Selected Issues

Abstract

Selected Issues

Youth (UN)Employment in Korea—Recent Trends and Drivers1

While Korea’s rate of youth unemployment is low in international comparison, it has recently increased. In addition, the share of inactive youth is exceptionally high. These developments are concerning as extensive research has shown long-lasting negative effects for individuals affected and the society and economy as a whole. This paper discusses the potential drivers behind youth unemployment in Korea, the various measures taken by the authorities and best practices from the literature and other countries. The analysis suggests that various factors have contributed to the current situation, including cyclical, structural and policy variables. In particular, weak consumption, a temporary increase in the youth cohort and expectation and skill mismatches are likely responsible. Moreover, issues with educational quality, a focus on direct job creation and high protection of regular workers and the resulting labor market duality have also contributed. The Korean government has already made significant and comprehensive efforts to tackle youth employment issues and plans to further expand on them. Based on a growing literature of international experiences and policy evaluations, the government could consider (i) fine-tuning existing measures, (ii) expanding preemptive measures and (iii) addressing general cyclical and structural impediments.

A. The Impact of Youth (Un)Employment

1. Youth unemployment and low-quality employment can have wide ranging and long-term effects on the individuals experiencing it, and the society and economy as a whole. In the short-term, youth unemployment could lower aggregate demand, increase fiscal costs and raise job mismatches (ILO, 2010; World Bank, 2012, Godfrey et al., 2002). However, it is the potential long-term effects that are most concerning as a growing literature has shown that a lack of decent work can have a persistent negative impact on future employment prospects, health and life satisfaction (Bell and Blanchflower, 2010; ILO, 2010; Banerji et al. 2015). In particular, empirical studies across multiple countries have found evidence of scarring, which describes an increased likelihood of unemployment and lower wages in later years.2 In the aggregate this can translate into lower savings and contributions to the social safety net (ILO, 2010; Banerji et al., 2015). It has also been shown to lower fertility in the short and long-run (Currie and Schwandt, 2015). In addition, persistent mismatches and loss of skills can hamper productivity and potential growth (Banerji et al., 2014). Studies have also found evidence of youth unemployment eroding social cohesion and increasing crime (Bell and Blanchflower, 2010; Banerji et al, 2015).

2. Youth unemployment and inactivity are having a negative impact on Korea’s economy and society. Nam and Kim (2013) provide evidence of the scarring effect for Korean youth. In particular, they find that youth who experienced periods of inactivity (i.e., not in employment, education or training) had a lower rate of employment, and higher rates of unemployment and inactivity later in life. In addition, they were more likely to be non-regular workers with lower wages. At the same time marriage rates have been declining to a record-low of 5.5 per 1000 people in 2016, which has also translated in low fertility rates at 1.17 in 2016, the lowest level since 2009. In addition, public opinion surveys suggest growing pessimism with regards to upward mobility and the return on effort and diligence (Kim, 2014).

B. Trend and Current State of Korea’s Youth (Un)Employment

3. Korea has one of the lowest rates of youth unemployment, but it has been increasing recently. The rate of youth unemployment (age 15 to 24) in Korea is relatively low compared to other OECD countries (see Figure).3 In 2016, it stood at 10.7 percent for youth aged 15 to 24, which was more than 2 percentage points lower than the OECD average. At the same time, Korea also had one of the lowest adult unemployment rates at 3.4 percent for those aged 25 to 54. This implies that the youth unemployment rate is more than three times as high than those for adults, which is one of the highest multiples in the OECD. In addition, Korea is one of few countries for which the youth unemployment rate has increased since 2012 (see Figure). It had the third highest increase in the OECD after Turkey and Norway.

A06ufig1

Harmonized youth and adult unemployment rate

(2016, 15 to 24 years old)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: OECD.
A06ufig2

Trend in youth unemployment rate

(15-24 years old)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: OECD.

4. Korea stands out due to a large share of highly educated unemployed youth and a high rate of inactive youth. More than a third of the young unemployed have tertiary education and almost all of them have finished their upper secondary education (see Figure). In addition, a broader measure adding inactive to the unemployed youth suggest a much larger group affected by the lack of employment opportunities. As of 2013, 18 percent of youth age 15 to 29 were not in employment, education or training (see Figure). However, this number is possibly overestimated for Korea as data on programs between upper secondary and post-secondary education are not available.

A06ufig3

Unemployed youth by education level

(2015, 15-24 years old)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: ILONotes: Basic includes lower secondary education and below, intermediate includes post-secondary non-tertiary and below and advanced tertiary and above.
A06ufig4

Youth not in employment, education or training

(2013, 15 to 29 years old)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: OECD

5. Korea’s youth struggles in finding high quality employment matching their skills. Korea’s employment rate for youth is low in international comparison at 27 percent in 2016, 13.5 percent below the OECD average. In addition, of those who do find employment the share of mismatches is high compared to other jurisdictions (see Figure). In particular, mismatches with regards to field of study are frequent at 33 percent among the youth. The share of temporary employment for youth was 25.5 percent in 2016, only slightly above the OECD average of 24.6 percent (see Figure).

