job seeker. There are the job and the job seeker, but they do not match each other because the skill or experience the job requires is different from what the job seeker is willing or able to offer. Hence, the problem is not a shortage of job opportunities, but a lack of correspondence between a job seeker’s skills or experience and the job requirement.

The second type of unemployment-termed frictional unemployment-takes place when the job provider and the job seeker simply do not know each other. The job provider does not know that there is a job seeker that can provide him the appropriate labor service. And the same is true for the job seeker. This type of unemployment occurs because the searching of an accurate match has been unsuccessful.

The third type of unemployment is demand deficiency unemployment or frequently called cyclical unemployment, attributable to a lack of aggregate demand. Simply, firms with excess supply decide to downsize their operations during economic recessions; thus, they lay off their workers and stop hiring any new workers.

For analytical purposes, I will classify labor market policies into three types. The first one is indirect active labor market policy or also called indirect employment creation policy. It includes education training, and employment service activities. The policy offers skills or vocational training for the unemployed to improve their employability and provides various job placement activities to facilitate job matching. The second one is direct active labor market policy or direct employment creation policy. It covers direct creation of jobs in the public sector and various employment subsidy programs, including public works programs, government subsidies to private employers, and government support for the unemployed to start new businesses. The third type is passive labor market policy that directly helps the livelihood of the unemployed by cash or in-kind benefits. Unemployment compensation and early retirement benefits illustrate the passive labor market policy.

Indirect active labor market policy is a major policy instrument for combating structural as well as frictional unemployment. In general, the best way to deal with structural unemployment is to provide skills training to the unemployed to minimize a skills mismatch in the labor market. In addition, frictional unemployment will be reduced most effectively by expanding public employment service activities for speedy job placement. Both are the examples of indirect active labor market policy.

Contrary to its effectiveness in times of structural and frictional unemployment, indirect active labor market policy is not highly effective in reducing demand deficiency unemployment. To tackle demand deficiency unemployment, the best labor market solution is direct employment creation in the public sector and various employment subsidies in the private sector. Direct active labor market policy is a major policy tool for reducing demand deficiency unemployment.

On the other hand, passive labor market policy is designed to alleviate the financial distress of the unemployed. It does not contribute to employment creation directly, but acts to reduce the hardship of the unemployed regardless of unemployment types. Consequently, it is used as an important supplementary policy tool to deal with a general unemployment problem. In fact, when high unemployment occurs suddenly and unexpectedly, the only viable policy tool becomes passive labor market policy.

An unemployment phenomenon in a country is a mixture of the aforementioned three types of unemployment. The policy appropriate for a specific country, therefore, is determined by the relative importance of the different types. Thus, in order to examine whether the Korean government’s anti-unemployment policy has been suitable for Korea’s unemployment situation, it is necessary to sort out which types of unemployment are most dominant in Korea.

Table 1-9 contains valuable information from which Korean unemployment can be decomposed by type and has several interesting findings:

(1) Structural unemployment accounts for about 20 percent of unemployment. Unemployment due to inappropriate skills or lack of education or experience altogether constitutes structural unemployment;

(2) Frictional unemployment is at most 11.8 percent of unemployment. Unemployment due to inappropriate wages, work hours, and working conditions could be interpreted in two different ways. It can simply mean that the job seeker targets only inappropriate jobs, mainly due to a lack of proper labor market information. In this case, it can be categorized as frictional unemployment. Alternatively, it can mean that the job seeker voluntarily chooses to be unemployed because his or her expectations are too high for the job. On this count, voluntary unemployment rather than frictional unemployment will more accurately describe the type of unemployment.

Although two possibilities may coexist, the relative weight of each component is unknown. Under the assumption that the voluntary unemployment component is small, most of the 11.8 percent could be interpreted as frictional unemployment, although this number is likely to be an overestimation;

(3) Demand deficiency unemployment explains at least 54.6 % of the total unemployment. Including those who prefer self-employment further raises this percentage to 62.4 %;

(4) For new graduates, the whole picture becomes slightly different. The significance of structural unemployment rises to 35.2%, and that of demand deficiency unemployment falls to 50.9%. These numbers suggest that structural unemployment becomes relatively more important for the young unemployed while demand deficiency unemployment becomes relatively more important for other age groups.

