Abstract
Selected Issues
Labor Market Duality in Korea1
Labor market duality in Korea is a complex issue, which encompasses various types of non-regular workers. Nonetheless, it is particularly prominent among SMEs and in the service sector and disproportionately affects women, the elderly and youth. On a macro level it has likely contributed to increasing inequality, low fertility rates and declining productivity growth. The two main drivers behind duality are various employment protection legislations and large productivity differentials in the product market. A general equilibrium search-and-matching model is applied to model duality and simulate the impact of flexicurity policies. It finds that a well-calibrated introduction of flexicurity could address a number of issues that Korea is facing, such as reducing duality and inequality, and raising productivity and welfare. For this it would be crucial to implement all three pillars to ensure gains are distributed among all individuals.
A. Definition and Impact of Duality
1. Duality is usually employed to characterize a labor market consisting of two tiers. In the regular tier workers enjoy high wages and social benefits—such as unemployment insurance and pensions—and have a high degree of job security. In the non-regular tier workers tend to receive lower wages, are less likely to be covered by social benefits and have lower levels of job security. In practice, non-regular work can take many forms, with potential for overlap. Often it is defined using types of employment contracts. The OECD provides cross-country data for three forms of employment that could be classified as non-regular: temporary, part-time and self-employment. Compared to other OECD countries Korea stands out for having a relatively high share of temporary and self-employed workers (see figure). With regards to part-time employment, Korea lies below the OECD average. However, beyond the incidence of non-regular employment contracts, it is critical to examine the impact of duality on individuals’ lifes and the economy and society as a whole.
Non-Regular Employment
(Share in total employment)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
sources: OECD. Note: * Temporary employment as strare of total dependent employment.Non-Regular Employment
(Share in total employment)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
sources: OECD. Note: * Temporary employment as strare of total dependent employment.Non-Regular Employment
(Share in total employment)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
sources: OECD. Note: * Temporary employment as strare of total dependent employment.2. The existence of different employment arrangements is not an inherent concern in itself. On the contrary, they can serve different priorities of employers and workers and thereby enhance welfare. For example, part-time contracts might be preferred by individuals desiring higher work flexibility and can raise labor force participation. Temporary contracts can be used as a screening device by employers, which can lower skill mismatches. In general, a certain variety in employment arrangements has the potential to lower unemployment and in particular long-term unemployment and reduce loss of skills.
3. Labor market duality can become a significant problem if it results in inefficiencies and welfare losses. Labor market duality can reduce productivity. For example, if non-regular employment arrangements result in recurring spells of short-term employment and unemployment, this can cause an inefficient “revolving door.” Labor market duality can also contribute to inequality by inducing insider-outsider dynamics, with regular workers enjoying higher bargaining power and ensuring higher wages and job-security (Bentolila and Dolado, 1994; Lindbeck and Snower, 2002). This can result in very different working conditions for similar work (Aoyagi and Ganelli, 2013) and loss of intergenerational mobility, e.g. by reducing non-regular workers’ investment into their children’s education (OECD, 2016). Finally, labor market duality can result in negative externalities as firms might not internalize social costs of non-regular employment arrangements (Bentolila and Dolado, 1994; Dolado et al, 2017).
B. Development of Labor Market Duality in Korea
4. Different types of non-regular employment have experienced varying trends over time. A classification of employment by status suggests that the share of non-salaried workers declined significantly from 41 percent in 1989 to 25 percent in 2016 (see Figure). The share of temporary workers remained largely unchanged. Standing at 27 percent in 1989 it peaked at 33 percent in 2002 and subsequently declined to 25 percent in 2016. A break-down by employment type suggests that the incidence of non-regular workers has remained relatively constant since 2003 (see Figure). However, the share of part-time employment has increased from 7 percent in 2003 to 11 percent in 2014. In addition, it has also been found that subcontract work has increased since the Asian financial crisis (Cooke and Brown, 2015).
Employment by Status
(in million persons)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Kosis, economically active population survey.Employment by Status
(in million persons)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Kosis, economically active population survey.Employment by Status
(in million persons)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Kosis, economically active population survey.
Employment by Type
(Share of all wage and salary workers)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Source: Kosis, economically active population survey, additional survey by employment type.Employment by Type
(Share of all wage and salary workers)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Source: Kosis, economically active population survey, additional survey by employment type.Employment by Type
(Share of all wage and salary workers)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Source: Kosis, economically active population survey, additional survey by employment type.5. Women, youth and the elderly account for disproportionately large shares of non-regular employment. While less than 40 percent of regular workers were women, they held 55 percent of temporary and more than 70 percent of part-time contracts (see Figure). Youth and the elderly only held about 23 percent of regular jobs, but 43 percent of non-permanent and 56 percent of part-time employment (see Figure). In addition, using micro data from the Korean Labor and Income Panel Study (KLIPS) suggests that the level of education also differs by employment status workers (see Figure). While about 34 percent of regular workers had only a high school education or below, this share was twice as high for temporary and daily (67 percent) and non-salaried workers (66 percent).
