8 The Korean Labor Market: The Crisis and After
Author: Mr. David T. Coe and Mr. Se-Jik Kim
Language:
English
Keywords:
SEM; economy; financial crisis; crisis; wage growth; upstream firm; salary worker; college wage premium; skilled worker; Unemployment; Employment; Wages; Labor markets; Global
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Abstract

This paper documents changes in Korea’s labor market during the period of economic crisis. The immediate impact of the crisis on Korea’s labor market has been substantial as labor demand shrank to an unprecedented extent, and as many macro and micro policies were deployed in an attempt to survive the crisis. The soaring interest rates and cutback in product demands forced many businesses out of the market, which led to a massive increase in the jobless population. The ensuing economic restructuring program, agreed upon between the IMF and the Korean government, aimed to improve the portfolios of commercial banks and corporations, and included major revisions in labor laws.

Dae Il Kim*

This paper documents changes in Korea’s labor market during the period of economic crisis. The immediate impact of the crisis on Korea’s labor market has been substantial as labor demand shrank to an unprecedented extent, and as many macro and micro policies were deployed in an attempt to survive the crisis. The soaring interest rates and cutback in product demands forced many businesses out of the market, which led to a massive increase in the jobless population. The ensuing economic restructuring program, agreed upon between the IMF and the Korean government, aimed to improve the portfolios of commercial banks and corporations, and included major revisions in labor laws.

In 1999, the Korean economy seemed to have resumed its growth trend. Although it is still debatable whether the recovery reflected successful economic reform or expansionary policies, real GDP grew rapidly in 1999, and both consumption and investment recovered substantially. Capacity utilization reached a record high by the end of 1999, and interest rates, exchange rates, and inflation stabilized. Employment also showed some recovery, although not to the 1997 level.

The empirical analysis of the changes in the Korean labor market in this paper focuses on a few issues. First, it briefly summarizes distinctive features of Korea’s labor market with respect to institutions, government policy, and market mechanisms, to help better understand recent changes in the labor market. Second, it documents the changes in employment and wages during the economic crisis and recovery, and investigates the pattern of such changes across sectors and types of workers. In doing so, it attempts to separately identify market and institutional forces to better understand the mechanisms behind such changes.

Not surprisingly, joblessness rose, particularly among unskilled workers. Unemployment and underemployment rose in terms of both quantity and duration. In the recovery in 1999, the demographic patterns of job gains and wage changes were biased against less skilled workers. Inequality may have increased during the crisis. Some evidence is found for consumption smoothing, especially among poor households.

One of several unexpected and surprising changes was a massive reallocation: many new jobs were created while even more jobs were destroyed. The pattern of job growth shows that, less surprisingly, newly created jobs were inferior to disappearing jobs as indicated by the general decline in wages and the widespread use of non-regular workers. As a result, many of those who formerly had stable, high-wage jobs became either employed in unstable, low-wage jobs, or unemployed. The increase in non-regular jobs does not appear to reflect firms’ attempts to reorganize work to achieve long-term efficiency gains, but instead, it seems to reflect their temporary attempts to cut labor costs in the short run.

This paper unfolds in the following way. The next section briefly summarizes key features of the Korean labor market. The following section documents changes in employment, job creation/destruction, unemployment, wages and inequality. The final section concludes with remarks on the implications of the empirical findings.

Institutions and Characteristics of the Korean Labor Market

This section reviews the market structure, institutions, labor supply behavior, and demand conditions in the Korean labor market.

Market Structure

The Korean economy has often been characterized by concentration of economic power among a few large companies. Many have argued that the distorted financial practices by these large firms were at the heart of the 1997 economic crisis. Indeed, a few large firms, previously thought of as too big to fail, went out of business or still are under a severe financial distress.

A market structure focused on a few large firms has a long history in Korea, starting during the period of fast and sustained economic growth in the 1970s and 1980s. The export-oriented economic policy, intentionally and unintentionally, has favored large firms with easier access to foreign markets, as did the Big Push toward heavy manufacturing and chemical industries since the late 1970s, for such industries required large-scale, up-front investments. During the process, commercial banks were guided to finance various projects of large firms without precise evaluation of their profitability.

The dominance of large firms has affected the labor market through various channels, one of which is subcontracting. As indicated in Table 1, more than 70 percent of manufacturing firms with less than 300 employees produced intermediate and final goods for large downstream firms in the early 1990s. The share of such sales in total output exceeded 85 percent among the upstream firms, and 75 percent of such firms supplied more than 95 percent of their output to downstream firms. In other words, upstream firms heavily relied on a single customer, as the largest downstream customer bought an average of 46 percent of these upstream firms’ output.

Table 1.

Subcontracting Among Small and Medium-Size Firms1

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Source: Kim (1997a).

The sample consists of manufacturing firms with 5-299 employees.

The share of sales to downstream firms in total outputs.

As a large number of small and medium-size manufacturing firms heavily relied on the orders from downstream firms, severe competition for orders placed them at a disadvantage in bargaining with the large downstream firms that tended to have monopoly and monopsony powers. Through such subcontracting webs, economic troubles experienced by large downstream firms rapidly spilled over to small upstream firms. The possibility of chain reactions has been the excuse for past interventions to protect large companies in Korea, to which the economic crisis was at least partly attributable. Further, it has served as the rationale for intervention in labor disputes in Korea, as discussed below.

Directly and indirectly, firm size has been associated with workforce composition. Table 2 shows the skill distribution of workers by firm size in 1995 and 1998, where worker skills are represented by their educational achievement. The clearly evident positive relationship between firm size and education level strengthened through the crisis. A part of this positive relationship is accounted for by subcontracting. Small subcontracting firms invested little in product design or R&D, but focused instead on maintaining a stable relationship with the downstream firms (Kim, 1997a). This suggests that their demand for creativity and problem-solving capacity in their workforce was not high. Thus the workforces of subcontracting firms were biased toward unskilled labor.1 Given that, it is not surprising that small firms were hit hard at the early stage of the crisis and that job losses were concentrated among less educated workers.

Table 2.

Skill Composition of Workforce by Firm Size

(In percent)

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Source: Author’s calculation based on data from the Survey on Economically Active Population (1995, 1998)Note: The sample is limited to wage/salary workers.

