Abstract
Selected Issues
What Fiscal Policy Can do to Increase Employment in Korea1
Boosting employment is a key priority in Korea, both in the short and longer term. The paper analyzes the measures Korea has adopted or planning. It finds that it would be critical to review periodically the impact of the large number of fiscal programs to support of SMEs. Fiscal incentives should be targeted to firms and activities that are more likely to promote long-lasting employment gains. Active Labor Market Policies could be enhanced by increasing spending on training and employment services. While there is scope to increase public employment, job creation in the public sector should be driven by the need to develop or expand services that cannot be provided adequately by the private sector. It should also take into account the possible impact on public sector productivity and the possible crowding out of private jobs. The paper empirical analysis indicates that Korea’s employment, especially among women, can also be supported by increasing public spending on early childhood education and care and by easing labor regulation on regular contracts.
A. Introduction
1. Boosting employment is a key priority in Korea, both in the short and longer term. In the near term there is need to prop-up job creation, which has been week in 2018 and so far in 2019, reflecting cyclical and structural factors. In the longer term it is crucial to support labor participation and employment to counter the expected impact of adverse demographics on the working population, which will slowdown economic growth and increase the fiscal burden of pensions and healthcare.
2. Korea’s employment rate of the population aged 15 to 64 was nearly 67 percent in 2018, 5 percentage points higher than in 2000. Korea’s employment rate was lower than the OECD average of about 69 percent in 2018. This is due to the low employment rate among females, which, at about 57 percent was 7 percentage points lower than the OECD average.
3. At 76 percent, males’ employment rate was slightly higher than the OECD average in 2018. However, this masks some underlying issues in Korea’s job market. Korea’s long-term unemployment is comparatively very low. The share of those unemployed for 12 months or longer was only 0.9 percent in Korea, compared with an OECD average of 30.5 percent. This is partly due to a lack of income support for unemployment, which often induces jobseekers to settle for a job as quickly as possible, regardless of its quality or the career prospects it might offer (OECD, 2018a). Moreover, compared to other OECD countries Korea stands out for having a relatively high share of temporary and self-employed workers, at 21. 9 percent and 25.5 percent, respectively, compared to an OECD average of 11.2 and 15.8, respectively, in 2016.2
Female Employment Rate in OECD Economies
(Age 15–64, percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Female Employment Rate in OECD Economies
(Age 15–64, percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Female Employment Rate in OECD Economies
(Age 15–64, percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Male Employment Rate in OECD Economies
(Age 15–64 Percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Male Employment Rate in OECD Economies
(Age 15–64 Percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Male Employment Rate in OECD Economies
(Age 15–64 Percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.4. The increase in Korea’s employment rate seems to have stalled since 2017. Twelve-month employment growth declined sharply in 2016 and early 2017. Since then it has been steady, hovering just over 1 percent for firms with less than 300 employees, and slightly higher for bigger companies.
Korea: Employment rate
(Age 15–64, percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: Haver Analytics.Korea: Employment rate
(Age 15–64, percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: Haver Analytics.Korea: Employment rate
(Age 15–64, percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: Haver Analytics.
Korea: Emplyment growth by Firm Size
(12-month growth, percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: CEIC.Korea: Emplyment growth by Firm Size
(12-month growth, percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: CEIC.Korea: Emplyment growth by Firm Size
(12-month growth, percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: CEIC.B. Review of Korea’s Main Policies for Employment Support3
5. Creating jobs and support employment is one of the main goal of the Korean government. Korea has used or is considering using a number of policies to support employment, including transfers to SMEs to create or preserve jobs, Active Labor Market Policies (ALMPs), and boosting public employment. These measures are reviewed in turn.
Support to SMEs
6. In Korea policy support to employment creation often takes the forms of fiscal support to SMEs.4 Korea is the OECD country with the largest share of firms with less than 250 employees (Figure). The share of employees in micro firms with less than 9 employees is also one of highest among OECD economies. The concentration of SMEs in labor-intensive sectors makes them the main source of job creation. Indeed, firms with less than 300 employees accounted for about 80 percent of the employment gains in 2017.5
Employees by firm size, 2015 or latest
(Percentage share of total employees)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Employees by firm size, 2015 or latest
(Percentage share of total employees)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Employees by firm size, 2015 or latest
(Percentage share of total employees)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.7. Many countries maintain schemes to support small businesses, such as reduced corporate tax rates for profits under a certain threshold, special tax allowances for investment by small firms, or tax preferences for (venture) capitalists who invest in small enterprises. The case in favor of these preferential treatment is generally based on the argument that, in the absence of intervention, SMEs are at disadvantage relative to their larger competitors.