Employment by Gender
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Kosis, Economically active population survey.Employment by Gender
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Kosis, Economically active population survey.Employment by Gender
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Kosis, Economically active population survey.
Employment by Age and Highest Education Level
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Kosis, Economically active population survey, KLIPS, author’s calculations.Employment by Age and Highest Education Level
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Kosis, Economically active population survey, KLIPS, author’s calculations.Employment by Age and Highest Education Level
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Kosis, Economically active population survey, KLIPS, author’s calculations.6. Most non-regular workers work in small firms and the service sector. In general, most Koreans are employed in the service sector. Among permanent workers about 68.5 percent are employed in the service sector, while for temporary and daily employees the share stood at 73.9 percent (see Figure). It was highest for part-time workers at 90 percent. Construction also accounts for a relatively large share of non-regular workers when compared to regular workers. A similar conclusion holds for small firms. They provide about half of all regular jobs. However, they account for 65 percent of temporary and daily employment and 77 percent of non-salaried workers.
Employment by Sector
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, the labor force survey at establishments; KOSIS, economically active population survey.Note: This excludes the agricultural sector and workers at government offices and non-wage workers at enterprises with no employees.Employment by Sector
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, the labor force survey at establishments; KOSIS, economically active population survey.Note: This excludes the agricultural sector and workers at government offices and non-wage workers at enterprises with no employees.Employment by Sector
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, the labor force survey at establishments; KOSIS, economically active population survey.Note: This excludes the agricultural sector and workers at government offices and non-wage workers at enterprises with no employees.
Employment by Firm Size
(By Employment Status, 2014)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: KOSIS, Report on the Establishment Status.Note: This excludes workers at government offices and non-wage workers at enterprises with no employees.Employment by Firm Size
(By Employment Status, 2014)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: KOSIS, Report on the Establishment Status.Note: This excludes workers at government offices and non-wage workers at enterprises with no employees.Employment by Firm Size
(By Employment Status, 2014)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: KOSIS, Report on the Establishment Status.Note: This excludes workers at government offices and non-wage workers at enterprises with no employees.C. Impact of Labor Market Duality in Korea
7. Non-regular workers in Korea tend to receive lower wages and are less likely to enjoy social benefits. Fixed-term workers receive on average about 66 percent of the hourly wage of regular workers, while part-time workers earn on average 62 percent and agency workers about 52 percent (see Figure). However, some of these gaps could be explained by differences in e.g., education, firm size, ability or tenure. With respect to social benefits, almost all regular workers are covered by employment insurance, health insurance and the national pension (see Figure). This is also true for most fixed-term and agency workers. Much less of part-time workers receive these social benefits, even though the share has more than doubled since 2007. Lower wages and social coverage have been connected to negative long-run effects for non-regular workers and their families, such as lower marriage and fertility rates and significantly lower spending on education of their children (OECD, 2016).
Relative Wage of Non-Regular Employment Types
(Relative to regular employee, hourly wage)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Survey on labor conditions by employment type.Relative Wage of Non-Regular Employment Types
(Relative to regular employee, hourly wage)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Survey on labor conditions by employment type.Relative Wage of Non-Regular Employment Types
(Relative to regular employee, hourly wage)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Survey on labor conditions by employment type.
Social Coverage by Employment Type
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Survey on labor conditions by employment type.Social Coverage by Employment Type
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Survey on labor conditions by employment type.Social Coverage by Employment Type
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Survey on labor conditions by employment type.8. Non-regular employment likely accounts for some of the income inequality observed. While income inequality as measured by the Gini index is comparatively low in international comparison at 29.5 in 2015, it has increased compared to earlier levels observed in the 1990s. In addition, the low pay incidence was high in Korea at 23.7 percent in 2014 compared to the OECD average of 16.2 percent. Various literature has found that labor market duality has worsened inequality in Korea and poverty is closely related with the status of employment (Lee, 2011; Shin, 2009; OECD, 2016). A theil-decomposition using KLIPS survey data suggests that in 2014 around 17.6 percent of overall inequality among salaried employed could be explained by inequality between regular and temporary workers.
9. Labor market duality has created a revolving door for temporary workers, with little opportunity to secure permanent employment. Separation rates are much larger and more volatile for temporary workers compared to regular workers (see Figure). While only around 2.4 percent of permanent employees left their jobs in 2016, 18.8 percent of temporary and daily workers did so. Moreover, the share of permanent workers being laid off is negligible at 0.4 percent of employment, while it stood at 14.2 percent for temporary and daily workers. Annual employment flows also hint towards low mobility between non-regular and regular workers (see Table 1). Most temporary workers remain in temporary employment a year later, while only 5.5 percent become a regular employee. Regular workers are in a much more absorbing state, with 92.5 percent remaining in their employment status.