Institutions: Law, Policy, and Unions

Labor Law and Government Policy Responses

The need for economic restructuring led the government to introduce measures both to enhance labor market flexibility and to mitigate unemployment and poverty. Redundancy layoffs and a temporary work agency were legalized, and the government spent 10.1 trillion won in 1998 and 9.2 trillion won in 1999 to fight unemployment. This section briefly summarizes the government’s responses to the crisis.2

The motivation for the introduction of redundancy layoff came from the common perception that large-scale employment adjustments had historically been difficult in Korea. Flexible employment adjustment was considered important for successful corporate restructuring and attracting foreign investors. The actual implementation of redundancy layoff was not smooth, however. Workers and unions strongly opposed it initially. The Tripartite Commission, established to deal with the issue, reached consensus and put forth the bill for redundancy layoff in early 1998.3

There has been criticism, however, that the new law has actually made it more, not less, difficult to adjust employment. Redundancy layoff was not banned before the new law, as the Supreme Court had acknowledged managerial need for layoffs in many previous rulings. The real changes in the new law were the procedures required for a redundancy layoff, and some of them are potentially binding. For example, a firm was required to “exhaust all means to avoid it” before executing a layoff. Such means could include wage reductions, work sharing, not filling vacancies arising from quits or retirement, no new hires, and contract buyout with a bonus. Further, firms were bound to consult “sincerely” with union leaders on how many and whom to lay off. If a firm executed a layoff before going through all these steps, the employer would be subject to a fine and possible imprisonment. The real problem, of course, is that it is always disputable whether a firm has exhausted all means to avoid a layoff, or whether a firm has been sufficiently sincere.

These requirements, intended to suppress excessive and unnecessary layoffs, have imposed costs on firms undertaking restructuring. Mass layoffs almost always brought about confrontations between workers and employers, even under the new law. These costs were not necessarily limited to the affected firms, but spilled over to the economy. In addition to the inefficiency resulting from hostile confrontations, firms often could not restructure their workforce, which in turn distorted labor demands. For example, the clause prohibiting new hiring made it very difficult for a firm to replace existing workers with more productive workers. This led to a significant drop in new hires in the economy, exacerbating the joblessness problem, especially among the young.

A temporary work agency was also introduced to enhance labor market flexibility, allowing employers to outsource workers from manpower agencies on temporary contracts. However, its use has been limited mainly because only professional workers could be outsourced. An employer may not, for example, outsource manufacturing production workers.

Firms were also allowed to replace workers on strike to continue production. This was potentially a very important change for industrial relations in Korea, as strikes have been an effective tool for unions. However, replacement is allowed only within the concerned establishment; replacing workers on strike with those outside the establishment is still prohibited. Firms may reallocate those not on strike to the production site vacated by workers on strike, but as picket-line crossing has been very rare in Korea, strikers have rarely been replaced.

The government attempted to limit job loss by providing various subsidies. Wage subsidies were offered for job sharing (hours reduction) and reemployment of laid-off workers.4 A subsidized loan program for new businesses was intended to induce new hires, but the program mostly targeted the so-called venture businesses.5 Training and placement services were expanded as well. The training program covered 301,244 jobless persons in 1998, and 324,623 persons in 1999; the job placement rate among trainees was 21.2 percent in 1998, and 35.3 percent in 1999.

The quantitative expansion of job training and placement services was mostly an expanded version of what had already been proven to be not very effective. Public sector-provided training was not always linked to market demands, but to the training capacity of the provider. Placement services were also provided by the public sector. As of 1999, only 6.7 percent of job searchers relied on job placement services, public or private, and most of them were older job searchers.

The unemployment policy package also contained programs targeting female and youth unemployment. Starting in October 1998, one-third to one-half of wages was subsidized to employers hiring female heads of household who had recently lost their job. Short-term job opportunities, mostly in social service and child care, were offered to low-income women. The policy also targeted college graduates at the entry level. Approximately 45,000 jobless new graduates were awarded internships for six months in the public sector in 1998.

The coverage of unemployment insurance was expanded from firms with 30 or more employees to firms with ten or more employees in January 1998, to firms with five or more employees in March 1998, and to all firms in October 1998. This expansion of unemployment insurance did not appear to have an immediate impact as eligibility was limited to those who had paid the premiums for at least six months (reduced from one year) at the time of job separation. Approximately 11 percent of people who lost jobs, and an even smaller fraction of the unemployed, were estimated to be eligible for benefits in 1998, because most job losses occurred among small firms.

As unemployment insurance helped only job losers, poverty had to be handled by other measures. Public assistance programs for the poor were expanded to cover an additional 310,000 persons in 1998.6 A loan subsidy program and public work program for the unemployed were also introduced. The subsidized loan program supported new business start-ups of the unemployed and provided living expenses.7 Public work programs were one of the most effective policies. The government spent 1.4 trillion won in 1998 covering 400,000 workers, and 2.3 trillion won in 1999 covering 380,000 workers.8 More recently, the Basic Livelihood Protection Program was introduced, which pays up to 930,000 won per month—compared with the minimum wage of 361,000 won—to a poor, four-person household.

Labor Unions

It was only in 1987 that labor union activity became an important aspect of Korea’s labor market. The union penetration rate rose to as high as 23 percent of wage and salary workers, or 13.8 percent of the total workforce, in 1989, but since then it has gradually declined mostly due to manufacturing’s declining share of employment (Kim and Lee, 1997). As of 1998, 14.2 percent of wage and salary workers, or 8.7 percent of the total workforce, were estimated to belong to a union (Korea Labor Institute, 1998).

There are two key characteristics of industrial relations in Korea. First, unions are at the enterprise level, with bargaining between the firm and union over wages and other terms of contract. Second, labor unions in Korea have been regarded as very militant by most domestic and foreign observers, with bargaining often evolving into hostile confrontations and destructive strikes. The role and effect of labor unions appeared to have changed during the crisis, as they sometimes cooperated with firms and the government, especially in the Tripartite Agreement. But at other times they exhibited the same militancy as before.