From the above findings, it can be concluded that the most important policy instrument to tackle the unemployment problem in Korea is direct active labor market policy: The dominant source of unemployment in Korea has been aggregate demand deficiency due to the post-crisis’ sudden recession engendered by the IMF’s deflationary policy; moreover, a passive labor market policy should be stressed because Korea’s unemployment has occurred so massively and abruptly that the alleviation of the strain on the unemployed becomes an extremely urgent social task.

The composition of the Korean government’s budget that is directly related to unemployment and the social safety net reveals that in the first half of 1998, policymakers did not clearly understand what types of unemployment they were dealing with and thus formulated inappropriate policies. In the beginning, relatively high priority was placed on indirect active labor market policy through training and job placement, while the importance of passive labor market policy, especially that of unemployment insurance, was relatively neglected.

By contrast, the government quickly had learned by the second half of 1998 that the correct policy response would be some combination of direct active policy and passive labor market policy because the major source of unemployment was aggregate demand deficiency. Thus, there was a drastic policy shift from the second half of 1998. Still, the importance of direct active labor market policy had not been fully acknowledged until 1999.

Table 1-10 demonstrates the policy transition.

In the first half of 1998, passive labor market policy was relatively neglected. Nonetheless, from the second half of 1998, the government began to correct this bias against passive labor market policy by increasing the budget for passive labor market policy and relatively reducing the budget for indirect active policy. This trend seems to be continuing into 1999.

In the future, indirect active policy will become a more important tool despite its relative insignificance at the moment. As the economy recovers in the coming years, structural and frictional unemployment will constitute an increasingly larger portion of Korean unemployment.

In light of indirect active policy’s emerging significance, the government should take measures to improve it. First, with respect to employment service activities, inadequate attention has been paid to the quality of the staff who actually carry out these services. Generally speaking, the demand for employment services has far outstripped their administrative capacity.

The major component of the current job placement service is simple provision of information on job vacancies while vocational guidance counseling is almost nonexistent. Vocational guidance counseling, based on in-depth analysis of future changes in occupational demand patterns, has become increasingly important in modern job placement services in many countries. Korea, by contrast, has not stressed staff training in this regard.

Employment services provided by the central government-i.e., the Ministry of Labor-is qualitatively superior to those offered by local governments simply due to differences in human capital. Although contracting out the program to local governments is frequently claimed by academicians to be a solution, it should be accompanied by simultaneous investments to improve the administrative will and capability of local governments.

Contracting out to the private sector is also highly desirable, but should take place in conjunction with increased transparency and accountability. Otherwise, private job placement activities could be misused.

Second, with respect to vocational training, little attention has been given so far to changes in labor demand. In some cases, the content of training provided had nothing to do with the skills demanded in the labor market. Analyses of the changes in the skills demanded have not yet been systematically incorporated into vocational training programs.

In addition, the vocational training provided by the government has hardly involved actual workplace training because the private sector’s involvement in the program has been quite insignificant. Thus, the training program tends to have weak linkages to the real needs of the workplace.

Furthermore, it is essential to develop a meaningful vocational training program for temporary and day workers, who account for the majority of the unemployed. Training programs for them may not require a high level of sophistication, and even intensive short-term training of basic skills could greatly enhance their employability as well as their job satisfaction.

In sum, vocational training programs should be more demand-oriented. Industries should participate more actively in the curriculum designing process as well as in the actual teaching and training. In addition, vocational training program should be coordinated with job placement programs. Otherwise, training could produce workers with skills hardly demanded by industries.

Chapter 2: Improving Labor Market Flexibility

There persists a popular yet misconceived notion: The Korean labor market is highly rigid due to its employment practices such as lifetime employment and aggressive unions; moreover, this labor market rigidity has been one of the major obstacles to smooth industrial restructuring in Korea. This view is pervasive but is simply incorrect.

The Korean labor market as a whole is neither more rigid nor more flexible than the labor market of any other countries. By international standards, the Korean labor market is a flexible rather than a rigid one. Many empirical studies support this assessment: One comparative study finds that wage flexibility in Korea is quite high, far surpassing the level of the United States, the Great Britain, Germany, and even Japan.