Flow Probabilities by Employment Status (2013-2014)
Flow Probabilities by Employment Status (2013-2014)
| To | |||||
| From | Regular | Temporary | Self-employed | Non-employed | |
| Regular | 92.5% | 1.4% | 0.9% | 5.1% | |
| Temporary | 4.8% | 81.4% | 1.7% | 12.2% | |
| Self-employed | 1.3% | 2.2% | 92.1% | 4.4% | |
| Non-employed | 3.6% | 4.1% | 0.9% | 91.4% | |
Flow Probabilities by Employment Status (2013-2014)
| To | |||||
| From | Regular | Temporary | Self-employed | Non-employed | |
| Regular | 92.5% | 1.4% | 0.9% | 5.1% | |
| Temporary | 4.8% | 81.4% | 1.7% | 12.2% | |
| Self-employed | 1.3% | 2.2% | 92.1% | 4.4% | |
| Non-employed | 3.6% | 4.1% | 0.9% | 91.4% | |
10. Disadvantages and persistency of non-regular employment could be resulting in inefficient investments into education and on-the-job training. Given the persistence and low expected income of non-regular employment, Koreans spend a lot of time and resources on trying to obtain high-quality regular employment. This starts at a very early age with private tutoring and continues in high school to prepare for the entrance exam for higher education. For those, who are not able to secure a regular job out of college, studying for entrance exams and accumulation of certifications and diplomas often continues (Kim, 2015b). While additional accumulation of human capital is usually seen as enhancing productivity and opportunities, in this case benefits of these investments have been questioned. On the contrary, investments into on-the-job training might be inefficiently low for non-regular workers on account of the “revolving door” effect. Kim (2016) has found that non-regular employees receive significantly less on-the-job training.
Separation and Layoff Rates
(by Employment Status)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Labor Force Survey at Establishments.Separation and Layoff Rates
(by Employment Status)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Labor Force Survey at Establishments.Separation and Layoff Rates
(by Employment Status)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Labor Force Survey at Establishments.D. Drivers of Labor Market Duality in Korea
Employment Protection Legislation
11. Korea has particularly strong restrictions on dismissal of regular workers. The OECD EPL measures (see Figure) suggest that Korea has very strict dismissal regulation in international comparison. In the case of dismissal for economic reasons firms have to prove that they actively tried to avoid dismissal and have exhausted “all means” (OECD, 2013). If dismissal is on account of managerial reasons, there must be an “urgent managerial necessity”, for which a clear definition is lacking (Kim, 2015a). In addition, dismissal above a certain number of employees has to be reported to the MOEL in advance (OECD, 2013). Korea has also a high frequency of reinstatement orders in case of unfair dismissal. In addition, a steep schedule in severance payments and significant gap in labor costs incentivize firms to hire non-regular employees.
Product Market Segmentation
12. There are large productivity gaps between sectors and firms and temporary workers in SMEs face a double penalty in terms of wages, social coverage, training and job mismatch. Labor productivity in the service sector was only 45 percent of that in manufacturing—far below the OECD average of 90 percent (see Figure). In addition, small firms’ productivity is only 24 percent of that of large firms, compared to an OECD average of 69 percent. These large productivity gaps have likely contributed to labor market duality as low productivity firms are unable to offer high-quality regular jobs (Ha and Lee, 2013; OECD, 2013). An analysis of KLIPS micro data supports the idea of a “double duality” as (i) temporary employees are generally receiving lower wages and have less social coverage than regular employees and (ii) temporary workers in SMEs are even worse off than temporary workers in large companies.
Dismissal Regulation for Regular Workers
(Scale from least (0) to most (6) restrictions, 2013)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Dismissal Regulation for Regular Workers
(Scale from least (0) to most (6) restrictions, 2013)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Dismissal Regulation for Regular Workers
(Scale from least (0) to most (6) restrictions, 2013)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.
Relative Labor Productivity
(in percent)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Relative Labor Productivity
(in percent)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Relative Labor Productivity
(in percent)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Insider-Outsider Dynamics
13. Insider-outsider dynamics have likely exacerbated labor market duality in Korea.
Insider-outsider dynamics arise due to labor turnover costs, which give a group of employees larger bargaining power and thus the ability to negotiate better contracts compared to outsiders with regards to wages, benefits or job security (Lindbeck and Snower, 2002). Some evidence for insideroutsider dynamics can be found in Korea as company welfare in certain firms is significantly larger than legally required with regards to benefits and retirement allowance (OECD, 2013; Kim, 2016). Union density is low in Korea at about 10 percent, compared to an OECD average of 17 percent. They have been criticized for lacking representativeness (OECD, 2013; Kim, 2016). It has been argued that they negotiate high benefits for their members (Eichengreen et al., 2015). Indeed, unions in Korea are largely representing regular workers, especially those in large companies (see Figure).