The characteristics and role of unions in Korea have been affected by legal provisions as well as by economic conditions. The Trade Union Act has prohibited third-party intervention in bargaining, which explains enterprise-level unionism.9 Union membership has been limited to workers, and thus any member becoming unemployed would lose membership. These legal provisions have made it very difficult for workers in small firms to organize. As a result, unions have been concentrated among large firms and public enterprises in Korea.10

Despite the low penetration rate, labor unions in Korea remained very strong during the 1990s mainly because they were concentrated among large firms. As mentioned above, economic troubles experienced by large downstream firms had the potential to be spilled over quickly to small upstream firms through the web of subcontracting. This possibility of chain reaction has served as the rationale for intervention in labor disputes in Korea. Prolonged work stoppages in large downstream firms placed small upstream firms at risk because the latter did not have easy access to capital markets, and also because work stoppages often resulted in delayed payments to the upstream firms. The Korean government intervened in labor disputes selectively, often inducing firms to concede to workers in return for favorable arrangements. Repeated interventions led both management and workers to look to the government whenever there were disputes.

Labor disputes have always been important to the government regardless of the causes. Given that, it has been rational for unions to be militant, as the possibility of government intervention increased with the intensity of confrontation. Labor unions in large companies and chaebol in Korea have had a reasonably successful record of wage (and other) bargaining, as they skillfully exploited government intervention. In the process, more often than not, picketing formed against the government, not the concerned firms, and the government usually responded.

The economic crisis in 1997 temporarily changed the behavior of labor unions in Korea. It was an economy-wide demand shock, and the scope of government intervention in the market was severely restricted. There was broad consensus that the labor market needed to become more flexible, and also that workers should bear part of the cost of restructuring, although they might have not been the cause of the crisis. In other words, all parties agreed that the economy would further collapse if the country did not undertake painful restructuring. The Tripartite Commission was formed, and management, workers, and the government reached an agreement on a restructuring program that included redundancy layoff. At this stage and for the following year, labor unions were relatively cooperative.

As the economy started to show signs of recovery in 1999, labor unions started to demand compensation for the concessions they had made during the previous year. Wages started to grow rapidly, retarding the recovery of employment in unionized firms. For example, between the second quarters in 1999 and 2000, real wages grew by 13.3 percent among firms with 300 or more workers, but grew by only 7.8 percent among smaller firms; employment, however, decreased by 8.1 percent in the former while it grew by 4.0 percent in the latter. One may relate the faster wage growth and resulting sluggish employment in large firms to the pattern of job growth during the recovery, which was biased toward unskilled low-wage jobs.

There are two dimensions of the insider-outsider problem that are quite serious in Korea’s industrial relations. First, there is the tension between workers and the jobless. As union members lose membership when unemployed, the jobless population’s interests are not protected by union members or employed workers. Faster wage growth is a good example: labor demand is reduced by higher wages, so that new hiring does not expand. Second, there is the tension between workers in large unionized firms and workers in small, unorganized firms. High wage growth in large firms limits the expansion of output, and thus fewer orders are placed for small upstream firms. At the same time, those unable to find jobs in large firms because of the high wage growth look for jobs in smaller firms, effectively increasing labor supply to smaller firms. This widens the wage gap between workers in small and large firms. The economic crisis has made the insider-outsider problem more visible, if not worse.

Labor Supply Aspects

Three aspects of labor supply are worth mentioning. First, male labor supply has been quite strong and inelastic with respect to wages. Second, women are less attached to the market, showing a clear age pattern in labor supply behavior. Third, and most importantly, there has been little distinction between unemployment (job search) and nonparticipation.

Figure 1 shows the share of employment in total population by age in 1997 for men and women. For men, the employment share rises until age 30 beyond which it stays above 90 percent until age 50. Thus a substantial fraction of prime-age men works, and an even greater fraction participates in the market, if job searchers are counted. For women, the employment share is much smaller than for men, reflecting a weaker attachment to the market. Further, the age pattern is M-shaped, with a peak at around age 25 and another peak at around age 45, both at about 65 percent. The sudden drop between ages 25 and 30 is approximately 25 percentage points.

Figure 1.
Figure 1.

Fraction at Work in Total Population by Age

Source: Survey on Economically Active Population (1997).

The decline in labor force participation of working women between 25 and 30 years of age is often linked to marriage and childbearing, as the fraction of married women rises equally fast in this age group. However, it is not clear whether the decline is the result of a labor supply decision or discrimination against married women. A relevant feature of female employment is that between ages 20 and 29,88.2 percent are employed as wage and salary workers, whereas between ages 35 and 54 only 50.9 percent work as wage and salary workers. Most of this difference is accounted for by the increase in the share working as self-employed or unpaid family workers, which is 10.9 percent among the younger population and 43.0 percent among the older population. It is not clear whether this is the result of discrimination or a preference for flexible hours.

The lack of distinction between unemployment and nonparticipation in Korea is basically the issue of response behavior in household surveys. As in many other countries, a non-worker is asked whether he or she has looked for a job during the week prior to the interview.11 Non-workers in Korea have tended to respond to the question as “not searching,” and only a handful of job searchers are found in the data. However, such a response often contradicts the market activity of non-workers. Table 3 shows that only a tiny fraction of job losses have led to unemployment and that an equally tiny fraction of job gains have absorbed unemployment. In other words, a large fraction of the population, reported as non-participants, are expected to maintain market activity. Such marginal participants—those hopping between employment and nonparticipation—are estimated to be as large as 14 percent of the total population above 15 years of age (Kim, 2000a). Workers moving between employment and nonparticipation have been the main reason for low unemployment rates and the small variability of unemployment during business cycles prior to the crisis.12 As discussed below, however, many more nonparticipants started to report themselves as unemployed during the period of economic crisis, which may be linked to increased assistance to the unemployed in the government’s unemployment policy.

Table 3.

Monthly Transition between Labor Market Status

(In percent)

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Source: Kim (2000a).Note: The i-jth entry represents the fraction of those with status i in a month changing into status j in the next month. The rows sum to 100. The entries in parentheses are the fraction of those with status i in a month who were in status j in the previous month. The columns sum to 100.