A06ufig5

Mismatch among youth

(age 16 to 29, by type of mismatch as a percentage of all youth employment)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: OECD.
A06ufig6

Share of temporary employed in total employment

(age 15 to 24, 2016)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: OECD.

6. Changes in youth employment and unemployment rates appear to be linked to demographic changes. Between 2000 and 2012 the population of youth age 20 to 29 declined by 1.2 million between 2000 and 2012 (Figure). 4 This translated predominantly into a decline in employed youth by almost 900 thousand (see Figure) and thus a decline in the employment rate from 60.1 percent to 58.1 percent. The unemployment rate remained relatively stable around 7.5 percent during this period. Since 2012 the population of youth began to increase again as the children of the baby boom generation entered this age group (see Figure). Until 2016 the cohort grew by 200 thousand. This resulted in an increase in the number of unemployed and the unemployment rate rose from 7.5 in 2012 to 9.8 in 2016 (see Figure). Employment also rose in absolute terms, but the employment rate only increased slightly to 58.3 percent in 2016.

A06ufig7

Youth by employment status

Thousand, age 20 to 29.

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: Haver, Statistics Korea.
A06ufig8

Change in youth population, by employment status

(Thousands of people, age 20 to 29)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: Haver, Statistics Korea.

7. The increase in youth employment since 2012 has been focused in the service sector and SMEs. While the recent increase in youth employment appears encouraging, a closer look is warranted at the type of employment created. The survey on labor conditions by the Ministry of Employment and Labor suggests that many new jobs for youth were generated in the service sector, in particular in hotels and restaurants and wholesale and retail trade. At the same time, jobs in manufacturing declined (see Figure). New employment also appears to be created mainly in SMEs, while overall employment for youth declined in large companies (see Figure). Many of the jobs created were in the range of a monthly wage from 1.9 to 2.7 million won.5

A06ufig9

Change in employment by industry and firm size

(2012-2016, ages 20 to 29)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: MOEL, Survey on Labor Conditions.Note: The data covers enterprises with at least five permanent workers.
A06ufig10

Change in employment by monthly wage

(age 20 to 29, person)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: MOEL, Survey on Labor Conditions.Note: The data covers enterprises with at least five permanent workers.

C. Drivers of Youth (Un)Employment

8. To understand how youth unemployment and quality of employment can be addressed it is crucial to understand the main drivers of its trend and magnitude. In the following, three main categories of potential drivers are discussed including (i) cyclical factors, (ii) structural drivers and (iii) policies. Our analysis suggests, that cyclical factors have a significant impact on changes in youth unemployment in Korea, but it is smaller than in most other countries. In addition, structural factors are significantly contributing to the level of youth (un)employment, particularly skill and expectation mismatches and duality in the labor market. Changing demographics have likely contributed to the recent uptick in youth unemployment. Policy variables that have affected the level of youth (un)employment in Korea include high protection of regular workers, educational quality and a focus of active labor market policies on direct job creation.

9. It is important to acknowledge that natural explanations exist for why youth unemployment rates tend to be higher than those of the prime-working age population. These include higher uncertainty regarding skills and productivity of a young applicant on the firm side and lack of job search experience and uncertainty about job preferences on the side of the applicant (ILO, 2010; World Bank, 2012). Youth is also more likely to move between employment, unemployment and education because of the periodical nature of educational terms.

Cyclical Factors

10. Cyclical factors, especially consumption growth, have a significant impact on youth unemployment in Korea. Nevertheless, the effect is smaller than in most other countries.

11. Theoretical channel: In general, an economic downturn implies fewer job vacancies and thus a higher competition for existing jobs. For youth, this can translate into a delay of labor market entry and acquisition of additional education. In case of labor market entry, stronger competition could prolong unemployment spells, worsen job mismatches or lower wages of job matches (ILO, 2010). In addition, various analysis has found that youth unemployment rates tend to be more sensitive to output growth and economic shocks than adult unemployment rates (ILO, 2010; Banerji et al.,2014). This is because youth are most likely to be dismissed first as they have less time to accumulate firm-specific skills and job protection tends to increase with tenure (World Bank 2012; ILO, 2010). Youth have also been found to work in more cyclically sensitive sectors and more fragile employment conditions, such as temporary contracts (Banerji et al., 2014).

12. Korea’s case: A regression analysis based on Okun’s law suggests that real GDP growth can only explain about 20 percent of the variation in the youth unemployment rate for Korea (see Figure). 6 This is a relatively small effect compared to most other countries. While it is unclear why youth unemployment is relatively less elastic to GDP in international comparison, it could be due to the comparatively large share of highly educated youth or the tendency of youth to become inactive rather than unemployed (see Figure). As in most other countries the youth unemployment rate appears more sensitive than that of the prime-working age population. Testing the sensitivity of the unemployment rates to different components of GDP growth indicates that the relationship is largely driven by consumption growth (see Figure). A similar result has been found for European countries by Banerji et al. (2014).

A06ufig11

Effect of output changes on unemployment

(by age group)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: OECD, WEO, Staff calculations.
A06ufig12

Elasticity of unemployment to GDP and its components

(Korea, by age group)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: OECD, WEO, Staff calculation.Note: lighter shaded bars are not significant at a p-value of 0.05.