8. As of 2017, Korea had in place 288 central government programs and over 1000 programs at the local government level to support SMEs (OECD, 2018b). Central government spending on such programs is estimated at around 0.8 percent of GDP in 2017. The government provides large-scale support to SMEs also through credit guarantees, which were the second largest in the OECD, at 3.8 percent of GDP in 2016. In addition, SMEs are assisted through preferential treatment in public procurement and several tax preferences.6 For instance, the reduction in combined corporate and personal rates on capital gains rates due preferential corporate income tax rates for SMEs compared to larger companies was estimated at 13 percentage points in 2014, one of the highest among OECD economies (OECD, 2015).
9. Do these forms of fiscal support to Korea’s SMEs help job creation and preservation? The empirical evidence on the employment effect of fiscal incentives to SMEs in Korea is scant, partly due to data limitations. Park and others (2017) find some positive and significant impact of fiscal support to SMEs on employment over 2011–2013 in firms from different sectors. Studies by MOSF and KIPF (2018) find a positive, but small impact of tax credits for SMEs on employment. However, it is not obvious whether employment gains supported by fiscal incentives are merely temporary or, instead, are associated with improvements in productivity and long-term profitability. For example, Chang’s (2016) evaluation of Korea’s 2009 public programs to support SME finance concludes that recipients experienced lower productivity growth than non-recipients.
10. SMEs’ difficulty in creating jobs is also related to the fact that Koreans, especially young people, often are unwilling to work for SMEs as they provide fewer training opportunities and wages are considered low. Given that, providing subsidies to SMEs might not be an effective way to boost employment there. Rather, helping SMEs becoming more productive and dynamic would make them more attractive to the youngsters. Hence, subsidies should be better focus on R&D activities that would help make SMEs more dynamic, rather than protecting jobs in weak firms. In Korea the marginal tax subsidy rate on R&D by SMEs is high compared to some other OECD countries (Figure). Nevertheless, there might be scope to re-orient some other forms of fiscal support currently extended to SMEs toward their R&D activity. Indeed, empirical analysis on advanced economies, based on firm-level and industry-level data, indicates that R&D tax incentives have a larger effect for small firms than larger companies (IMF, 2016). Also, evaluation studies on selected advanced economies suggest that R&D tax incentives for small firms are two to three times more effective in promoting R&D investments than for an average size firm (IMF, 2016). Moreover, it would be important also to support young and innovative firms that are more likely to achieve productivity gains and long-lasting increases in employment rather than provide subsidies based on firm size.
11. The analysis above suggests the following policy implications:
Given the large number of fiscal programs in support of SMEs, it would be important to regularly monitor and periodically review their impact There may be a need to set up a comprehensive and integrated database on the different programs.
Instead of extending subsidies only on the basis of firm size, it would also be critical to identify firms that are more likely to attain increases in productivity and profitability, and bring about long-lasting employment gains, such as young and innovative firms.
To make SMEs more attractive to youth, it would be important to design fiscal incentives that would help SMEs to become more productive and dynamic.
Given that that R&D tax incentives for small firms are particularly effective in promoting investment, consideration should be given to re-orient some other forms of fiscal support currently extended to SMEs toward their R&D activity.
Tax Subsidy Rates on R&D Expenditures, 2017
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.The 1-B index is an indicator representing a notional level of tax subsidy rate under different scenarios. It is based on a number of assumptions and calculations specific to each country. International comparability may be limited.Tax Subsidy Rates on R&D Expenditures, 2017
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.The 1-B index is an indicator representing a notional level of tax subsidy rate under different scenarios. It is based on a number of assumptions and calculations specific to each country. International comparability may be limited.Tax Subsidy Rates on R&D Expenditures, 2017
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.The 1-B index is an indicator representing a notional level of tax subsidy rate under different scenarios. It is based on a number of assumptions and calculations specific to each country. International comparability may be limited.Active Labor Market Policies
12. Active labor market policies (ALMPs) are government programs to support employment and help the unemployed. According to the OECD definition, programs specifically designed to support employment include (1) public employment services (PES), such as placement and related services; (2) training; (3) employment incentives (i.e., incentives for recruitment or to facilitate continuing employment); (4) direct job creation (typically in the public sector); (5) start up incentives to promote entrepreneurship; (6) subsidies for the employment of persons with a permanently (or long-term) reduced capacity to work. Programs to help the unemployed include various types of unemployment benefits as well as programs facilitating early retirement of older workers who are assumed to have little chance of finding a job.