Demand Shift toward Educated Labor

The 1980s and the early 1990s have been a period of great wage compression in Korea, especially between the skilled and unskilled workers. The college-high school wage differential, which stood at 96.2 percent in 1985, declined steadily to 55.7 percent in 1995. Most of this decline reflected increases in the supply of college graduates among younger cohorts. However in the mid-1990s, the premium started to grow, suggesting a shift in labor demand toward educated labor.13

In Table 4, an estimate of relative labor demands is reported.14 The ratio of the demand index relative to the 1994 level is calculated for each demographic group of workers.15 The index has grown faster among educated men than uneducated men, indicating that labor demand has shifted toward skilled workers during the 1990s. This finding is consistent with the literature that shows unemployment duration has increased most among the least educated workers (Kim, 1997b, 1999). The economic crisis in 1997 reduced demand for unskilled workers, or those with no more than a high school diploma, but there is little evidence that it lowered demand for college graduates.

Table 4.

Estimated Demand Index by Gender/Education Group

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Source: Author’s calculation based on data from the Survey on Economically Active Population (1994-99) and the Survey on Wage Structure (1994-99).

It is notable that there has been a gender gap in labor demand in Korea. The gap can be viewed in two dimensions. First, women have seen a faster increase in labor demand than men in most education groups. Given that the gender premium has also shrunk during the 1990s, this suggests that labor demand has shifted toward women in Korea.16 Second, unlike for men, there appears to be no discernible education gap in labor demand for women. Between 1994 and 1997, labor demand for women with no more than a high school diploma increased faster than for women with a college degree. Less educated women experienced a significant decline in demand during the crisis, but the difference between educated and uneducated women in 1999 is much smaller than between educated and uneducated men. In sum, labor demand in Korea has shifted toward women and toward educated men.

The increase in demand for educated workers has been met by an ever-increasing supply of young educated workers in Korea. As shown in Figure 2, the share of college graduates is higher among young age cohorts than older cohorts. The increase in college enrollment was partly due to the expansion of college admission in 1981, and also to the conversion of two-year colleges into four-year colleges in the early 1990s. The rapid increase in college graduates has lowered the college wage premium during the 1980s and the 1990s despite the demand increase (Kim and Topel, 1995). However, as previously noted, the college premium started to rise during the mid-1990s, implying that the increase in demand became more important than the increase in supply.

Figure 2.
Figure 2.

Expansion of College Education in Korea

Source: Survey on Economically Active Population (1985-99)

Changes in Employment, Unemployment, and Wages17

The immediate and most obvious effect of the crisis on Korea’s labor market was the sharp decline in employment and the rapid increase in unemployment. As illustrated in Figure 3, employment declined by 1.45 million during the five-month period between October 1997 and March 1998. During the same period, unemployment rose by almost a million from 0.45 million to 1.38 million. In addition, the share of households with no earners is estimated to have risen from 6.3 percent in 1997 to 6.8 percent in 1998. This was the period of massive bankruptcies among small firms caught off-guard by soaring interest rates and credit rationing.

Figure 3.
Figure 3.

Changes in Employment and Unemployment

Source: Survey on Economically Active Population (1985-99).

Employment, Job Creation, and Destruction

The immediate and massive decline in employment in 1998 and its recovery in 1999 did not affect all sectors and demographic groups the same.18 For example, manufacturing and construction jointly lost one million jobs in 1998, reflecting that typical firms in these sectors suffered more from the financial crisis due to their high debts. Such massive job losses were also non-neutral among types of workers, affecting unskilled workers more adversely. High school dropouts lost more than a million jobs, and 20-to 29-year-old workers lost 710,000 jobs.

A few developments stand out. First, employment in agriculture/fisheries and public administration, which had been shrinking, recorded substantial net growth of 225,000 jobs in 1998. The increase in agricultural employment implies that the traditional sector has provided some buffer to the shock by supplying additional income sources to hard-hit workers and households. The increase in public sector employment reflects the effect of government responses to soaring unemployment in the form of public work programs and internship.

Second, the pattern of recovery in 1999 differed among sectors and demographic groups. In terms of sectors, the 1999 recovery was generally a mirror image of the 1998 job losses, as manufacturing employment rose by 115,000. Agriculture lost 117,000 jobs, offsetting the previous year’s growth. On the other hand, construction lost a further 110,000 jobs, but the extent of job losses was much smaller in 1999 than in 1998. And the public sector showed an even stronger job growth of 118,000 in 1999. In terms of demographic groups, those hardest hit by job losses in 1998 continued to struggle. Despite the generally strong employment growth, jobs for less educated workers grew much slower, and jobs for the 20- to 29-year-old population declined further. An interesting exception is the increase in unskilled laborers in 1999, which rose by 314,000 in 1999, a more-than-sevenfold increase compared to 1996-97. The slower employment growth among uneducated workers and the faster increase in unskilled jobs suggest occupational downgrading during the recovery, as does the fact that newly created jobs were relatively low-paying and required longer work hours.19

Finally, and more importantly, the post-crisis period brought about an enormous reallocation of jobs, greater than suggested by the changes in employment. Extensive job creation and destruction have taken place during the period, as shown in Figure 4. As noted above, newly created jobs have been low-paying jobs, while high-wage, good jobs were being destroyed. The government created many new jobs, most of which were for unskilled labor. In 1998, for example, more than half (51.2 percent) of newly created dailywork positions were in the government sector, an enormous increase from 2.8 percent in 1997.

Figure 4.
Figure 4.

Job Gains, Losses and Net Job Gains during the Economic Crisis

(In 1,000 persons)

Source: Kim (2001a).

Public sector job growth absorbed a lot of unemployed workers despite its concentration among unskilled jobs, as shown in Table 5. The share of unskilled laborers in the government sector increased, from 10.6 percent in 1997 to 16.0 percent in 1998, and to 27.1 percent in 1999. The share of daily workers in the government sector increased much faster from 3.4 percent in 1997 to 11.0 percent in 1998, and to 26.3 percent in 1999. These are surprising developments because unskilled workers have typically been only marginally attached to the market. Unskilled workers rarely went through an unemployment spell, but rather hopped between nonparticipation and employment (Kim, 2000a). As will be seen below, unemployment rose permanently during the crisis, as the relative value of job search rose. The increase in public sector jobs also contributed to the rise in the value of search, as those jobs were allocated mainly to those “registered as unemployed.” It is difficult, therefore, to measure the contribution of increased public-sector jobs to reducing unemployment because they may have induced unemployment in the first place.

Table 5.

Net Job Gains and Employment Absorption

(In 1,000 persons)

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Source: Author’s calculation based on data from the Survey on Economically Active Population (1995-99).Note: The changes in sectoral unemployment are calculated as the number of job losers from the sector entering unemployment minus the number of job gainers in the sector out of unemployment.