13. Data of employment by sector and employment type provides further insight into cyclical factors (see Figure). A smaller share of youth is employed in manufacturing and construction, which explains the lower sensitivity to exports and investment. At the same time, more youth is employed in the non-tradeable service sectors, especially hotels and restaurants, which explains the higher sensitivity to consumption growth. The share of temporary employment is also higher for youth at 25 percent in 2016, compared to 16 percent for those of age 25 to 54 (see Figure).

A06ufig13

Employment by sector

(Share of total employment, 2016)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: Kosis.
A06ufig14

Temporary employment

(share of total employment, 2016)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: OECD.

Structural Factors

14. Structural factors are significantly contributing to the level of youth (un)employment in Korea, particularly skill and expectation mismatches and duality in the labor market. In addition, changing demographics – a temporary spell of growing youth cohorts and large education gaps between elderly and youth – have likely contributed to the recent uptick in youth unemployment. The effect of technological change and integration into global value chains is less obvious and needs further analysis.

Skill Mismatch

15. Theoretical channel: Skill mismatch appears in various aspects, including the level of education, the lack of specific skills needed for a certain position or the field of study. These mismatches can lower the probability of finding employment or decrease the quality of employment. Accepting jobs below the attained education can result in a “trap” as on-the-job search intensity might decrease (Holzer, 1987), accumulation of job-specific human capital might keep youth stuck in their position (Pissarides, 1994) or the acceptance of an underskilled job is a negative signal to other potential employers (de Grip et al., 2008). For example, Baert et al. (2013) find that accepting a job for which one is overeducated substantially retards the transition to an adequate job in a sample of Belgian youth.

16. Korea’s case: Skill mismatch has likely contributed to low labor force participation and increases in youth unemployment in Korea. Dao et al. (2014) find that youth’s education mismatch in Korea has been on an increasing trend since 2006. They estimate that a 10 percent decrease in mismatch could raise employment rates by about 6 to 14 percentage points. More recent data supports this finding as a significant number of jobs remained unfilled in SMEs in 2016, especially for lower skill levels that only require high school graduation (see Figure). This development is not surprising as Korea has by far the largest educational gap between elderly and youth (see Figure). Thus, the jobs that are freeing up are likely not suited for high-skilled youth entering the labor market. Other work also provides evidence with regards to the lack of specific skills, arguing that in general most formal education falls short of meeting businesses’ demands (Kim, 2015; OECD, 2012). The field-of-study mismatch has also been found to be high in Korea at 50 percent, compared to a country average of 38 percent (Montt, 2015).

A06ufig15

Unfilled job openings by firm size and sector 1/

(2016)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: Occupational labor force survey, MOEL.1/ Skills levels refer to requirements:(1)(1) no education or experience, (2-1) high school or 1yr experience, (2-2) 2-year college or 1-2yr experience, (3) 4-year college or 2-10yr experience, (4) PhD or more than 10yr experience.
A06ufig16

Graduates by field

(2014, Upper secondary and above)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: OECD.
Expectation Mismatch

17. Theoretical channel: Higher educated youth might voluntarily choose a state of unemployment or inactivity. This could be due to high reservation wages or certain expectations regarding one’s career path. In particular, when labor markets are very segmented and rigid, it can pay off for youth to stay unemployed and queue for better jobs (World Bank, 2012). However, accepting a job below one’s skills can also act as a stepping stone (in the absence of the trap discussed in the previous paragraph) and avoids scarring from unemployment (Sicherman and Galor, 1990; discussion in Baert et al., 2013).

18. Korea’s case: A survey by the national statistics office in 2015 found that most youth between 15 and 29 desired a career in government and public enterprises (44 percent) or large companies (25 percent). This is not surprising since there is the significant labor market duality in the form of high wage premia for regular workers compared to non-regular workers and for employees in large companies compared to small companies (see Figure). These premia are even larger than those for college graduates and can thus not only be explained by education. Hence, these clear preferences of most youth have resulted in extensive preparations to enter the job market. Significant amounts of time are spent on preparing for recruitment exams or accumulating diplomas or certificates, thereby delaying labor market entry (Kim, 2015). In addition, more than 80 percent of young people that left their first job, did so for voluntary reasons. 47 percent left their job because they were dissatisfied with their working conditions, further supporting an expectation mismatch (Keum and Yi, 2016).

A06ufig17

Wage Premia by age group

(total monthly wage including monthly special payment, 2016)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: Survey on labor conditions, MOEL.Notes: Education premium: college graduate and above compared to high school graduate, Regular premium: regular to non-regular employee, Large company: employee in company with 500 or more employees to company with 5 to 9 employees.
Demographics

19. Theoretical channel: Standard theory suggests that an increase in the labor force reduces the capital-labor ratio, which would lower wages (Solow, 1956). If wages cannot fully adjust due to rigidities, unemployment could also increase. However, if capital is determined by an endogenous saving rate the outcome would be less clear (Ramsey, 1928). In addition, theories suggest that larger youth cohorts might increase vacancies (Shimer, 2001) and that youth might choose to stay in education thereby increasing wages and employment in the long-run (Newhouse and Wolff, 2014). Empirical evidence largely finds that an increase in cohort size entering the labor market lowers wages (Welch, 1979; Brunello, 2011; Morin, 2015) and increases youth unemployment (Korenman and Neumark, 2000). However, Shimer (2001) finds the opposite result for the US that youth unemployment falls as cohort size increases.