Global Trend of Market Polarization
14. There exists some evidence that Korea has experienced labor market polarization. A trend of polarization of labor markets—employment shifting away from middle-wage tasks towards low- and high-wage jobs – has been documented for many advanced and emerging economies (Autor, 2010; Reijnders and de Vries, 2017 and references therein). For Korea, previous analysis has found mixed results. While Reijnders and de Vries (2017) do not find evidence for polarization of employment shares, while Lee and Lee (2015) do find evidence that offshoring has contributed to larger wage inequality between temporary and regular workers in manufacturing sectors. Changes in employment shares by wage levels suggest that Korea has undergone different trends between 1993 and 2016 (Figure). A clear polarization took place from 1993 to 1999 with employment shares moving from medium-wage largely to high-wage occupations. A further polarization took place from 2009 to 2016 as employment shares moved from medium- to low-wage occupations.
Trade Union Density by Employment Type
(2016)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Survey on Labor Conditions.Trade Union Density by Employment Type
(2016)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Survey on Labor Conditions.Trade Union Density by Employment Type
(2016)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Survey on Labor Conditions.
Changes in Employment Shares by Wage Level
(percentage points)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Survey on Labor Conditions by Employment Type.Note: Classifications are changing slightly between 1999 and 2000 and 2008 and 2009.Changes in Employment Shares by Wage Level
(percentage points)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Survey on Labor Conditions by Employment Type.Note: Classifications are changing slightly between 1999 and 2000 and 2008 and 2009.Changes in Employment Shares by Wage Level
(percentage points)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: MOEL, Survey on Labor Conditions by Employment Type.Note: Classifications are changing slightly between 1999 and 2000 and 2008 and 2009.Key Labor Market Reforms
Before the Asian crisis employees enjoyed high level of employment protection. Korea introduced its first labor law in the 1950s and the minimum wage in 1988. However, labor regulations were not a widely-debated issue as the country was realizing an “equitable growth miracle” with high levels of employment and job protection (see Figure). In particular, regular workers enjoyed high protection with regards to notification procedures, the definition of justified or unfair dismissal and a high possibility of reinstatement following unfair dismissal. Temporary work was very restrictive concerning the types of work for which it was allowed and the maximum duration of successive fixed-term contracts.
During the Asian crisis labor market regulations underwent significant changes under the lead of a tripartite commission. Both, regular and temporary employment regulation became significantly less strict (see figure). The main change for regular employees was the recognition of collective dismissal in case “urgent managerial need.” In addition, the Dispatched Workers Act was introduced, which allowed the practice of temporary work agency employment in 26 specified occupational areas. It did not set any limits on the duration of fixed-term contracts or contract renewals (Kim and Skott, 2016). At the same time, social expenditure picked up significantly from an average of 2.9 percent of GDP between 1990 to 1996 to 4.8 percent from 1997 to 2003. The increase in the flexibility of employment protection during the Asian crisis has been put forth as a main driver behind significant changes in the structure of employment, mainly an increase in the share of non-regular workers and an increasing gap in wages and benefits (Cho and Keum, 2009; Ha and Lee, 2013; OECD, 2013).
Public Social Expenditure
(Share of GDP)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Public Social Expenditure
(Share of GDP)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Public Social Expenditure
(Share of GDP)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.
Strictness of Employment Protection
(Index ranging from 0 to 6, with higer values indicating higher strictness)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Strictness of Employment Protection
(Index ranging from 0 to 6, with higer values indicating higher strictness)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Strictness of Employment Protection
(Index ranging from 0 to 6, with higer values indicating higher strictness)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.The government aimed to curb labor market duality in 2007 with the introduction of the Fixed-Term and Part-Time Employees Act and the Dispatched Employees Act. These aimed to reduce labor market segmentation by restricting the employment period for fixed-term workers to two years and prohibiting discrimination against non-regular workers, who perform similar tasks to regular workers in the same firm. However, these laws have been criticized for only applying to firms with at least five workers and very specific types of non-regular employment, which has led to avoidance behavior by firms (Cooke and Brown, 2015). In addition, it has been argued that the cap on the length of fixed-term employment has been counterproductive as firms reacted by firing and replacing them to avoid reaching the threshold (OECD, 2016). Still, around one-third of workers were converted to regular employment and some literature suggests that it has contributed to a modest decline in temporary workers (OECD, 2013; Ha and Lee, 2013)
In recent years, the Korean government has tried to improve employment protection legislation for non-regular workers. In 2012, guidelines were introduced to reduce discrimination in wages and working conditions and penalties for inadequate use of temporary agency contracts were strengthened (OECD, 2013). In addition, the Temporary Workers Act and Dispatch Workers Act were amended in 2014 to give greater protection to non-regular workers with regards to discriminatory treatment and compensation for overtime (Cooke and Brown, 2015). The regulation of regular contracts has also seen some changes, including a shortening of notice period in case of dismissal, and replacing penal provisions with financial penalties in case of unfair dismissal (OECD, 2013). A new tripartite agreement was announced in September 2015 with one main goal being the alleviation of the dual structure of the labor market. However, critics say it later lost support from key actors (IMF, 2016).
