Rigid labor poses biggest risk to economy

The Korea Times

The Korea Times

Finance

Wed, November 29, 2023 | 08:42

Economy

Rigid labor poses biggest risk to economy

Posted : 2018-11-22 17:10

Updated : 2018-11-29 15:53

By Park Hyong-ki

Militant unions and an inflexible labor market are posing the biggest risk to the Korean economy already beset by sagging domestic demand.

Together with President Moon Jae-in's pro-labor policies, these unfavorable factors are dampening business confidence and scaring off foreign investors.

A number of international financial organizations have been urging Korea to address and resolve problems in the labor market for more than a decade.

The rigid labor system will continue to drag on the economy as it further increases inequality between regular and irregular workers, amid worsening unemployment, they said.

With rapid rises in the minimum wage and an abrupt reduction in working hours, the government's pro-labor policies, albeit well-intended, have made matters worse by pulling down market flexibility.

The OECD cautioned in its Nov. 21 economic report that further sharp increases in the wage would "dampen employment and growth."

The administration is seeking to increase the scope of the flexible working hour system for the private sector in an effort to reduce the side effects caused by the wage hikes and the 52-hour workweek system.

The system allows companies to "flexibly" ask their employees to work long hours on specific days with heavy workloads and less on other days when they don't have a lot of work to do. Companies can do so as long as they abide by the law, enabling their employees to work an aggregate 52 hours per week.

Umbrella union groups, including the Korean Confederation of Trade Unions (KCTU), strongly oppose this, saying it will only reduce the number of quality jobs and worsen conditions for workers.

Analysts say persistent labor reform delays and policy mismanagement are further undermining the economy that is already faced with problems such as falling productivity due to an aging population.

"The rigid labor market poses the biggest barrier to the economy in expanding and attracting foreign investment," said Jeffrey Jones, the chairman of the board of governors at the American Chamber of Commerce in Korea (AMCHAM).

Jones is also a lawyer at Kim & Chang, Korea's biggest law firm who mostly represents foreign companies.

"Every administration since former President Kim Dae-jung has recognized it as one of the most important issues. They all wanted to deal with it, but failed."

Then and now with President Moon Jae-in, making the labor market flexible is going to be a huge challenge because it has become an "emotional issue," he added.

In its 2018 report, the World Economic Forum indicated that the labor sector was one of Korea's biggest weaknesses, undermining the nation's global competitiveness. Out of the 140 countries surveyed, Korea ranked 124th in labor-management cooperation and 114th in layoff costs.

In Korea, politicians can't pursue reforms due to the fear of losing votes and facing a union backlash. Also, the general population misunderstands the economic concept of labor flexibility.

"Ordinary citizens do not see that it can help individuals expand and create jobs. Instead, people understand the issue as if it would undermine their job security. And this gets them emotional," Jones said.

As a result, the market has been trapped in a vicious cycle of job mismatches, dualism and income inequality, according to analysts.

Along with the wage hikes, this has led companies to be cautious about hiring as they are not even free to fire underperforming and unsuitable workers.

"A number of government regulations are acting as deterrents to companies hiring new workers, including the large 16 percent hike in the minimum wage in 2018, with another large hike of 10.9 percent planned for 2019," said Rajiv Biswas, chief economist at IHS Markit Asia in Singapore.

"Labor market regulations that reduce labor market flexibility such as high job termination costs and aging demographics are adding to the challenges. Improving the labor force will be a key policy challenge for Korea over the next two decades."

James Rooney, vice chairman of the Seoul Financial Forum, said the lack of flexible adoption and implementation of future-focused labor policies has become "Korea's greatest failure."

He added the outdated system is holding back growth and preventing full employment.

"We need to reallocate Korea's only one real natural resource ― precious human resources ― from old activities relevant for the past to new activities relevant for the future. Rigid labor policies and regulations get in the way of this," said Rooney, also a professor of international finance at Sogang University.

"We need to help them be released from old jobs and tasks that are no longer value-added and assist them in redeployment to the new jobs that will create future value," he concluded.

hyongki@koreatimes.co.kr