A06ufig18

Population projections, age 20 to 29

(in million)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: Statistics Korea.

20. Korea’s case: As discussed above, Korea has experienced a period of almost 20 years in which the youth cohort declined. However, this did not result in a decline in the rate of youth unemployment and the employment rate decreased. Since 2014, youth population (age 20 to 29) has started increasing again, which has coincided with increases in youth unemployment and some absolute increase in employment, yet most of the increased employment has taken place in SMEs and the service sector. This recent increase is temporary and Korea is forecasted to reach a cliff in 2019 after which the youth cohort will drop-off sharply (see Figure). This might release some pressure on the labor market in the future. Nevertheless, the current youth cohort faces the risk of becoming a “lost generation”, given the potential scarring effect of unemployment spells at a young age.

Structural Changes in Labor Market Demand

21. Theoretical channel: Structural changes in labor market demand have been at the forefront of theoretical and empirical discussions. In particular, technological change and integration into global value chains (GVCs) has been seen as a potential driver of the polarization of the job distribution and the loss of certain routine jobs (Autor, 2010; Acemoglu and Autor, 2011). Youth might be at a special disadvantage if the education system does not prepare them for the new types of jobs that are being created. At the same time, they might have the ability to learn and adjust faster, which could increase their chance of employment compared to older cohorts.

22. Korea’s case: As previously discussed employment for youth in manufacturing and large companies has recently declined, which could be related to the structural changes discussed above. A more detailed break-down of the change in employment by manufacturing sectors reveals significant differences and suggests that GVCs did not have exclusively negative effects on employment creation (see Figure). For example, the chemicals sector has added jobs for youth, while having one of the highest indicators for forward and backward participation in GVCs (see SIP GVC for details). However, the sector of electronics and computers, which has lost the most jobs for youth, is also highly integrated into GVCs.

A06ufig19

Change in employment in manufacturing sectors,2013-2016

(Age 15 to 29, thousand)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: Kosis.
Policies

23. Significant policy variables that have affected the level of youth (un)employment in Korea include high protection of regular workers, educational quality and a focus of active labor market policies on direct job creation. Standard policy variables – including the tax wedge, minimum wage and generosity of unemployment benefits – are comparatively moderate in international comparison and are likely not strong factors driving the level and recent change in youth (un)employment.

Labor Costs

24. Theoretical channel: Labor costs can have a direct effect on unemployment by increasing the relative price of labor and thereby lowering labor demand (Banerji et al., 2014). While wages tend to be an outcome of a bargaining process between a firm and its employees, policies can also affect labor costs. Most prominently, minimum wages and tax wedges can raise labor costs. 7 High minimum wages and labor costs can become a problem for youth as they tend to have less work experience and employers might face higher uncertainty regarding their skills and productivity. Therefore, several countries set lower minimum wages for youth and sometimes provide subsidies (ILO, 2012). However, if highly educated youth are unemployed because they are rejecting precarious wage conditions, a lower minimum wage could further reduce incentives to work.

A06ufig20

Tax Wedge

(In percentage of labor cost)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

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.
A06ufig21

Minimum Wage

(Relative to median wage)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: OECD

25. Korea’s case: Korea’s tax wedge was 22 percent in 2016, significantly below the OECD average of 36 percent (see Figure). In addition, the Enterprise Labor Cost Survey finds that in 2015 79 percent of labor costs were direct labor costs. The remainder was largely attributable to severance pay (9 percent) and legally required benefits (7 percent). However, other analysis suggests that it is not the cost of hiring or employing a worker, but the cost of dismissal, which limits the availability of regular employment (OECD, 2013; Kim 2015). Regarding the minimum wage, Korea lies above the OECD average if measured relative to median wage (see Figure). While introduced in 1988, it has only applied to all workers since 2000. In addition, only recently the full minimum wage has been expanded to workers below the age of 18. The government has also struggled with and recently tried to improve enforcement (OECD, 2013). Most youth below the age of 30 received wages significantly above the minimum wage, but significant hikes could affect wages and potentially employment (see Figure and SIP Minimum wage).

A06ufig22

Youth employment by monthly wage

(Below age 30, employed persons in 2016)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: Kosis, Staff calculations.
Opportunity Costs

26. Theoretical channel: If unemployment benefits are high individuals could reduce their search effort for employment and might be more reluctant to accept lower wages. This could increase unemployment (Banerji et al., 2014). However, an adequate level of unemployment insurance would allow job seekers to wait for a better job match and could thereby lower skill mismatches and contribute to longer and more productive employment spells. For youth, eligibility is a major issue as first-time job seekers are usually not part of unemployment benefit schemes. Thus, they usually rely on unemployment assistance benefits (ILO, 2012; Carcillo et al., 2015).