The same study also reveals that employment flexibility in Korea was higher than that in Japan and Italy, but slightly lower compared with the United States, the Great Britain, and Germany during the 1972-1983 period. Between 1983 and 1991, however, employment flexibility in Korea was substantially high relative to the United States, the Great Britain, and Germany, not to mention Japan.

Another empirical study concluded that historically, the influence of unions over employment adjustment has been minimal in Korea. The increased labor union activities in the late 1980s had only a limited impact on labor market flexibility. The employment response to demand shocks has been quite substantial, while the wage response has been rather modest. In contrast to free labor mobility across sectors, the labor mobility between the firms of different sizes appears less flexible in Korea.

Why is there a difference between these research findings and the popular perception that the Korean labor market is highly rigid? The answer lies in that the Korean labor market is dualistic and highly segmented. Different labor market practices exist in firms of different sizes and of different types of workers in the Korean labor market.

Large-scale firms usually provide long-term employment security according to a seniority-based wage and promotion system. Workers in such firms are relatively well-paid and enjoy high unionization rates. Within these firms exists a dual career track: University graduates are hired as middle level managers and high school graduates are hired for the production lines. There is a sharp distinction between them, but production workers are also rewarded with employment security and promotions based on seniority.

To some degree, these practices are present throughout the entire industrial system, but the scope of these practices is much narrower in smaller firms where job security is minimal and the earnings profile is nearly flat; in smaller firms, wages are relatively low and unionization is rare. As of 1993, the unionization rate of the firms with 10-29 workers was 0.9% and with 30-99 workers was 5.4%, whereas the unionization rate of the firms with 5,000-15,000 workers was 62.1% and with 15,000 or more workers 76.0%.

These differences in sizes overlap with variations in employment types. As of 1998, regular workers constituted 54% of all wage and salary employment, temporary workers 32%, and day laborers 14%.

Regular employment reflects permanent jobs with legal protection and with relatively generous polices within enterprises including restricted layoffs, health care benefits, various fringe benefits, and lump sum severance pay. Workers with regular jobs are usually better-paid and are promoted on a regular basis.

In contrast, temporary employment includes workers with fixed contracts of less than a year. Temporary workers are paid much less and are generally found in relatively unskilled jobs. Because they are not protected by labor laws, they lack the legal defense against unwarranted dismissal. They are also not entitled to the fringe benefits provided by enterprises. Daily employment comprises casual workers, hired on a daily basis and without public or private benefits.

The Korean labor market can be divided into two broad segments: One mainly consists of regular workers in large-scale firms; the other one includes all workers in small-scale firms as well as temporary and day laborers in large-scale firms. The former can be called the modern sector while the latter the pre-modern or informal sector.

It is only the modern sector that enjoys the legal protection of modern labor laws, such as prohibition of unwarranted collective dismissals.

Some unions in large-scale private firms and some public enterprises have expressed strong resistance to massive dismissals in the industrial restructuring process. One of the major reasons behind such resistance is undoubtedly the inadequate social safety net in Korea. Their militant resistance, shown in a few highly visible cases, has been exaggerated and distorted by the mass media. The result is a false impression that the Korean labor market as a whole is highly rigid and inflexible due to aggressive and militant unions

There is obviously a small segment in the labor market that enjoys relatively higher wages and various protections of modern labor laws while simultaneously representing militant unions. This segment is composed of privileged workers who share some economic rents with employers. Since large-scale firms and public enterprises enjoy monopoly rents in the market, their employers tend to share some of the benefits with employees as an incentive for hard work, industrial peace, or simply for improvement of their public image. But this merely represents a small segment of the Korean labor market: Unionized workers represent only 12-13 percent of the wages and salary workers or approximately 1.5 million out of 13.2 million workers.

Workers in the informal sector are freely dismissed at employers’ discretion. Most workers in this sector are subject to mass dismissals at any time simply by non-renewal of their labor contract. In this respect, employment in the informal sector is highly unstable and remarkably flexible without proper protection of basic labor rights.

Related to the dualistic structure of the Korean labor market is an interesting trend of wage differentials over time. The wage differentials by sex, age, education, industry, and occupation have declined over the years since the mid-1970s. Interestingly enough, however, the wage differentials by firm size have risen during the 1980s and have remained high until the present. This vividly shows that dualism has at least been persisting, if not widening in Korea.