In addition, the government has passed various measures to enhance social insurance and union coverage for non-regular workers. In 2010 the government implemented the Trade Union and Labor Relations Adjustment Act, which introduced a framework that allows multiple unions to exists within a firm and set cost limits for union representatives that employers need to cover (OECD, 2013). In addition, in 2011 the Comprehensive Non-regular Workers Initiatives was introduced and included the expansion of the social insurance system, stronger enforcement of the minimum wage and vocational training for non-regular workers (OECD, 2016). Also, the Korean government did succeed in significantly increasing social care programs targeted at the vulnerable by introducing parental leave, childcare support, subsidies to the elderly and vocational training. For example, the share of social expenditure targeted at families increased from about 2.2 percent in 1998 to 11.5 percent in 2014. The government also introduced the Duru Nuri Social Insurance Subsidy Program that provides targeted subsidies to low-wage workers at small businesses for social insurance contributions (OECD, 2013).
The policy program of the new administration is also aiming to reduce duality. The new administration is aiming to address duality through three main pillars, (i) increasing households’ disposable income through a higher minimum wage and expanding eligibility for basic social security recipients, (ii) promoting decent employment by restricting application of temporary contracts and reducing the legal limit of weekly working hours and (iii) advancing fair competition between large corporations and SMEs by promoting profit sharing and removing unfair practices.
E. Policies to Address Market Duality in Korea
15. Labor market duality in Korea is a complex issue, but policies can play a critical role in addressing it. Duality is an entrenched characteristic of Korea’s labor market. Moreover, the causes behind it are multifold and go beyond laws and policies, including the nature of contract negotiations and global trends reducing the bargaining power of specific workers. Yet, the previous discussion has also shown that policies have critically contributed to duality and its harmful implications for those affected. Thus, labor reforms have the potential to significantly improve Korea’s labor market and give important impulses. It is also clear that measures would need to address labor as well as product markets to address the “double duality”. This section will focus on the side of the labor market and present and evaluate detailed policy options.
16. Korea should consider moving towards its own form of “flexicurity” to reduce duality and its negative effects on the economy and society. Labor market policies should shift towards “protecting the workers, not the jobs” by pursuing a model of flexicurity. This would address duality and its negative effects through various channels:
Increasing productivity. A model of flexicurity would enhance resource allocation and thereby increase productivity (Blanchard et al., 2013 and references therein). This would allow workers to move towards the most productive jobs and ensure they would acquire the necessary training. This would likely result in better matches and thus lower product market segmentation and labor market duality.
Raising labor force participation. A flexicurity approach is often suggested to countries wanting to reduce high unemployment rates (Zhou, 2007). While this is not generally an issue for Korea with an unemployment rate at 3.8 percent, flexicurity could help to increase its low labor force participation rate by incentivizing inactive individuals to enter the labor market. As this would often be women it could have a further feedback effect - by adding a second earner to families the demand for job-security among insiders might relax as implications of job loss are better cushioned.
Preparing for structural change. Korea stands out as the country with the biggest education gap between youth and the elderly in the OECD and one of the fastest aging countries in the world. Thus, it is unlikely that the jobs the elderly are retiring from, are a good match for youth joining the labor force. It is thus critical to protect workers instead of jobs a la flexicurity to avoid large mismatches and productivity losses, which would exacerbate duality. This is even more pressing, given the global trends of technological change and integration of labor markets which call for quicker adjustments of workers to new tasks.
Enhancing equity. A flexicurity approach would reduce the high protection granted to regular employees and adapt a smoother schedule. This would lower labor market duality and the inequalities it entails. In addition, the combination with higher unemployment benefits and activation policies would enhance job matches and protect the vulnerable, which would enhance equity and lower duality further.
17. The flexicurity model centers around three main levers of labor market policy—employment protection legislation, unemployment insurance and active labor market policies. In particular, it consists of the so-called “golden triangle” of (i) flexible rules for hiring and firing, (ii) a strong safety net in form of unemployment insurance and (iii) active labor market policy. This policy mix aims to provide a necessary level of labor market flexibility, while ensuring a high level of security to the workers through social protection and active labor market policies (Zhou, 2007). The general idea is that workers should be protected more through unemployment insurance than employment protection legislation, while acknowledging that unemployment benefits can only be higher if active labor market policies ensure incentives for work are not diminished (Blanchard et al, 2013).