27. Korea’s case: For Korea, the net replacement rate in the initial phase of unemployment was 56 percent, slightly below the OECD average of 63 percent (see Figure). However, unemployment benefits are conditional on having been insured under the Employment Insurance System for at least 180 days. In addition, if the employee quit voluntarily no benefits are paid (OECD, 2007). Thus, young Koreans are less likely to be eligible for these benefits, also because they often leave their jobs voluntarily (see above). However, the government introduced an “Employment Success Package Program” in 2009 which offers allowances to job seekers conditional on job-seeking activity or participation in trainings (see Box 1).

A06ufig23

Net Replacement Rate, initial phase of unemployment

(single earner, previous earnings = 67%AW)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: OECD.
Active Labor Market Policies

28. Theoretical channel: Policies that aim to activate individuals are expected to have positive employment effects. For example, trainings increase employability and conditionality of allowances should raise incentives to search for work and accept jobs. Indeed, most cross-country econometric analysis has found such a positive effect, but detailed micro evaluations point towards a more mixed picture. These studies suggest that effectiveness significantly depends on the type of program and its implementation (Banerji et al., 2014 and discussion in section D).

A06ufig24

Public expenditure on active labor market policy

(share of GDP)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: OECD.

29. Korea’s case: Spending on ALMPs as a share of GDP is relatively low in Korea at 0.4 percent of GDP in 2015, compared to an OECD average of 0.5 percent. It falls also below the OECD average if measured per unemployed (see Figure). Regarding the composition, about 56 percent of ALMP spending in 2015 was on direct job creation. Crosscountry research has shown that these tend to be the least effective (see section D). Training and employment incentives made up about 28 percent of public expenditure of ALMPs. The new government is planning to expand various of these measures (see Box 1).

Key Policies on Youth (Un)employment

The Korean government has identified the issues of youth unemployment and the quality of youth employment for some time. Beginning in 2003 with the administration of Moo-hyun Roh extensive policies targeted at youth employment have been passed by all administrations, such as the special act on youth employment promotion (2004) and the comprehensive measures for youth employment (2013). They have been comprehensive and addressed all aspects of the issue, including the supply and demand side and the matching process. The total number of job policies under different central Ministries and local authorities have been estimated to be around 200, which holds the potential for some redundancies or inefficiencies (Kim, 2017).

Measures on the supply side have targeted the quality and types of skills developed in education. Meister schools, a new type of vocational schools, were introduced in 2010. These are based on the German method of training master craftspersons (OECD,2016b) and are set up to adapt their curriculum to industry needs. Job placement rates are high at 90 percent (OECD, 2016a) and their number increased to 41 schools by 2016. In addition, National Competency Standard (NCS) were developed in 2013 to identify and standardize skills for specific jobs. New curricula based on NCS were introduced to high schools, Meister schools and vocational colleges (OECD, 2016b). The work-study dual system, introduced in 2013, allows firms to hire young job-seekers as employees, who simultaneously study and earn certificates based on the NCS with financial support from the government. Jeon et al. (2015) estimate the net benefit of one position to be 8.9 million KRW. By August 2017, around 50000 youth and 10000 companies had participated in the program (HRD, 2017; MOSF). In 2016, the stepping stone program was launched, which provides job training and education in public institutions and large enterprises. In addition, part of the Employment Success Package Program targets young unemployed age 18 to 34. It financially supports youth who are developing an individual plan for job-seeking or attend vocational training (MOEL, 2016). While these measures are widely seen as steps in the right direction, it has been pointed out that further improvements are necessary such as ensuring the quality of placements, increasing ownership of businesses and expanding the reach of programs (Kim, 2014).

Measures on the demand side have aimed to expand job opportunities across the public and private sector. Increasing public employment of youth has been a strategy since President Roh. Since 2013, government agencies and public enterprises have a quota for youth of 3 percent. In addition, subsidies are given to SMEs that employ youth aged 15 to 29. These include a tax credit of five million won for each permanent young job-seeker employed and 150 percent tax deductions for increases in wages paid for young permanent workers (MOSF, 2015). In 2017 a further subsidy was introduced that provides KRW 20 million a year for three years to SMEs that hire three youth workers as regular workers. Measures have also been taken to raise youths’ interest in SME employment by improving working conditions through support for voluntary improvements (MOEL, 2016). Youth entrepreneurship has also been promoted through the Young Entrepreneurs Start-up Academy, the Youth Development Fund, and the provision of seed money for youth enterprises trough the “Youth Business 1000” program. In addition, the K-Move program helps young job-seekers to find jobs overseas. In 2016 it secured close to five thousand jobs (HRD, 2017). However, to address the quality of youth employment it will be critical to tackle the dualities between regular and non-regular and small and large companies through reforms in labor and product market.

Measures aimed at improving the matching processes have focused on internships and improvement of information provisions. Since 2009, the government subsidizes 6-month internships for unemployed youth in SMEs. Recently, the initiative was further focused on increasing the number of internships with high-growth SMEs (Kim, 2015). In addition, the infrastructure of employment services on campus has been expanded through on-campus youth employment centers and the creation of a human resources computer network connecting the private and public sectors is supposed to improve information exchange about employment opportunities (MOEL, 2016). While these measures target the matching process, it could also be fruitful to introduce pre-emptive measures (see section D) to help youth adapt to a changing labor market and support their career planning at an early stage.