Besides the structural aspect, there are other areas of flexibility in the Korean labor market. First, wages have been quite flexible in Korea to a degree far surpassing other countries and more so since the crisis began. As of the third quarter of 1998, wages dropped by 14.2% in real terms compared with the same period in 1997. This wage flexibility is possible because the Korean wage system consists of several elements, some of which may vary in the course of the business cycle. Base pay is fixed, but bonuses, overtime allowances, and other fringe benefits, which comprise a significant portion of total earnings, are flexible and usually discretionary.

Second, overtime is also flexible in Korea. Unions are less reluctant to accept a cut in working hours: Hours of work have declined about 5 to 6% between mid-1997 and mid-1998.

Third, even in large firms, employment flexibility can be secured through the outsourcing of production to smaller firms with more flexible employment practices. Another area of employment flexibility involves a large number of temporary and daily workers, for whom there is no protection from dismissals.

The examples of flexibility in the Korean labor market point out that the popular notion of Korean labor market rigidity is misleading and far from depicting the true picture. How can one say that the labor market is rigid when real wages dropped about 14.3% in a year and the unemployment rate tripled in less than a year? Nonetheless, there is some rigidity in the modern sector and labor market inflexibility is yet to be rectified.

But this effort should be balanced by the simultaneous effort to improve labor protection in the informal sector.

Chapter 3: Industrial and Labor Relations

Developmentalism

The dominant feature of the Korean government’s industrial relations policy has been “developmentalism” over the past 30 years. Industrial relations policy has not stressed the establishment of industrial democracy or social development. Rather, these goals have been subordinated to the achievement of rapid economic growth. Consequently, industrial relations policy has become a mere subset of the country’s overall economic development strategy. Since the dominant development strategy has been the expansion of low-cost export production, neither local demand nor the adverse impact of low wage policy has been the policy area to be reckoned with . Instead, the primary objective of Korea’s industrial relations policy has been to create and maintain hard working, disciplined, low-cost labor.

Against the government’s industrial relations policy, Korean labor relations can be characterized as “authoritarian paternalism.” It is authoritarian in the sense that free collective bargaining at the enterprise level is prohibited. The government has frequently adopted “quick fix” solutions through direct intervention rather than relying on free collective bargaining. One expert accurately described Korean labor relations as “unionism without collective bargaining.”

Also, the government has suppressed the independent representation of the political and social interests of organized labor. The rules and policies concerning industrial relations are drafted, implemented, and if necessary, modified by the government with little prior consultation with unions.

At the same time, Korean labor relations is paternalistic in two distinct senses. At the micro level, the government has tried to supervise directly the working conditions of individual firms without consulting unions and frequently issued administrative orders to do so. At the macro level, the government has chosen a development strategy that stresses labor-intensive technology and outward-looking development to greatly benefit labor.

In sum, labor relations is at once authoritarian and paternalistic in that the government has included labor economically while excluding it politically. The government is not willing to share political power with organized labor although it has allowed labor to share the economic benefits of rapid growth, especially in the form of expanding employment.

This long tradition of “authoritarian paternalism” has been under attack and seriously weakened since 1987, when the government accepted democratic reforms following the series of militant anti-government demonstrations by students and middle-class urban dwellers. Since then, the government’s long-standing suppression of labor union activities has been significantly reduced. Free collective bargaining has been attained so that working conditions could be determined without government intervention.

Tripartite Commission: Political Inclusion of Labor

Despite democratic reforms, the government’s political exclusion policy toward labor had continued until it came to a halt for the first time in May 1996. At that time, the government decided to establish the Presidential Commission on Industrial Relations Reform to revise labor laws. To the commission, the government invited union leaders, from both the conservative (the official Federation of Korean Trade Unions) and more liberal unions (rival Korean Confederation of Trade Unions).

Another significant step toward political inclusion of labor took place in January 1998 when the government established a Tripartite Commission in which labor, management, and government leaders joined together to discuss ways to overcome the current economic and financial crisis.