Flexicurity: Country Examples and Best Practices
Country Examples
Denmark has a long history with flexicurity and is its leading example. Denmark has often been used as the model student of flexicurity (Auer, 2010; Zhou, 2007; Algan and Cahuc, 2006). A cross-country comparison illustrates the significant spending on unemployment insurance (see Figure) and active labor market policies (see Figure). While it has also been argued that Denmark has flexible rules for hiring and firing (Wilthagen, Tros, and van Lieshout, 2003; Danish Ministry of Foreign Affairs, 2017), it falls in the middle of OECD countries in the OECD indicator for strictness of employment protection legislation. However, this is largely due to the length of mandated notification periods and not, as in the case of Korea, complexities regarding dismissal trials. The flexicurity model in Denmark has a long history and has undergone continuous calibration to improve outcomes and adjust to emerging challenges (Zhou, 2007). In addition, the success of the flexicurity model in Denmark has been attributed to a fundamental trust of employees towards their employers and the social safety net, flexibility within jobs to ensure a good work-life balance, an education system that fosters independent thinking and working and a strong tradition for lifelong learning (Danish Ministry of Foreign Affairs, 2017).
Net Replacement Rate
(Initial phase of unemployment, single earner, previous earnings = 67%AW)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Net Replacement Rate
(Initial phase of unemployment, single earner, previous earnings = 67%AW)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Net Replacement Rate
(Initial phase of unemployment, single earner, previous earnings = 67%AW)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.
Spending on Active Labor Market Policies
(US$ per Unemployed)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD, Haver, Staff calculations.Spending on Active Labor Market Policies
(US$ per Unemployed)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD, Haver, Staff calculations.Spending on Active Labor Market Policies
(US$ per Unemployed)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD, Haver, Staff calculations.Other countries have moved towards flexicurity more recently, with some promising results. For example, Austria introduced a reform of severance pay in 2003, which increased flexibility while ensuring income security. Kettemann et al. (2017) find that the reform resulted in a substantial increase in job mobility. Portugal introduced an even broader set of reforms between 2011 and 2015 that reduced severance pay and eased the definition of fair dismissal, while widening the safety net and strengthening its activation framework. In a preliminary evaluation, the OECD has called the reforms “a move in the right direction”, noting that both employment and unemployment rates improved significantly and stronger than expected (OECD, 2017).
Best Practices
The three pillars of flexicurity critically depend on each other and need to be calibrated together to ensure an adequate balance between incentives, support and protection. In particular, workers should be mostly protected through unemployment insurance. Employment protection through legislation should be limited and turnover costs due to judicial uncertainty should be avoided. Where there is a role for legislation it should focus on monetary transfers from the firm to the worker and should increase smoothly with tenure, avoiding jumps that can cause duality. If unemployment insurance is raised it will need to be accompanied with effective active labor market policies (Blanchard et al., 2013).
Initial conditions likely play an important role in ensuring success of reforms towards flexicurity. Various factors have been identified that increase the likelihood of success of flexicurity reforms. These include a high level of trust between firms and workers (Blanchard et al., 2013), a certain degree of “public spiritedness” of citizens (Algan and Cahuc, 2006), a low unemployment rate and a healthy fiscal position (Zhou, 2007).
Continuous calibration and attention to detail are critical for a successful implementation. The flexicurity model in Denmark has been continuously adjusted and fine-tuned, which appears critical for its success (Zhou, 2007). In addition, the details of the policies implemented matter. For example, there exists a wide range of active labor market policies that need to be chosen carefully and adjusted to the country-specific context (Blanchard et al., 2013). Comparing Korea’s and Denmark’s spending on active labor market policies suggests that Korea spends the largest share on direct job creation, while Denmark mostly spends on training and sheltered employment and rehabilitation (see Figure).
The right level of flexicurity should be chosen to ensure fiscal viability. Denmark spends large amounts on active labor market policy (1.7 percent of GDP in 2015) and unemployment insurance (1.1 percent of GDP), compared to Koreas comparatively low spending of 0.4 percent and 0.3 percent of GDP. This has called into question the efficiency of the flexicurity model as large costs might result in a high labor tax wedge thereby discouraging employment creation (Zhou, 2007). Additionally, costs are likely to expand significantly in times of crisis (Andersen, 2011). Thus, it is critical to find an adequate balance between flexibility and security and ensure that the tax wedge does not widen excessively. For example, Denmark has reduced its tax wedge since 2000 and is now close to the OECD average. Korea’s tax wedge is comparatively low (see Figure).
ALMP Spending by Type of Program
(Share of Total ALMP Spending, 2015)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.ALMP Spending by Type of Program
(Share of Total ALMP Spending, 2015)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.ALMP Spending by Type of Program
(Share of Total ALMP Spending, 2015)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.