The new administration is planning to strengthen previous efforts in its supplementary budget for 2017 and policy program. In particular, the new policy program will ask public institutions to fill more than 5 percent of their positions with youth. In addition, it is aiming to provide SMEs with extra incentives for hiring youth and to further promote overseas employment. It also pledges to reform public education and introduce innovative job training programs. The supplementary budget plan for 2017 included an increase in the young startup fund by 500 billion won, the adoption of a young job seeker allowance, and an increase in young SME employees matching funds to their asset building accounts.

Education and Vocational Training

30. Theoretical channel: Higher levels of educational attainment in a youth cohort tend to mechanically lower labor force participation as more time is spent in education. However, higher education is generally expected to increase productivity of individuals and thus their employability and job quality in the future. Moreover, the quality of education and applicability of skills is of great importance for youth employment outcomes (Banerji et al., 2014).

31. Korea’s case: In Korean society, a university education holds a high value (OECD, 2016). This is reflected in one of the highest gross enrolment ratios of tertiary education at 93 percent in 2015 and very large private expenditure on higher education. Korean students perform well on PISA tests and study excessively in high school to prepare for the entrance exam to higher education (College Scholastic Ability Test, CSAT). However, universities are chosen based on their network-enhancing role rather than their teaching and research performance. Universities’ general curricula and lack of creative and critical skill development are struggling to prepare students adequately resulting in job mismatches and too few technical specialists (Kis and Park, 2012; Eichengreen et al., 2015). In addition, vocational training tends to have a negative image as some programs have low quality and links to the business sector tend to be weak (Kis and Park, 2012). This has translated into low enrolment rates in vocational education and training at upper secondary level (18 percent in 2014, compared to the OECD average of 44 percent). However, the government has undertaken significant steps to address these issues (see Box 1).

A06ufig25

Educational Quality

(how well does the education system meet the needs of a competitive economy? 1 = not well at all; 7 = extremely well)

Citation: IMF Staff Country Reports 2018, 041; 10.5089/9781484341636.002.A006

Sources: World Economic Forum, Executive Opinion Survey.

D. Best Practices

32. Successful policies need to be comprehensive and tailored, with recurring impact evaluations and adjustments. Measures are most successful if they are formulated and implemented as a comprehensive policy framework and are embedded into national development plans. They need to consider structural and cyclical aspects of the issue as well as combine demand-and supply-side interventions. At the same time, their design needs to recognize the individual characteristics of the youth and the specific barriers and disadvantages they face. Targets should include qualitative measures, with regular monitoring and evaluation assessments ensuring adjustments are made when necessary. While a multi-stakeholder approach is important, it is also crucial to ensure coordination and coherence. Mechanisms should also be put in place to allow affected youth to be part of the design and implementation process. (see ILO, 2012; ILO, 2015)

33. Active labor market policies have been a main tool to address youth unemployment. Active labor market policies include job search assistance, job training programs, employment services and employment subsidies. International experience suggests that to be successful they need to address individual characteristics and specific labor market disadvantages, and be well-targeted to the most vulnerable. The design should ensure a clear contribution of the program by avoiding deadweight losses and ensuring that activities do not merely substitute existing employment (ILO, 2012). Coordination with passive labor market policies, such as unemployment insurance and social assistance, also work well to provide incentives for participation. For example, the Netherlands provide offers of work or education to youth aged 18 to 27 but if they refuse the offer they are denied social benefits (ILO, 2012). In Denmark, if pupils do not follow their individual education plan parents risk losing child benefits (OECD, 2010). Various countries have also introduced comprehensive youth guarantee schemes that provide commitments to place youth in education, training or work programs (Banerji et al., 2014).

Demand Side Policies

34. Well-designed fiscal policy can play an incentivizing role to increase private sector labor demand. As youth is particularly sensitive to the business cycle, counter-cyclical policies can reduce the negative impact of volatility on youth employment (ILO, 2012). Fiscal policy can also stimulate demand through a reduction in labor taxes or social security contributions (SSC). These have been found to be most effective if targeted to low-wage earners (Hammermesh, 1993; IMF, 2012), in the form of employer SSC cuts (IMF, 2014) and applied in more rigid labor markets (IMF, 2014). While targeting of cuts can reduce fiscal costs, their incentives need to be considered carefully. For example, cuts conditional on the level of the wage should be phased out gradually to avoid the creation of a “low-pay trap” (IMF, 2014). Another option is hiring subsidies. However, these need to be short-term, carefully targeted and closely monitored (Kluve et al., 2016; IMF, 2014). Targeting should be based on workers instead of firms (IMF, 2012) and avoid concentration on individual characteristics such as age and diploma, which can lead to substitution effects (Carcillo et al., 2015). Most importantly, they should be linked to on-the-job training (ILO, 2012).