Having agreed upon a major agenda, the Tripartite Commission declared a Social Agreement. The Social Agreement addressed almost all the reform issues essential for overcoming the current economic and financial crisis. It ranged from the issue of corporate governance and accounting transparency to the issue of labor market flexibility, extension of the social safety net, and reinvention of the government. The Agreement’s notable accomplishment was the union leaders’ acceptance of mass layoffs in the corporate restructuring process. Through intense discussions at the Tripartite Commission, union leaders came to understand the inevitability and urgency of mass layoffs in the process of corporate restructuring. Based on the Agreement, the National Assembly quickly revised the labor laws and stipulated the conditions for dismissals.

Soon after, however, the progressive Korean Confederation of Trade Unions encountered strong criticisms from the rank-and-file members against its acceptance of mass layoffs. As a result, new leadership emerged and replaced the old one that had participated in the Tripartite Commission. The new leadership declared its withdrawal from the Commission, claiming that illegal and excessive mass dismissals had become common after the revision of the labor laws. They argued that excessive dismissals were against the spirit of the Social Agreement based on the equal burden-sharing among the three parties-labor, management, and government. But under the immense pressure from the public, the Korea Confederation of Trade Unions rejoined the Commission in August 1998 only to withdraw again from the Commission in February 1999 on the grounds that the restructuring of the economy had been carried out with the sole sacrifice of labor. Lately, the Tripartite Commission has lost its vigor.

Looking Ahead

This section will examine two policy-related questions. The first is how volatile Korean industrial relations will be in the coming years: Will industry-labor relations present a serious obstacle to smooth industrial restructuring in Korea? The second question concerns the Tripartite Commission: Should the Commission be re-established or abandoned? And if it should be re-established, what are the ways to do so?

On the first count, Korean industry-labor relations will not be particularly explosive and pose little threat to corporate restructuring. Generally, the leaders of labor unions-even the radical unions-are pragmatic, rather than ideological. Their primary concern is the improvement of the living standards of their rank-and-file members. Moreover, they find globalization inevitable and restructuring unavoidable. What they ultimately demand is, therefore, a fair and equal burden-sharing of globalization.

The rank-and-file members also believe in an economic unionism, not a political one. They are primarily concerned with their stake in the Korean economy. Similarly, although most middle class urban dwellers, who largely determine the public opinion, are very sympathetic to unions’ struggle for improved working conditions, their sympathy is limited to an economic sphere.

Table 3-1 shows the long-term trend of union membership and labor disputes over time.

The year 1987, when the former President Rho Tae-Woo declared a drastic policy reform toward democracy, was clearly a major turning point in the history of Korean industrial and labor relations.

Immediately following the declaration, union membership and the total number of labor disputes skyrocketed. The number of disputes soared from about 200 cases per year to 3,700 cases in 1987. Union membership also rose from 1 million to more than 1.9 million in 1989. But after two or three years of adjustment, both unionization rates and dispute occurrences continued to decline gradually: Union membership has fallen from 1.9 million in 1989 to 1.5 million in recent years; the number of disputes also has sharply dropped from 3,700 in 1987 to less than 100 cases lately. This trend will likely continue, since the economic crisis of 1997 has not led to a significant departure from the past.

Concerning the second question, it is important to reestablish the Tripartite Commission because its formation represented a significant step toward the political inclusion of labor. Politically included labor is indispensable not only for successful economic restructuring but also for the advancement of democracy in Korea. After a long history of authoritarian rule, establishing the mutual trust between labor, management, and government takes time and demands patience of the parties concerned.

Meanwhile, several improvements are needed in the organization and operation of the Commission. First, a greater number of individuals representing the public interest should be included as Commission members. In particular, scholars and journalists who are respected by both labor and management for their integrity and expertise must take part in the Commission. The improvement on the personnel is an urgent task especially for the government that has long been criticized for its association with developmentalism.

Second, honest and constant information sharing among members is perhaps the Commission’s most challenging task. Information sharing creates the mutual trust among the members and generates a common understanding of the global and local realities facing the Korean economy. The lack of trust can be overcome only through an honest exchange of information and constant sharing of opinions among labor, management, and the government. Thus, improving transparency and accountability in Korean corporate governance is required not only for restoring international confidence in the Korean economy but also for building up the mutual trust between employers and employees, thereby establishing industrial peace.