13. At 0.4 percent of GDP, Korea’s spending on measures to support employment is close to the OECD average, but the composition of this spending raises some issues. Korea ALMPs are largely focused on direct job creation, with this spending category representing more than half of government expenditure on employment support in 2016 (Figure). This is a much larger share than the OECD average, which is about 13 percent. About 21 percent of direct job creation spending was targeted at workers above the retirement age of 65 years in 2018. ALMP spending for the working-age population is therefore somewhat lower than data suggest. Alternative fiscal instruments (e.g., targeted transfers) would probably be more efficient and effective tools to support the elderly.
Expenditure on Active Labour Market Programs by Category, selected OECD Countries
(Percent of GDP)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Note: PES stands for Public Employment Services and Administration.Expenditure on Active Labour Market Programs by Category, selected OECD Countries
(Percent of GDP)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Note: PES stands for Public Employment Services and Administration.Expenditure on Active Labour Market Programs by Category, selected OECD Countries
(Percent of GDP)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Note: PES stands for Public Employment Services and Administration.
Expenditure on Active Labour Market Programs by Category, Selected OECD Countries
(Share of Total)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Note: PES stands for Public Employment Services and Administration.Expenditure on Active Labour Market Programs by Category, Selected OECD Countries
(Share of Total)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Note: PES stands for Public Employment Services and Administration.Expenditure on Active Labour Market Programs by Category, Selected OECD Countries
(Share of Total)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Note: PES stands for Public Employment Services and Administration.14. In addition, Korea’s spending on PES is relatively low: only 0.04 percent of GDP and about 10 percent of employment supporting ALMPs. Conversely, the average spending on PES among OECD economies is 0.1 percent of GDP and nearly 28 percent of the total spending on employment supporting ALMPs. Low spending on PES may hinder their effectiveness, as documented in a number of studies (e.g., Crepon et al., 2005; Petersen et al., 2013). Korea’s spending on training is also lower than the OECD average, and a relatively small share of total expenditure on employment supporting ALMPs.
15. Korea devotes more than 13 percent of its ALMPs expenditure to employment incentives, for about 0.05 percent of GDP in 2016, according to OECD data. This is the second item—after direct job creation—on which Korea spends the most.7 The rationale for these incentives is to compensate firms that would hire or preserve jobs in the event that a worker’s productivity is temporarily lower than the wage for some reason. Sufficient improvement in the worker’s productivity—through learning-by-doing, training, or company direct monitoring—is supposed to be the essential condition for maintaining employment after the expiry of the subsidy period. It is not clear the extent to which individual cases are reviewed and monitored periodically in Korea. Without adequate monitoring, there is a risk that these types of employment incentives be kept in place over an extensive period of time to preserve employment, regardless of workers’ productivity.
16. The international experience suggests that hiring and wage subsidies can be effective in boosting employment if appropriately targeted (IMF, 2012). But the effectiveness of these subsidies in increasing employment depends on the degree to which they reduce hiring that would have occurred also without the subsidies or lead employers to substitute one type of individual for another to take advantage of the subsidy. There are indications that Korea’s employment incentives might not be well targeted. For example, there are incentives to support hiring of highly educated workers, even though companies would likely hire competent talent voluntarily even without the subsidy (Park, 2016).
17. The analysis above suggests the following policy implications:
There is a need to reconsider the composition of ALMPs.
Spending on public employment services that support job-matching and on training should increase.
Consideration should be given to supporting income for the over 65 through targeted transfers rather than spending on employment support.
It would be important to periodically review the effectiveness of employment incentives and reassess whether they are properly targeted.
Public Sector Employment
18. At less than 8 percent, Korea’s share of employment in general government relative to total employment is one of the lowest among OECD countries. The wide cross country variation in government employment size partly reflects national choices about the role of government. Among advanced economies, the Nordic countries (Denmark, Norway and Sweden) employ a relatively large proportion of their population in the provision of public services, other countries such as Korea and Japan employ much smaller shares. It has to be noted, however, that these data reflect employment in general government, excluding SOEs. In Korea about 80 percent of people employed in the central government was between 35 and 54 years of age in 2015.
Employment in General Government, 2015
(Percent of Total Employment)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Employment in General Government, 2015
(Percent of Total Employment)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Employment in General Government, 2015
(Percent of Total Employment)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.
Employment in Central Government by Age
(Share of Total Employed, percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Sources: OECD.Employment in Central Government by Age
(Share of Total Employed, percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Sources: OECD.Employment in Central Government by Age
(Share of Total Employed, percent)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Sources: OECD.19. Given the relatively low share of public employment in total employment, the Korean government is considering expanding public sector jobs, as part of its strategy to boost employment, including among the youngsters.8 Expanding public sector employment can be an effective way to reduce unemployment in the short term, providing a stabilizing effect during recessions or in relatively disadvantaged regions. However, there are questions on whether expanding public sector jobs is an efficient tool to boost employment for the whole economy in the longer term (Algan, Cahuc and Zylberberg, 2002; Caponi, 2017).