35. Public employment programs have not been effective in addressing youth unemployment. Public employment programs have usually been used in times of crisis to prevent depreciation of human capital and sustain labor market attachment. However, they have recently become a more regular measure of youth employment policy (ILO, 2015; Carcillo et al., 2015). Empirical evidence largely finds no or even a negative effect of public employment programs on youth employment (Sianesi, 2001 for Sweden, Caliendo et al., 2011 for Germany, Dorsett, 2006 for the UK, Card et al., 2010). Possible reasons include the lack of transferable skills acquired, a potential for stigma, or a reduction in search efforts (IMF, 2012; Carcillo et al., 2015; ILO, 2015). Public employment might also crowd out private employment and could create a pool of applicants waiting for permanent public sector employment (IMF, 2012). To improve the impact of public employment measures they would need a clear policy objective and careful targeting, while ensuring interlinkages with other activation strategies and skills training that increases employability beyond the public sector (ILO, 2015).

36. Structural policies can increase labor demand and the quality of jobs. Reforms in product and capital markets have the potential to encourage job growth (IMF, 2012). In addition, labor market reforms can improve the transition of youth from entry jobs to more stable employment by reducing duality between temporary and permanent contracts (OECD, 2010). Moreover, some countries have a separate minimum wage for youth set below that of adults to encourage employment. However, empirical results on the effect of a special minimum wage for youth have been inconclusive (ILO, 2012).

Supply Side Policies

37. Supply side measures need to be based on rigorous analysis of skill demand and provide valuable education or work experience. Many countries are measuring and forecasting skill shortages. These can be used to adjust curricula and education policy, but should also be employed to provide information, counselling and guidance (ILO, 2012). In addition, youth often struggle to find employment because of the lack of work-experience. Apprenticeships, internships and other labor market training programs can address this issue. For these programs to be successful they need to provide a real learning experience by combining theoretical training with periods of work experience. It is also crucial to ensure value of programs through recognized qualification or certification and a market-based design. Integration with the formal schooling system and ensuring a gateway to good quality jobs will avoid the fear of youth to be locked into these programs (ILO, 2015). Various countries have increased incentives for apprenticeships through tax credits, scholarships or exemptions (OECD, 2014). Other countries have also established business colleges and industrial or applied universities that can supply more market-oriented skills (Schmid, 2013).

38. Measures supporting youth entrepreneurship need to ensure that it is a viable career opportunity and not just a survival strategy. Successful programs identify the particular barriers faced by youth and offer comprehensive packages that accompany youth along the process, including theoretical classes, financial support, business advisory services, mentoring and follow-up. Measures should also include the introduction of entrepreneurship in the curricula of secondary and tertiary education to increase awareness and reputation of the profession (ILO, 2012; ILO, 2015).

Transition and Matching Policies

39. To ensure efficient matching public employment services need to be personalized and provide accurate labor market information. In particular, the design of an individual employment plan early in the spell of unemployment is crucial. In addition, profiling systems need to build on accurate and timely labor market information and take into account the personal situation of clients. Services also need to reach out to diverse groups and target those, who need assistance the most through forming broad-based partnerships with e.g., educational institutions (ILO, 2012; ILO, 2015). Denmark is an example of an approach providing quick, intensive and individualized services for youth of all ages. Pupils in lower secondary education prepare education plans in collaboration with parents, the school and the guidance center. Older youth are provided with an individual interview, a job-search training course and an educational opportunity or work placement quickly after application for welfare benefits. In addition, the Ministries of Education and Employment developed a database, which provides an overview of all youth and their education to identify and target vulnerable youth (OECD, 2010).

E. Policy Implications

40. While Korea’s rate of youth unemployment is low in international comparison, it has recently increased. In addition, the share of inactive youth is exceptionally high. These developments are concerning as extensive research has shown long-lasting negative effects for individuals affected and the society and economy as a whole. Staff analysis suggests that various factors have contributed to the current situation, including cyclical, structural and policy variables. In particular, weak consumption, a temporary increase in the youth cohort and expectation and skill mismatches are likely responsible. Moreover, educational quality, a focus on direct job creation and high protection of regular workers and the resulting labor market duality have also contributed. The Korean government has already made significant and comprehensive efforts to tackle youth employment issues and plans to further expand on them. Based on a growing literature of international experiences and policy evaluations, the government could consider (i) fine-tuning existing measures, (ii) expanding pre-emptive measures and (iii) addressing general cyclical and structural impediments.

41. The current policies are a significant and important step to address youth unemployment. In particular, Meister schools, the work-study dual system and internships are important measures that can have long-run positive effects. The effect of these programs could be further strengthened by increasing ownership by businesses, expanding the reach of programs and ensuring the quality of placements, to guarantee accumulation of on-the-job skills and enhance career prospects. In general, it will be crucial to continuously evaluate and monitor impact and costs and adjust the programs when necessary. For example, the youth guarantee program in Finland was first introduced in 1996, but has continuously been revised since then. These revisions included broad working groups comprising ministries, employer associations, trade unions and a youth organization. It will also be critical to retain a comprehensive policy framework that encompasses all measures to ensure coordination and coherence. A national media campaign, as done in Finland, might also be useful to encourage participation and involve stakeholders. The use of direct job creation should be considered carefully and should be linked to developing or expanding services that cannot be provided adequately by the private sector.