Third, the government’s role in the Commission should be dualistic. In case of “rights” issues, such as unfair labor practices, the government should intervene promptly and strongly to uphold the law. On the other hand, with respect to “interest” issues including wage negotiations, it should adopt a strictly neutral and noninterventionist approach. The government could encourage compromises; nonetheless, it should refrain from taking sides. Otherwise, instead of engaging in free collective bargaining, employers and employees will compete for the government’s support, further precluding Korea from overcoming the problem of “unionism without collective bargaining.”

The government should reorient its past authoritarian and paternalistic approach toward setting rules and strictly monitoring them. In this respect, the government’s recent handling of the Hyundai case involving a dispute over mass layoffs was inappropriate. Although there is no doubt that the authoritarian approach must be overcome, it should be kept in mind that populism could present another pitfall in Korea’s movement towards genuine democratization.

Chapter 4: Prospects and Conclusion

The Unemployment Outlook

The unemployment rate will continue to rise at least up to 1999. There are several reasons behind this projection.

First of all, small and medium-sized firms will continue to experience a shortage of credit inflow. Even though the government has been relaxing monetary policy recently, little new credit will be channeled to the small and medium-sized firms. Most of the credit will continue to flow into large firms, although it is the smaller ones that could generate relatively larger employment opportunities.

Secondly, the year 1999 will witness the full-scale disemployment effect due to the restructuring and downsizing of large-sized firms of the year earlier. Furthermore, in 1999, the public sector is also scheduled to begin its restructuring.

Thirdly, although the Korean economy expects positive growth in 1999 at around 2%, the positive growth will not generate much employment for two reasons. First, the improvement of the labor market condition will be reflected more likely in the form of higher wages rather than expanded employment. It is partly due to the labor unions’ strong preference for higher wages to new employment and partly due to firms’ desire to avoid complications in future employment adjustments. Second, revival of the economy will bring back discouraged workers to the labor market for active job seeking. Thus, even as the economy begins to rebound, the unemployment rate will tend to remain at a relatively high level.

Fourthly, Korea’s decade-old wage system shows a strict correlation between wages and the worker’s age and tends to discourage the reemployment of mid-career workers. Once laid off, mid-career workers have extreme difficulty in finding jobs except for dead-end positions in the informal service sector. Under these circumstances, the human capital of mid-career workers tends to depreciate rapidly after layoffs. As a result, they are likely to remain structurally unemployed even as the economy recovers.

Therefore, it can be predicted that the relatively high unemployment rate will persist in Korea even as the economy restores its previous growth within the next 2 to 3 years.

Table 4-1 shows the unemployment outlook projected by the Korean government for the next 2 to 3 years.

It indicates that unemployment is expected to rise continuously up to 7.9 percent in the first half of 1999 and slow down from the second half of 1999. For the next 2 to 3 years, unemployment is likely to stay at 5.5 to 7%. However optimistic this projection seems, The general trend will not be far from what is shown in Table 4-1.

Not only will unemployment continue to rise in 1999, but three qualitative changes will also occur: the worsening of long-term unemployment; a rise in youth unemployment particularly among new school graduates; and an increase in an economically inactive population including discouraged workers.

As the economic recession continues, the average duration of unemployment tends to rise. Those unemployed for six months or longer represented 7.8 percent (about 104,000) of the total unemployment in the first half of 1998, but increased to 19.8 percent (about 312,000) in the second half of 1998. Again, it is estimated that the number will continue to rise up to 31.2 percent (about 520,000) in 1999.

Youth unemployment will become even more serious. As of December 1998, the unemployment rate in the age group of 15 to 19 was 27.7 percent and that of 20-29 was 13.1 percent, more than three times higher than the average rate of 7.9. Not only has the rate been relatively high, but there has also been a rising trend of youth unemployment as large-scale firms and public enterprises have ceased their hiring of new employees.

Conventionally, large-scale industries and public enterprises hire new employees immediately following school graduation. Therefore, no new hiring during the restructuring period implies rising unemployment among new graduates.