Tax Wedge
(In percentage of labor cost)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Note: ratio between the amount of taxes paid by an average single worker (a single person at 100% of average earnings) without children and the corresponding total labour cost for the employer.Tax Wedge
(In percentage of labor cost)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Note: ratio between the amount of taxes paid by an average single worker (a single person at 100% of average earnings) without children and the corresponding total labour cost for the employer.Tax Wedge
(In percentage of labor cost)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: OECD.Note: ratio between the amount of taxes paid by an average single worker (a single person at 100% of average earnings) without children and the corresponding total labour cost for the employer.F. Simulation of Flexicurity Policies
18. A general equilibrium search-and-matching model is applied to model duality and simulate the impact of flexicurity policies. In this model, based on Dolado et al. (2017), labor market duality and unemployment arise endogenously on account of employment protection legislation and search- and matching-frictions. The type of duality focuses on that between temporary and permanent workers and accounts for differences in wages and job security. In addition, the ‘revolving door’ arises endogenously as employment protection legislation jumps after a certain amount of tenure in a job. The model also accounts for the positive aspect of severance pay and job security as individuals are risk averse and have only partial private insurance. This means workers value the protection and insurance aspects of severance pay and dismissal costs. The baseline of the model is calibrated to the Korean economy.2
19. The calibrated model is able to capture main aspects of duality in Korea. The calibrated model produces a “revolving door” effect in the shape of a significant spike in job-destructions just before temporary workers would enter into permanent employment and become subject to the protection of firing cost. In addition, temporary workers are accepting lower wages due to significantly lower bargaining power and the possibility to be retained as a permanent worker in the future. On the other hand, the wage profile of regular workers increases with tenure as employees gain bargaining power through accumulation of severance pay benefits. Older workers accept lower wages compared to younger workers as they do not have the possibility to search for new employment once laid-off.
20. The model analyzes the impact of a move towards flexicurity on duality, welfare and income. Five different simulations are conducted. First, each of the pillars is introduced separately, and then a full package of flexicurity is passed. The first pillar -a move towards more flexible hiring and firing – is modelled through a decline in the firing costs. The second pillar of a stronger safety net is introduced through an increase in unemployment benefits. Finally, active labor market policies are introduced as measures that enhance matching and provide training. In the model, they take the form of an increase in the productivity parameter in the matching function and an increase in the productivity of initial matches, assuming that training will increase productivity of workers. Table 2 provides main results of all experiments.
Korea: Policy Experiments
Korea: Policy Experiments
| Baseline | Decrease in Firing Cost | UI Increase | Increase Matching | Increase Training | Flexicurity Package | |
|---|---|---|---|---|---|---|
| Unemployment rate | 7.50% | 6.90% | 7.80% | 7.00% | 7.30% | 6.70% |
| Output | 1.00 | 1.00 | 1.00 | 1.01 | 1.08 | 1.09 |
| Average Productivity | 1.00 | 1.00 | 1.00 | 1.00 | 1.08 | 1.08 |
| Average Income | 1.00 | 1.01 | 1.00 | 1.02 | 1.08 | 1.11 |
| Average Welfare | 1.00 | 1.00 | 1.02 | 1.03 | 1.08 | 1.12 |
| Relative job-turnover (temp to perm) | 7.50 | 2.29 | 7.50 | 7.50 | 8.00 | 4.29 |
| Relative wage (temp to perm) | 0.75 | 0.83 | 0.75 | 0.71 | 0.77 | 0.87 |
| Income Gini | 16.1 | 15.4 | 15.6 | 16.6 | 16.3 | 15.0 |
Korea: Policy Experiments
| Baseline | Decrease in Firing Cost | UI Increase | Increase Matching | Increase Training | Flexicurity Package | |
|---|---|---|---|---|---|---|
| Unemployment rate | 7.50% | 6.90% | 7.80% | 7.00% | 7.30% | 6.70% |
| Output | 1.00 | 1.00 | 1.00 | 1.01 | 1.08 | 1.09 |
| Average Productivity | 1.00 | 1.00 | 1.00 | 1.00 | 1.08 | 1.08 |
| Average Income | 1.00 | 1.01 | 1.00 | 1.02 | 1.08 | 1.11 |
| Average Welfare | 1.00 | 1.00 | 1.02 | 1.03 | 1.08 | 1.12 |
| Relative job-turnover (temp to perm) | 7.50 | 2.29 | 7.50 | 7.50 | 8.00 | 4.29 |
| Relative wage (temp to perm) | 0.75 | 0.83 | 0.75 | 0.71 | 0.77 | 0.87 |
| Income Gini | 16.1 | 15.4 | 15.6 | 16.6 | 16.3 | 15.0 |
21. Lowering firing costs significantly reduces the revolving door effect, but only benefits the poorest. Lowering the cost of firing significantly by about 60 percent reduces the revolving door effect by lowering job-destruction among temporary workers and raising their wage relative to permanent workers (see Table 2). It thereby significantly reduces inequality and the unemployment rate. The latter is due to less turnover of temporary workers, who thus spend less time in unemployment. Overall, average measures of income, welfare and productivity remain largely unchanged as does total output (Table 2). However, a closer look at the distribution of income and welfare effects suggests that there are winners and losers of this reform. In particular, income gains accrue to the bottom 40 percent of the income distribution (see Figure), in particular the young as they are more likely to be temporary workers. The upper 40 percent are instead losing some income.
