Tag Archives: labour market dualism

South Korea – The President and the Economy

Several presidents in South Korea have entered office with pledges to address the economy: former President Lee Myung-bak’s 747 economic plan; former President Park Geun-hye’s economic democratization; and current President Moon Jae-in’s “J-nomics.” The focus on the economy may seem surprising, given that the Korean economy is hardly considered a laggard by on most counts: in 2017, the per capita GDP was US $38,350, real GDP growth 3.1 percent, and unemployment at 3.7 percent. As a comparison, the OECD average per capita GDP in 2017 was US$ 42,252, GDP growth was 2.6, and unemployment was 5.77. This may sound like First World problems to many, but the economic weaknesses behind the stellar numbers is very real and may be a contributing factor to the country’s high suicide rates among youths and the aged. This piece discusses some of these weaknesses.

President Moon’s “J-nomics” relies on the principle of income-led growth based on job-creation and consumption as the drivers of economic growth in the country, with the public sector spearheading this new approach. The approach was embraced for its radical departure from the trickle-down blueprint of his predecessors that relied on corporate-growth to engender jobs and lead to higher incomes. The President’s bold reorientation of the economy took a major step forward with the implementation of a 16 percent wage rise to 7,530 won ($6.60) per hour from 2018 by the Minimum Wage Commission; this was followed by a reduction in the workweek to 52 hours in July 2018. To ensure that small and medium-sized enterprises are able to meet the new wage increases, the government rolled out huge subsidies for small- and medium-sized businesses as well as the self-employed that were hardest hit by the new minimum wage policy.

What are some of the economic weaknesses that this new approach is designed to address? One of the biggest problems for the Korean economy is labor market dualism. Korea has one of the highest incidence of low-paid work among the OECD countries, exceeding 20 percent, stemming from the high number of non-permanent workers in the economy, as depicted in Figure 1.

Figure 1: Total employment in Korea by status in employment, 2016 (number of persons and share of total, %) 

The large firms – particularly the chaebols that hire more than 300 workers – pay significantly better, as Figure 2 below shows. However, they have also significantly reduced their share of the labor market, generally contracting out work to the small- and medium-sized companies or outsourcing abroad, as shown in Figure 3.

Figure 2: Average hourly base pay in Korea

Figure 3: Share of labor market by firm-size

This reduction is higher than has occurred in other OECD countries, as Figure 4 shows, which is partly instructive of how poorly previous policies relying on trickle-down job creation has worked.

Figure 4: Persons employed by firm size, 2013 or latest available year (%)

At the same time, however, the numbers above also explain why President Moon’s policies have run into problems: small- and medium enterprises are the dominant employers in the Korean economy, and they have been unable to absorb the minimum wage increases, even with the help of the government’s subsidies. Meanwhile, the 26 percent non-regular workers are not beneficiaries of the minimum wage.

As a result, despite the President’s efforts, 2018 has been a challenge: unemployment rate rose from 3.8 percent in July 2018 to 4.2 percent in August; this is the highest level for the year, and the highest in the aftermath of the global financial crisis. The President’s popularity has fallen hard on the economic news, and there are signs that the increasing economic distress in the country is leading to open conflict in the President’s cabinet over the efficacy of the policy.

The President has, thus far, maintained commitment to the direction of the policy, but has also signaled a willingness to temper its magnitude. Meanwhile, there have been suggestions that a more successful approach would be to address the issue from a social protection standpoint. With social protection at 10.4 percent of the GDP, Korea is among the lowest of OECD countries where the average is 21 percent of the GDP. There is clearly room for steering the economy, particularly for those most vulnerable to economic shocks, in that arena.