Underemployment

Unemployment data understate the deterioration in the labor market caused by the crisis to the extent that the nature of jobs held by employed workers deteriorated. High-wage, good jobs in manufacturing have been replaced with low-wage jobs in trades and agriculture/fishery, suggesting a rise in underemployment. Table 6 reports the distribution of worker types in total employment. Regular employees are those on a labor contract of unspecified length; temporary employees are those on a contract shorter than a year; and daily employees are those employed on a daily basis.20 Non-employees are employers (hiring employees), self-employed (on own account), and unpaid family workers working no fewer than 18 hours a week.21

Table 6.

Distribution of Employment Types and Work Hours

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Source: Author’s calculation based on data from the Survey on Economically Active Population (1996-99).

Figures in parentheses are percent of total.

Unpaid family workers working more than 18 hours a week.

Although the shift away from regular employees began earlier, the trend was strengthened by the economic crisis, and continued after the crisis. The share of temporary and daily employees, on the other hand, has risen. The increase in daily employees in 1999 more than offset the decline in regular employees. Self-employment rose during the period of economic crisis, as did unpaid family workers. It is notable that unpaid family workers decreased in 1997, but increased substantially in 1998. It is possible that many small businesses were converted to family businesses in order to cut labor costs, and many job losers may also have become unpaid family workers.

A part of the sharp increase in non-regular workers represents public works program offered to the unemployed. Kim (2001a) shows that the government sector accounted for 51.2 percent of the net increase in daily employment in 1998, which increased from a mere 2.8 percent in 1997. The increase in nonregular workers in the private sector appears to reflect firms’ efforts to cut labor costs temporarily. Kim (2001b) shows that an increase in the use of nonregular workers was positively associated with the job separation rate of regular workers among sectors. He argues that the positive correlation is rather inconsistent with the organization-restructuring hypotheses and more consistent with the cost-reduction hypothesis.22 Choi (2001) also reports a similar result.

Permanent Increase in Unemployment23

The massive fluctuations in employment were reflected in equally large fluctuations in unemployment. Unemployment rose from 452,000 in October 1997 to 1.65 million in July 1998, with three-fourths of the increase in a five-month period between October 1997 and March 1998 (see Figure 3). The increase in unemployment was unprecedented in Korea’s labor market history in which unemployment fluctuated much less than employment.

Motivated by such a sudden increase in unemployment, a number of researchers have tried to estimate the natural rate of unemployment in Korea. Yoo (1999a) estimates that the natural rate of unemployment may have risen to 6.7 percent in 1998, and Shin (1999) estimates the rate at 5-6 percent in 1998. Yang (1999) argues that the high unemployment rate has shown a tendency to persist. Although unemployment decreased quickly in 1999 relative to 1998, their predictions remain valid; Figure 3 shows that unemployment was much higher at the end of 1999 compared to the end of 1996 while employment is quite comparable between the two points. Further, as of October 2000, employment almost recovered its long-term growing trend, but unemployment is still greater by 200,000 than in the comparable months in 1996 or 1997. The permanent increase in unemployment is an important issue for labor market policy.

The permanent increase in unemployment reflects changes in job search behavior.24 There are three supply channels affecting the level of unemployment. First, there is the decision by nonparticipants on whether to remain idle or search. Second, there is the decision by those who lost jobs on whether to exit the market or search. Third, there is the decision by those who searched for a job but failed to find one on whether to keep searching or exit the market. Figure 5(a) plots the number of nonparticipants starting a job search and their share as a fraction of nonparticipants. Both the number and shares almost doubled in 1998 relative to 1997, and although they subsided, they were still higher at the end of 1999 than in 1997. That is, many more nonparticipants started a job search than before. Figure 5(b) shows that a much greater fraction and number of those who lost jobs entered an unemployment spell instead of exiting the market in 1998. This tendency decreased somewhat in 1999, but it remained still stronger than in 1997. Lastly, Figure 5(c) shows that the number of people who had looked for a job but had failed to find one also increased substantially in 1998, although the share dropped somewhat, reflecting the much greater unemployment in 1998 than 1997. In sum, the first two supply channels increased unemployment, and the last channel somewhat limited the increase in unemployment.

Figure 5.
Figure 5.

Monthly Inflow into Unemployment

Source: Kim (2000b).

Not all the changes in supply channels were exogenous in the sense that such changes could have been induced by the decline in labor demand through the income effect on labor supply. For example, large-scale job losses had left many households workerless and/or poorer, and previously non-participating members of such households might have been induced to enter the market to supplement household income. Indeed, middle-aged women accounted for a majority of the increase in the numbers initiating a job search after nonparticipation, at least a part of which is the added worker effect. Further, some of the job losers who entered an unemployment spell might have exited the market if their household income had not declined. Some failed job searchers exiting the market might have continued their search if the job access rate had not declined.

Kim (2000b) estimates the counter-factual series of unemployment under the assumption that there were no exogenous changes in supply by the jobless. The estimates account for the direct impact of the decline in demand through higher job separation rates and lower job access rates, and also for the indirect impact through income effects such as the added worker effect. By comparing actual unemployment and the estimated counter-factual unemployment rate, Kim argued that the exogenous change in supply behavior could account for 25-33 percent of the total increase in unemployment between 1997 and 1998.25 On average, actual unemployment in 1998 was greater by 281,000 than predicted by past search behavior, suggesting that the unemployment rate would have been 5.5 percent rather than 6.8 percent if not for the exogenous supply changes. The changes in supply behavior do not appear to have been induced by the expansion of unemployment insurance, which raised the relative value of job search against nonparticipation for only a small fraction of those who lost jobs. One must look to the forces that may have affected the broader population than those covered by the insurance. Various benefits offered to unemployed workers by the government may have induced nonparticipants to declare themselves as unemployed, to a larger extent than the public work program absorbed unemployment.26

Wages and Inequality

The effect of the crisis also shows up in wages. As indicated in Figure 6, nominal wages in firms with ten or more employees doubled between 1991 and 1996, rising an average of 15.3 percent a year. As the annual CPI inflation was 7.2 percent during the period, real wages rose 6.1 percent a year, and were 36 percent higher in 1996 than in 1991. The steep increase in wages stopped in 1998 when nominal wages fell by 5.9 percent between July 1997 and July 1998. This amounted to a 12.5 percent decline in real wages, as the inflation rate was 7.5 percent in 1998.