22. Increasing unemployment benefits can significantly lower inequality, but has no effect on duality and can exacerbate unemployment. We increase unemployment benefits moderately by 15 percent, which is around the increase necessary to raise Korea’s net replacement rate to the OECD average. This measure is not able to reduce duality in any way and has no significant impact on the level of productivity, output or average income (see Table 2). However, it does raise welfare. It also lowers inequality as measured by the Gini coefficient. Yet, it does increase the unemployment rate as it raises individuals’ incentives to remain unemployed. Hence, an introduction of unemployment benefits by itself can only address concerns of inequality and bears the risk to induce higher unemployment rates.
23. Enhancing matching or productivity through training can contribute to higher income and welfare, but might exacerbate duality between temporary and permanent workers. An increase in the matching productivity by 20 percent, increases output, income and welfare through lowering the unemployment rate (see Table 2). However, it has no effect on the “rotating door” effect and even exacerbates inequality through widening the wage gap between temporary and permanent workers. This is because as the probability of a match becomes more likely, firms are more ready to separate from a current worker-match and post a new vacancy. Raising the productivity by 10 percent has the strongest impact out of all policy measures on output, productivity, income and welfare (see Table 2). However, it actually exacerbates the revolving door effect and raises inequality. This is on account of training raising the productivity of the outside applicant pool. It is important to note, that this simulation does not account for the costs of these measures and thus effects on income, unemployment and welfare should be seen as an upper bound.
24. Introducing all three pillars of flexicurity can reduce duality, lower inequality and raise income and welfare for all groups of the economy. Introducing all three pillars (corresponding to four measures) raises output and average productivity, income and welfare significantly (see Table 2). In addition, it lowers the “revolving door” substantially and reduces the wage gap between temporary and permanent workers. It also lowers income inequality as measured by the Gini coefficient. A distributional analysis shows that a well-calibrated flexicurity package is able to raise income (see Figure) and welfare across all quintiles in the distribution, young and old. Hence, the combination of the measures would be able to improve economic and social outcomes across all dimensions, while implementation of only one pillar would likely carry some negative side-effects.
Income Change by Quintile (Firing Cost)
(percentage change)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Author’s calculations.Income Change by Quintile (Firing Cost)
(percentage change)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Author’s calculations.Income Change by Quintile (Firing Cost)
(percentage change)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Author’s calculations.
Income Change by Quintile (Flexicurity)
(Percentage Change)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Author’s calculations.Income Change by Quintile (Flexicurity)
(Percentage Change)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Author’s calculations.Income Change by Quintile (Flexicurity)
(Percentage Change)
Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A005
Sources: Author’s calculations.G. Conclusion
25. Labor market duality in Korea is a complex issue, which encompasses various types of non-regular workers. Nonetheless, it is particularly prominent among SMEs and in the service sector and disproportionately affects women, the elderly and youth. On a macro level it has likely contributed to increasing inequality, low fertility rates and declining productivity growth. The two main drivers behind duality are various employment protection legislations and large productivity differentials in the product market. However, other factors such as insider-outsider dynamics and global trends such as globalization of labor markets and technological progress are also likely contributing.
26. Korea should consider implementing its own version of flexicurity. The previous literature and model analysis has shown that a well-calibrated introduction of flexicurity could address a number of issues that Korea is facing, such as reducing duality and inequality, and raising productivity and welfare. For this it would be crucial to implement all three pillars to ensure gains are distributed among all individuals. Yet, as the country examples have shown such a reform would need further important components, such as flexibility at the intrinsic margin (i.e., flexible jobs to ensure they fit the heterogenous needs of individuals), an education system teaching responsibility and independent thinking and a culture of life-long learning. In particular, trust and ownership by all social partners are critical, with all stakeholders being part of the social dialogue, including non-unionized workers, SMEs and the self-employed.
27. Measures need to be carefully designed and targeted, gradually implemented and constantly revised. While the model is a clear simplification, each of the three pillars can be implemented in manifold ways. For example, unemployment benefits can be increased, expanded or extended in various ways. Rigidity in regular contracts can be reduced through reducing complexity and uncertainty in dismissal procedures or adjusting severance pay to a smoother schedule. In particular, there exist many different active labor market policies and various evaluations have shown the importance of careful design and targeting (Card et al., 2010; Card et al., 2015). For Korea, it will be particularly important to consider women, youth and the elderly in their policies to ensure that their particular issues are addressed.
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