Another development will involve those who give up their job search due to poor job market prospects. This population is likely to rise very rapidly. As an economic recession persists along with high unemployment, people tend to abandon their job search. During the past six months from August 1998 to February 1999, the net increase in the inactive population was 1.057 million. The average annual increase in the inactive population had been about 200,000 before the crisis, meaning at least 800,000-900,000 persons were discouraged and withdrew from the labor force.

The rising trends of long-term joblessness, youth unemployment, and inactive population altogether will aggravate the unemployment problem in Korea. The upswing in long-term joblessness and youth unemployment could become politically explosive. When economic distress is combined with political discontent, the situation could easily become volatile. At the same time, the sharply rising inactive population could become socially implosive. It could lead to worsening crime and rising social unrest. Overall, the unemployment problem will be potentially dangerous and difficult to handle in Korea?a grim reality especially for 1999.

On March 19, 1999, the government decided to increase the labor market budget that had been passed by the National Assembly last December from 7.7 trillion won to 16 trillion won. The net increase is about 8.3 trillion won, exceeding a doubled amount of the originally planned budget. The budget for public works programs has increased substantially.

The immediate problem facing the government is how to use this increased budget more effectively. Theoretically, there are two models of implementing public works programs: traditional public delivery model or private delivery model. The former is a scheme implemented by the government and the latter by the private sector outside the normal bureaucracy.

In Korea, all the public works programs have been implemented by the government. This public delivery model has several drawbacks. It could be susceptible to political influence and political considerations rather than economic efficiency or effectiveness. It also tends to be driven by supply conditions rather than demand conditions. Specifically, the bureaucrats’ stake in the government, not the actual needs of the unemployed poor, determines the content, direction, and quality of program. Moreover, in managing the program, incentives for producing better programs and better services are relatively insufficient. All these factors are likely to produce flaws in public works programs.

A private delivery model usually does not suffer from the aforementioned drawbacks.

It does however have its own shortcomings.

Still, the private delivery model will be worth trying in Korea. There are several different versions of the private delivery model, but the most promising envisions the government as a fund provider and leaves the task of designing, organizing, and implementing public works programs to a private entity, a private contractor, nongovernmental organizations (NGOs), or grass roots community.

The government only provides funds and evaluates the program without intervening in its management. The management of the program, from design to implementation, should be under the control of the private entity. This private delivery model can be an important policy alternative, especially when the institutional capacity?the manpower as well as organization?of the government in the field of a social safety net is quite limited. The private delivery model could make the program more efficient and effective because it can mobilize private initiatives and make use of NGOs’ flexibility to be more responsive to the needs of those who rely on a social safety net. However, as an intermediate stage, it will be more desirable to allow both models?the public delivery and private delivery?to coexist and compete with each other.

The Industrial and Labor Relations Outlook

Industrial relations by itself will not pose a serious threat to the restructuring of the Korean industry and economy. The unions in large-scale firms and in public enterprises will continue to be vocal, but can not afford to take an extreme stance. Middle class urban dwellers will not tolerate unions’ extreme demands or provocative collective action. In addition, unions themselves are virtually ready to compromise as long as the burden sharing is reasonably fair.

Nonetheless, there are signs that workers’ frustrations are worsening. They believe that burden sharing has been increasingly unfair and uneven and the cost of restructuring has been unduly hurting them with mass layoffs, without affecting corporate owner-managers and government officials. They criticize corporate governance reform and public sector reform as too slow and compromised. They also complain that the way of handling restructuring at the enterprise level has too frequently ignored due process in labor standards law. Workers have filed 112,000 complaints mostly in unfair labor practice cases in 1998, twice as many times as the previous year’s 62,000 cases.

In this respect, five points are worth mentioning. First, the government should always uphold the labor law strictly and promptly. Especially, breaches of labor practices by management must be handled according to the law. At the same time, any illegal labor strikes should be dealt with the same firmness and promptness. Establishing the rule of law in industrial relations is the number one priority for the Korean government. Otherwise, labor and management will not perceive the rules of the game as given and instead will attempt to bargain with the government in order to change the rules of the game to their own benefit. Traditionally, implementation of the labor law has been rather fragile in Korea. The tolerant attitude of the government in upholding the law has presented difficulty in most labor disputes.