Figure 6.
Figure 6.

Nominal Monthly Wages during the Past 15 Years

(In thousands of Korean won)

Source: Survey on Wage Structure (1985-99)Note: Firms with ten or more employees are sampled.

Wage changes were not the same in all sectors. Industries with the greatest job losses experienced the largest wage declines. As indicated in Table 7, nominal wages fell by 6-10 percent in manufacturing, construction, retail and wholesale trades, and financial, insurance, and real estate (F.I.R.E.) between July 1997 and July 1998. However, nominal wages changed little in transportation, communication, and services, and even rose in public utilities in 1998. Indeed, nominal wages rose as much as consumer prices in public utilities leaving real wages broadly stable.

Table 7.

Nominal Wages

(Thousands of Korean Won)

article image
Source: Monthly Labor Statistics (July issues in 1996-99).Note: Monthly wages in July of each year among firms with ten or more regular employees; figures in parentheses are percentage changes from previous year.

Three points are noteworthy about wage changes during the crisis. First, nominal wages have been flexible. If not for the wage fall, the decline in employment would have been much greater. Actual wage declines must be greater than indicated in the table because the workforce composition shifted away from low-wage workers due to the concentration of job losses among them. Second, the non-neutrality in wage changes appears less strong than the non-neutrality in employment changes (see Table 5). This suggests that employment adjustments were more important than wage adjustments.27 Third, the unusual increase in wages in public utilities reflects that most utilities are state owned. Because firms and workers in public utilities were less pressured by the crisis, wages kept pace with inflation.

The recovery in nominal wages in 1999 is a mirror image of the decline in 1998. Those sectors with the greatest wage losses in 1998 recorded the greatest comebacks in 1999, as they did in terms of employment. Nominal wages were actually cut by 24.1 percent in public utilities.28 This recovery pattern strongly suggests that the increase in wages was to compensate workers for the suffering in the previous year. A similar pattern is also found in the size structure of wages. Nominal wages fell most for small and large firms between July 1997 and July 1998, and then rose most for the same firms between July 1998 and July 1999.

The demographic pattern of wage changes in 1998 can be deduced from Table 8. The gender premium had been declining in Korea before the crisis, reflecting female progress in the labor market, although the decline was relatively slow during the mid-1990s. Between 1996 and 1998, however, the premium declined somewhat faster. Given that employment fell less among men both absolutely and relatively, this suggests that men may have conceded a greater wage cut in return for job stability. The age premium, unlike its declining trend in the past, increased between 1997 and 1998, suggesting that the demand shock was even worse among the young population than indicated by the considerable employment loss among them. The college premium had been declining throughout the 1980s and the early 1990s due to the fast-rising supply of college graduates, but this trend reversed in the mid-1990s as the premium rose.

Table 8.

Wage Premiums

article image
Source: Author’s calculation based on data from the Survey on Wage Structure (1993-98).

Male/female wage ratio minus 1.

40-54 years old/20-29 years old wage ratio minus 1.

College/high school graduates wage ratio minus 1.

The rise in the age and college wage premiums, together with soaring interest rates during the early phase of the crisis, suggests that income inequality widened during the crisis. Table 9 shows that between the second quarter of 1997 and the same quarter in 1998, urban worker households experienced varying levels of income changes according to their location in income distribution. The poorest 10 percent saw their total earnings and labor income decline by more than 20 percent. In contrast, the richest 10 percent saw their total income increase by more than 10 percent, and their labor income decrease only by 2.0 percent. Among the middle-income group, total earnings and labor income decreased by about 10 percent. This pattern implies rising income inequality.

Table 9.

Percent Changes in Income and Expenditure by Income Decile

article image
Source: Income and Expenditure Survey on Urban Working Households (1997-2000).

The changes in consumption expenditure were much more similar among income groups, indicating that low-income groups were engaging in dissaving while high-income groups were still saving, or alternatively that low-income groups had become more insecure financially while high-income groups were cautious in their spending.

The recovery in income in the following year is much less impressive compared with the loss between 1997 and 1998. The recovery tended to favor low-income groups. Most of the recovery took place in labor income, which suggests that the recovery was related to the strong employment gains among unskilled workers in 1999. The recovery pattern in consumption strongly favored the richer households, however, hinting that the 1998 decline in consumption among them was precautionary. The top 60 percent of the distribution recorded two-digit increases in nominal consumption while the bottom 40 percent recorded one-digit increases. That is, as the economy recovered from the early shock, households were re-adjusting their saving (consumption) behavior by doing the opposite of what they did the previous year. The recovery in income and consumption between 1999 and 2000 shows a similar pattern as that between 1998 and 1999, but the magnitudes are much greater in 2000, indicating gains were concentrated in the latter half of 1999.

One should keep in mind that the true increase in inequality, both in income and consumption, is quite likely to be greater than reported in the table because the above results are obtained from urban wage and salary worker households. If households with no labor earnings were added to the sample, inequality would have increased more.29

Concluding Remarks

The major impacts of the economic crisis are probably the increase in inequality, underemployment, and the permanent increase in unemployment. Rising inequality reflects labor market demands, which had already started to shift away from less skilled workers in the 1990s. The crisis intensified this trend. Labor income declined most among low-income households, but they were not necessarily those who gained most during the recovery. Although sectoral employment recovery showed a pattern of compensation for the previous year’s loss, most job gains were concentrated in low-wage unskilled jobs. In other words, there was occupational downgrading among job losers during the crisis. Such a trend is likely to continue in the future, as the economy is swiftly becoming more knowledge- and computer-based, which is a worldwide phenomenon. Although access to information becomes easier for almost everyone, the winners in market competition will be those who can handle information more creatively and thus more profitably. The reform programs, if successful, will reinforce such competition in the market, and inequality will be pressured to increase.

Legal surroundings and firms’ responses are also pointing to an increase in inequality. The share of non-regular employees such as part-time, temporary, and daily workers has increased, and will continue to do so as firms attempt to lower labor costs. Redundancy layoffs, a temporary help agency, and flexible hours are now legalized and will help firms further reduce labor costs. More flexibility in labor markets, coupled with increased capital mobility within and across countries, will increasingly put unskilled workers at a disadvantage.