42. The effectiveness of existing measures could further be enhanced through more preemptive engagement of youth. For example, Denmark has introduced the development of education plans in lower secondary education. This measure could help Korean children, who are investing a lot of time and resources at an early age, by developing realistic and individual education and career plans. For this, it will also be crucial to provide forecasts of skill demands to help youth choose efficient educational investments. In addition, Denmark also introduced a database, which provides an overview of all youth and their qualifications to identify the most vulnerable. Korea could apply a similar strategy to identify and provide ALMPs to discouraged youth.

43. Measures will also need to address broad-based cyclical and structural impediments. As youth unemployment is particularly sensitive to the business cycle, it will be critical to address the current negative output gap and weak consumption growth. Expansionary fiscal policy can help to increase domestic demand and thereby boost employment growth. However, the analysis has also shown the importance of broad-based structural issues. Product market reform should aim to increase productivity in SMEs and services, thereby boosting their potential to provide decent jobs and reducing segmentation. Duality in employment contracts should also be reduced. For example, policies should aim to simplify rules for dismissal for regular workers and adjust contracts and benefits to a smoother schedule.

44. A youth strategy as part of a comprehensive and well-coordinated policy package would yield multiple benefits. Given the significant interactions with the broader issues of labor market duality, product market segmentation and sluggish domestic demand, youth (un)employment would best be tackled as part of a comprehensive strategy. As analyzed in the selected issues papers “A New Strategy for Korea’s Fiscal Policy in a Low-Growth Environment” and “Labor Market Duality in Korea” this would encompass a move towards flexicurity, stronger social safety nets, structural reforms in the product market, and an increase in fiscal spending to boost labor supply. In combination with the targeted policies towards youth discussed above, this package would create decent and sustainable employment through improved competitiveness and long-run growth, while ensuring youth will be able to take advantage of the new opportunities created. Thus, it will be critical to implement the policies in a coordinated and gradual way. Given the significant fiscal space and still negative output gap measures that boost demand should be given priority, while policies that could have short-term contractionary effects need to be cushioned well.

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1

Prepared by Cristina Arbelaez (APD) and Johanna Schauer (APD).

2

E.g., Oreopoulos et al., (2012) using Canadian data find that a rise in unemployment rates by 5 percentage points can lead to cumulative earnings losses of up to 8 percent in the first 10 years after graduation. Gregg and Tominey (1995) found a wage penalty from early unemployment of the magnitude of 13–21% at age 42 for the UK. Kahn (2010) finds large, negative wage effects of graduating in a worse economy for the US. Other literature also finds scarring in the form of youth unemployment increasing the incidence of future unemployment (Gregg, 2001; Nilsen and Reiso, 2011).

3

Korea also stands out due to its very low share of long-term unemployed (defined as being unemployed for one year or longer) in total unemployed. For those aged 15 to 24 it stood at 0.5 percent.

4

In the analysis, we focus on the age group from 20 to 29 whenever data is available. The use of the word “youth” thus refers to the age group 20 to 29, if not explicitly presented otherwise. Given the high share of tertiary enrolment this age group appears the most important for employment analysis.

5

This translates into 67 percent to 96 percent of the average wage in 2016.

6

We follow the methodology of Banerji et al. (2015) and Ball et al. (2013).

7

The OECD defines tax wedges as the ratio between the amount of taxes paid by a worker and the corresponding total labor cost for the employer. It is supposed to measure the extent to which tax on labor income discourages employment.

Republic of Korea: Selected Issues
Author: International Monetary Fund. Asia and Pacific Dept
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    Harmonized youth and adult unemployment rate

    (2016, 15 to 24 years old)

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    Trend in youth unemployment rate

    (15-24 years old)

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    Unemployed youth by education level

    (2015, 15-24 years old)

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    Youth not in employment, education or training

    (2013, 15 to 29 years old)

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    Mismatch among youth

    (age 16 to 29, by type of mismatch as a percentage of all youth employment)

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    Share of temporary employed in total employment

    (age 15 to 24, 2016)

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    Youth by employment status

    Thousand, age 20 to 29.

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    Change in youth population, by employment status

    (Thousands of people, age 20 to 29)

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    Change in employment by industry and firm size

    (2012-2016, ages 20 to 29)

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    Change in employment by monthly wage

    (age 20 to 29, person)

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    Effect of output changes on unemployment

    (by age group)

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    Elasticity of unemployment to GDP and its components

    (Korea, by age group)

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    Employment by sector

    (Share of total employment, 2016)

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    Temporary employment

    (share of total employment, 2016)

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    Unfilled job openings by firm size and sector 1/

    (2016)

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    Graduates by field

    (2014, Upper secondary and above)

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    Wage Premia by age group

    (total monthly wage including monthly special payment, 2016)

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    Population projections, age 20 to 29

    (in million)

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    Change in employment in manufacturing sectors,2013-2016

    (Age 15 to 29, thousand)

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    Tax Wedge

    (In percentage of labor cost)

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    Minimum Wage

    (Relative to median wage)

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    Youth employment by monthly wage

    (Below age 30, employed persons in 2016)

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    Net Replacement Rate, initial phase of unemployment

    (single earner, previous earnings = 67%AW)

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    Public expenditure on active labor market policy

    (share of GDP)

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    Educational Quality

    (how well does the education system meet the needs of a competitive economy? 1 = not well at all; 7 = extremely well)