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Korea's Labor Productivity on the Decline amid Stalled Labor Reforms
Rigid Labor Market Impedes Economic Growth
Korea's Labor Productivity on the Decline amid Stalled Labor Reforms
  • By Jung Suk-yee
  • October 25, 2018, 09:43
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South Korea’s labor productivity is on the decline with labor reforms on hold.
South Korea’s labor productivity is on the decline with labor reforms on hold.

During the Asian financial crisis in 1997, the International Monetary Fund (IMF) called upon the South Korean government to make the local labor market more flexible before anything else. In response, the government prepared the Act on the Protection of Dispatched Workers in February 1998.

Still, the act failed to achieve a flexible labor market. Amid strong opposition from the labor community, the act was limited to 26 fields of worker dispatch and the maximum period of the dispatch was limited to two years. As a result, the job stability of temporary workers, which the act intended to protect, was threatened and the act did not lead to sufficient job creation. Meanwhile, regular workers working for large companies under the umbrella of militant labor unions enjoyed more vested interests and labor productivity deteriorated.

During the past 20 years, labor reforms in South Korea have shown little progress. Under the circumstances, it is pointed out that South Korea’s national competitiveness will continue to deteriorate if it fails to achieve a flexible labor market with Industry 4.0 around the corner.

The reforms that started during the financial crisis led to policies under previous governments for facilitating dismissal of poor performers along with a change in employment rules in favor of employers. Under the current government, however, the policies have been discarded and adopted labor-friendly policies one after another. The examples include a sharp increase in minimum wage, working hour reduction, and an expanded scope of ordinary wages.

According to the World Economic Forum (WEF), South Korea ranks 73rd out of 140 countries when it comes to labor market competitiveness, whereas it ranks 15th in terms of overall national competitiveness. Besides, the country ranks 114th and 124th in layoff cost and labor-management cooperation, respectively. The IMF recently mentioned that the labor market structure of South Korea is negatively affecting the productivity of the local economy and adding to inequality, advising the government to build more social safety nets and increase the flexibility of the labor market.

South Korea’s labor productivity is on the decline with labor reforms on hold. According to the Organization for Economic Cooperation and Development (OECD), South Korea came in 21st and 27th out of 36 countries with a labor productivity per worker of US$68 and a labor productivity per hour of US$32.9, respectively. The latter of the United States, Germany and Japan are 190%, 180% and 130% of South Korea’s.

Moreover, in South Korea, the labor productivity of small and medium-sized enterprises (SMEs) stands at one-third of larger companies’. According to the OECD, the ratio was 32.5:100 in 2015 and South Korea was followed only by Ireland (10.7:100), Greece (26.9:100) and Mexico (29.5:100). The minimum wage is increasing irrespective of the productivity indices. In South Korean SMEs in the manufacturing sector, the minimum wage jumped four-fold while the labor productivity increased by 80% during the past 18 years.

A gig economy is expected to emerge in the era of Industry 4.0. It can be defined as exchange between those with talents, skills, time, and so on and those willing to pay for them. Airbnb and Uber are two of the examples. McKinsey & Company recently predicted that the new type of economy would create an added value of US$2.7 trillion until 2025, which is equivalent to approximately 2% of the global total GDP. Countries like Britain and Japan are already moving ahead with labor reforms, shifting the focus of social safety nets from enterprise employees toward new types of workers. South Korea has no time to waste in pursuing labor reforms.