Second, the reforms of corporate governance toward more transparency, accountability, clear disclosure, and more power for professional managers will eventually overcome the current lack of the mutual trust between employers and employees, thereby greatly contributing to industrial peace. Because public sector reform, specifically the downsizing of the government, is extremely underdeveloped, without a more serious corporate reform and public sector reform, workers will not accept the current state of burden sharing.

Third, more investment for the expansion of the social safety net will alleviate the hardship of workers in the restructuring process and ease the rising tension in industrial relations. Without an adequate social safety net, workers’ resistance to mass layoffs will be unavoidable. Furthermore, building an effective social safety net will be an increasingly important issue in the future for two reasons. The first is that the unemployment rate in Korea will remain relatively high even as the economy restores its previous growth path. The second reason is that as unemployment is prolonged, the private sources of support will inevitably dry up.

Fourth, reactivating the Tripartite Commission is no less important in successfully managing the state than in handling current labor issues. One important challenge of globalization for most new democracies is to build an effective institutional framework to deal with rising social and economic conflicts. It has been apparent that globalization tends to increase the inequality between different sectors of the economy as well as different segments of population. Against the trend of globalization, thus, it is essential to develop the institutional capacity of the government to manage potential conflicts in a consensual manner. Toward this goal, the transformation of the current Tripartite Commission into an effectively consensual instrument will serve well for solving social and economic problems.

Fifth, even though industrial and labor relations by itself is not too serious a problem, it could always pose a social and political threat if economic discontent in the work place is combined with political and social resentment. In this regard, the attitude of the middle class becomes crucial. If middle class urban dwellers turn their backs to the government and align with unions, industrial and labor relations could become politically explosive. As unemployment persists and the joblessness among young people rises, this possibility of sudden conversion will also increase.

Therefore, what is needed is an inclusive policy of cooperation among all segments of society and regions. Recently, there is a growing concern that regional sentiment might have intensified since the new government came into power. If so, non-partisan and non-regional management of state affairs becomes even more essential in creating a government of national unity.

Global Coordination

The last but not the least area of concern is international cooperation. Since the dominant type of the Korean unemployment is demand deficiency, rapid growth in aggregate demand will be essential in a comprehensive reduction in unemployment. On the other hand, there is a limit to expanding domestic aggregate demand for two reasons. One is a small market size determined by population and per capita income. The other one is the decade-old export-oriented structure of the Korean economy. For restoration of the Korean economy and for a substantial reduction in unemployment, it is necessary for foreign aggregate demand to expand rapidly. Otherwise, it will be very difficult for Korea even to repay its accumulated foreign debts.

To a great extent, the same argument could be made for other countries severely hit by the recent Asian financial crisis. In the end, a massive growth stimulus at the global level?equivalent to the Marshall Plan after World War II?will be essential. This stimulus is only possible through a concerted international effort among the major economic powers, namely, the United States, the EU, and Japan. The concerted action under U.S. leadership includes but is not limited to cutting interest rates, raising government spending or reducing taxes, increasing foreign aid, and rescheduling debt as well as providing substantial debt relief.

A substantial increase in global aggregate demand will help the crisis-hit and debt-ridden countries to revive their economies sufficiently to pay back their increased debts and reduce their unemployment down to a sustainable level.

Another area requiring international coordination among major economic powers is new global governance, including the architecture of a new financial framework to regulate the global capital market. The recent Asian financial crisis provided ample evidence that small, open economies are vulnerable to short-term capital movements regardless of how robust its macroeconomic fundamentals are.

Thus, new global governance to forestall speculative short-term capital flows becomes essential. Among the necessary national and international arrangements are restricted capital controls, exchange controls, transaction taxes (including a Tobin Tax), and some regulations of the capital flow in industrialized countries.

These arrangements will restore greater national autonomy and encourage stable long-term foreign investment. Nonetheless, these arrangements will be possible only by the initiative of the major economic powers.

Without coordination among major economic powers to increase global aggregate demand and to reinvent global governance over the financial market, it will be extremely difficult for the countries currently facing economic turmoil to overcome the resulting difficulties and return to their prior normal growth paths. Moreover, generating sufficient job opportunities to reduce current high unemployment in crisis-hit countries will be infeasible. It is time not only for unilateral efforts, but for strong global leadership that can spearhead the necessary global coordination.

Appendix: View the appendix for this document.

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