The permanent increase in unemployment appears to reflect both market forces and changing institutions. The value of job search compared with nonparticipation has risen due to both income effects and higher unemployment benefits. Rising inequality increases labor supply of those who have been idle in low-income households, as is evident in the increase in labor supply from married women from the relatively poorer households. In some cases, children left school early to enter the job market. The fraction of 15- to 17-year-olds enrolled in school declined by 0.4 percentage point between 1997 and 1999, and the fraction searching for a job increased by 0.2 percentage point during the same period.30

Historically, workers have responded to a deterioration in their economic situation in two ways—human capital investment and collective actions. The former is effective and brings long-term benefits, but it is costly. The latter is easier, but efficiency gains are unclear. Little evidence is found, however, for the former. In addition to the above-mentioned decline in enrollment rate, many households reduced educational expenditure during the crisis quite substantially.31 Such a response may be only temporary, but educational expenditure has not yet recovered to the pre-crisis level.

Collective actions by workers tended to gain momentum during the crisis. As a means of protecting workers, collective actions will lose effectiveness in the future. The labor market will become increasingly more individualized, and the incentive to collude among workers will increasingly be limited to less-skilled workers. Further, as the recent incidences of collective actions have focused mostly on pie splitting, they have been viewed as one of the many obstacles to successful economic reform. Collective actions, at least at this point, do not seem to be the ultimate solution to the problem.

The changes during the crisis and current economic conditions suggest that the Korean labor market should also go through fundamental changes. Both firms and workers will find a way to improve their longer-term prospects given the changes in market conditions. Firms will have to look for new manpower management strategies and workers will have to look for new ways to cope with the changing demand situations. In addition, government will have to provide an environment in which both firms and workers are induced to make efficient choices. Given that firms and workers are optimizing their choices under the institutions provided by government, the role of government can be said to be the most important component in these changes.

Given the shifts in labor demand, labor market policies should focus on job creation, and education and training to induce efficient supply responses, and also on income redistribution policies such as a progressive income tax, an earned income tax credit, an effective placement service, and a stronger social safety net, to name a few. Many countries have been trying to do the same, so the question is not what, but how. Of course, all these must be accompanied by real and fundamental restructuring of the economy: healthy financial institutions and profitable firms are required for job creation, which is the most important policy target.

The experience of the crisis in Korea offers an important lesson on how to implement the above measures. It is the coordination of a series of measures that matters, not the measures themselves. Public education should be strengthened (or funded more) to offset the decline in private expenditure. But the educational reform actually implemented hit the wrong target; it simply lowered the mandatory retirement age of schoolteachers, forcing many to leave, which effectively increased student-teacher ratios.32 The market increasingly requires a skilled workforce, but the Ministry of Education has implemented policies that will discourage talented and hard-working students. An unemployment policy promoting temporary internships of young college graduates at large companies has potentially conflicted with the “no new hire” clause for redundancy layoffs. While the least-skilled workers lost most jobs, high-tech businesses were subsidized under the job creation policy.33 The public work program paid 150 percent of the minimum wage for a minimal amount of work, attracting workers away from small businesses and hindering the entry of small, low-wage businesses. The newly introduced Basic Livelihood Protection Program guarantees each four-person household 930,000 won per month, which is 257 percent of the minimum wage and 70 percent of the average wage of all wage and salary workers. As argued above, unemployment may have risen permanently due to the ill-designed unemployment policy. These are just a few examples of coordination failure in implementing policies that are expected to have a large and important impact on the labor market.

The coordination failure is most likely to have arisen because some of the policies gave an unbalanced emphasis on temporary pain relief. As well elaborated by Pencavel (1996), product and factor markets are interlinked with each other, and thus policy coordination is a critical issue in dealing with all economic problems. Policymakers need to keep in mind that labor market issues must be dealt with in a more comprehensive framework covering both product and capital markets. Further, potential conflicts must be minimized among policies having various targets. In addition, labor market policies must place a stronger emphasis on long-term issues, especially on improving the skill levels of workers and encouraging human capital accumulation.

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*

The author would like to thank Dong-Chul Cho and Gyeong-Joon Yoo for helpful comments and discussion on the topic.

1

Kim (1997a) finds that a 10-percentage point increase in the share of firms selling more than 80 percent of outputs on subcontract increases the share of high school graduates or less educated workers among new hires by 1.5 percentage points.

2

The discussion in this section draws mostly upon Ministry of Labor (1998, 1999).

3

The Commission was called upon by President Kim Dae Jung to shape labor market policies during the crisis. It consisted of union representatives, business representatives, and a neutral party of government officials and professionals. The major issues discussed in the Commission included the introduction of redundancy layoffs and a temporary work agency, and unemployment policies.

4

Although the full effects of such job maintenance programs are difficult to measure, they are unlikely to have been large since layoffs have not been the major reason for job losses. For example, among those who involuntarily lost a job in 1998, only 18 percent was through semi-voluntary retirement or layoff from surviving firms. Most job losses were due to bankruptcies. Shedding workers may improve the cash flow of the firms that are marginally under financial distress, but not sufficiently so to change the fate of firms under severe financial distress.

5

There were at least three problems with this program, including the overly narrow definition of a venture business as one using sophisticated computer technology. Second, the labor demand induced in such businesses, if any, did not match the unskilled workers losing a job. Inflow of capital into the venture sector only led to excessive competition for very high-skilled workers, raising their wages and the wage gap between the skilled and unskilled. Third, the administration of the program has not been efficient because few public officials could properly evaluate the future profitability of highly technical projects, or distinguish between technically complex projects. Not surprisingly, many incidences of fraud have been reported.

6

The program classifies the beneficiaries into three groups - home care, institutional care, and self-support. Those under home care received 162,000 won per month in 1998 (22 percent higher than in 1997), and those under institutional care received 125,000 won per month (16 percent higher). Those in self-support programs were eligible for in-kind transfers and subsidized loans, but not for cash benefits as they were considered to be able to work. Among the additional 310,000 people covered, 233,000 people were classified in the self-support program, as most were job losers able to work.

7

These programs had only a limited impact for two reasons. First, the government intended to finance the program by issuing bonds, but the sale of bonds were far below the target as yields were set far below the market interest rate. Second, the loan windows were set up in commercial banks, and the banks applied a set of restrictive conditions on loan approval. For example, applicants for loans were requested to provide some collateral or cosigners, neither of which was easy for a jobless person.

8

Public work programs also caused some side effects. First, a major portion of the participants in the program had not previously been in the labor force. Second, the compensation level was too generous at 500,000 won per month, which was approximately 50 percent higher than the legal minimum wage. As a result, workers who would have sought employment in small, low-wage businesses tended to prefer public work programs.

9

During the crisis, the Act was amended so that unions could solicit professional help (for example, from lawyers). The amendment led to an unusual increase in “professionals,” mostly from other unions, helping small unions. In that sense, it effectively allowed intervention by other unions in firm-level bargaining. The increase in “professionals” quickly subsided, however.

10

A11 firms with 15,000 or more employees are organized except for Samsung Inc., but the penetration rate is below 10 percent among firms with fewer than 100 employees (Kim and Lee, 1997).

11

In the United States and other OECD countries, a non-worker is asked whether he or she looked for a job during the previous four weeks. The low rate of unemployment during the 1990s prior to the crisis in Korea has often been considered as reflecting the difference in weeks, but recent data indicate that it is not the number of weeks, but the response behavior.

12

Employment has fluctuated substantially during business cycles, however; such fluctuations have been comparable to those seen in other OECD countries (Kim, 2000a).

13

See Table 8 for the recent changes in college premiums.

14

The demand indicator is calculated following Katz and Murphy (1992), Juhn, Murphy and Pierce (1993), and Kim and Topel (1995). The index uses changes in sectoral employment, where sectors are defined as industry-occupation cells. The main idea is that if the sectors hiring a certain group of workers more disproportionately expand, this can be viewed as an increase in demand for the group of workers.

15

I report the index for the post-1994 periods only because new industry and occupation classification was introduced in 1994.

16

See Table 8 for the recent changes in gender premium.

17

The data for the empirical analysis include the Survey on Economically Active Population(SEAP: National Statistical Office, 1985-99), the Survey on Wage Structure (SWS: Ministry of Labor, 1993-98), Monthly Labor Statistics (MLS: Ministry of Labor, 1996-2000), and the Income and Expenditure Survey on Urban Working Households (IESUWH: National Statistical Office, 1996-2000).

18

See Kim and Yoo (2001) for the detailed sectoral and demographic pattern of employment changes.

19

See Kim (2001a). Newly created jobs would have paid 6 percent lower wages than destroyed jobs even in the absence of downward pressure from the economic crisis, as most new jobs were retail/service and unskilled jobs while destroyed jobs were high-wage manufacturing jobs. Weekly work hours tended to be longer by 3.7 hours. Such wage and hour gaps between destroyed and created jobs tended to be greater among high-skilled workers, suggesting the possibility of occupational downgrading.

20

The Labor Standard Law prohibits fixed-term contracts exceeding a year. Thus regular workers usually have a contract with no indication of duration.

21

Unpaid family workers working fewer than 18 hours a week are classified as jobless.

22

Kim (2001b) considered the high-performance organization and core-periphery worker arguments against the cost-reduction hypothesis to explain the increase in non-regular workers.

23

For detailed demographic patterns in unemployment changes, see Kim and Yoo (2001). This section focuses only on the “permanent” increase in unemployment.

24

Unemployment increased too fast, given the magnitude of demand shock. The demand shock placed on the economy by the crisis is roughly comparable to the shock that took place in 1979-80 following the second oil shock. Between 1979 and 1980, real GDP growth fell by 9.8 percentage points and the unemployment rate rose by 1.4 percentage points. Real GDP growth fell by 10.8 percentage points between 1997 and 1998, which was reasonably comparable to the 1979-80 changes, but unemployment rate increased by 4.2 percentage points. Although the two shocks were almost 20 years apart and the level of industrialization differed, the differences in unemployment responses appear too large. Other studies also point out that unemployment rose too fast in 1998. Yoo (1999b) shows that the unemployment rate in 1998 should have been 4.4 percent based on the Okun coefficient from the past three decades.

25

More recently, Nam and Rhee (2001) show that such an effect could be even greater.

26

Kim (2000b) shows that the labor supply increased most among the part of the population that traditionally is detached from the market. This included women, the elderly, and less educated persons. He concludes that they might have remained idle if it were not for the unemployment benefits offered by the government.

27

Kim and Topel (1995) showed that most sectoral shocks had been absorbed by inter-sectoral shifts in employment rather than by inter-sectoral wage differentials in the 1970s and 1980s. They interpreted the results as indicating that Korea had a single integrated labor market.

28

In particular, nominal wage cut in public utilities was a result of the pressure imposed on state-owned firms—the wage growth in 1998 was criticized as reflecting poor management in those firms.

29

The share of households with no labor earnings increased from 6.8 percent in 1998 to 7.9 percent in 1999.

30

Estimated from the Survey on Economically Active Population.

31

Between the second quarters of 1997 and 1998, educational expenditure declined by 8.7 percent among urban working households. The decline was greater among low-income households: it declined by 13.0 percent among the households in the bottom 40 percent in income distribution, while it declined by only 4.4 percent among the households in the top 40 percent (Income and Expenditure Survey of Urban Working Households). If this continues, inter-generational earnings mobility will be seriously impaired in the Korean labor market.

32

An increase in class size is likely to lower the quality of education (see, for example, Card and Krueger, 1992; Krueger, 1997; and Lazear, 1999).

33

Only wages, not jobs, grew astronomically in the sector as newly entering firms competed to attract a limited number of skilled workers.

Within Same Series

Other IMF Content

Other Publishers Content

Cover Korean Crisis and Recovery
Korean Crisis and Recovery
Author: Mr. David T. Coe and Mr. Se-Jik Kim
ISBN:
9781589060685
Publication Date:
19 Sep 2002
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781589060685.072
Pages:
548

Fraction at Work in Total Population by Age

Expansion of College Education in Korea

Changes in Employment and Unemployment

Job Gains, Losses and Net Job Gains during the Economic Crisis

(In 1,000 persons)

Monthly Inflow into Unemployment

Nominal Monthly Wages during the Past 15 Years

(In thousands of Korean won)