20. Economic theory suggests that the public employment’s impact on the labor market depends on whether the production of the public sector is a substitute to that of the private sector. In that case, it could result in crowding out of private jobs. Public jobs that produce pure collective goods (such as justice or defense) are less likely to have adverse effects on private employment than other types of jobs, such as those in transport, education and health, where private production is possible. The empirical literature on the impact of public employment on labor market performance is scant, but typically confirms the prediction that expanding public employment may result in the crowding out of private jobs. For example. Algan, Cahuc and Zylberberg (2002) find that in a group of OECD countries in 1960–2000, on average the creation of 100 public jobs may have eliminated about 150 private sector jobs.
21. Employment conditions in the public sector also play an important role in determining the impact of public jobs on private employment. Public jobs that pay attractive wages and, or, offer benefits, tend to attract more workers, and could crowd out some private jobs (IMF, 2016b). While data on the compensation differential between the public and private sector is not readily available for Korea, data on other advanced economies suggest that public-sector wages tend to be slightly higher relative to the private sector, particularly for low-skilled workers (Postel-Vinay, 2015). When comparing benefits from public and private sector jobs, factors such as job security and wage progression system need also to be taken into account.
22. The analysis suggests the following policy implications:
Public sector job creation should be linked to developing or expanding services that cannot be provided adequately by the private sector.
In creating public jobs, it would be important to assess and take into account the possible impact on public sector productivity.
Consideration could be given to conducting comparisons between public and private sector wages to obtain information to on wage differential which can inform wage setting and hiring conditions in the public sector.
C. Understanding the Drivers of Employment Rates: An Empirical Analysis
23. Assessing the appropriate fiscal policy measures to support employment requires an understanding of the drivers of the employment rate. These include structural factors that affect individuals’ decisions to supply labor; policies, institutions, and noneconomic factors that influence the prospect of finding or retaining a job; and cyclical factors. Some policies, such as the tax-benefit system, directly shape the incentive to supply labor; others, such as the employment protection legislation, may influence labor demand. Other measures, such as spending on training and employment services, affect the ability to find employment. Long-lasting changes in demand for workers’ skills could also affect labor force participation and, hence, employment (IMF, 2018b).
24. To better understand the role that fiscal policies can play in supporting employment, an empirical analysis of the determinants of employment rates is carried out using cross-country panel regressions in OECD economies since 1985. Previous empirical studies on the determinants of employment rates in advanced economies include Garibaldi and Mauro (2002), Bassanini and Duval (2006), and Fiori et al. (2012). In addition to updating earlier empirical evidence, the present estimates focus specifically on the role of fiscal policy variables (e.g., ALMPs and the tax-benefit system), while controlling for cyclical and structural factors that may affect employment, including secular changes in the demand for labor.
25. The dependent variable is the employment rate (for men and women in primary age—15–64 years—together and separately).9 The policy variables include: the labor tax wedge, defined as the ratio between the average tax paid by a single-earner family and the corresponding total labor cost for the employer10; the wedge between the tax rates of second earners and single individuals, which could affect especially women’s decision to seek and retain employment; public expenditure on ALMPs; and the indicator of stringency of employment protection regulations for permanent workers (EPL).11 Policies that help reconcile work inside and outside the household are proxied by public spending on early childhood education and care as a percent of GDP, and number of weeks of job-protected parental leave available to mothers.
26. Control variables include the output gap, to account for the cyclical position of the economy. The ratio of employment in the service sector relative to employment in the industrial sector, the share of urban population, trade openness, and exposure to technological progress (measured as in Chapter 3 of the April 2018 World Economic Outlook) are introduced among the regressors to capture the potential shifts in the demand for different types of labor due to structural transformation.12 The share of the population within a specific gender group with tertiary education is included to control for the possible impact of education level on labor market participation and employment. Wage-setting institutions and frameworks are proxied by the union density. Country and time fixed effects were also included in the model. Variables that are likely to be endogenous (e.g., the output gap, ALMPs) are included in the specification with one-year lag.
27. The estimation results indicate that fiscal policy can play an important role in promoting employment. The coefficients on public expenditure on AMLPs and childcare spending are positive and statistically significant for both men and women, but larger for the latter. A high wedge between the tax paid by a worker and the corresponding total labor cost for the employer is found to have a negative and significant relation with employment, in line with results from previous literature (e.g, Fiori et al., 2012). Conversely, the wedge between the tax rates of second earners and single individuals is estimated not have a significant impact on employment.
28. Longer leave available to mothers is found to have a positive and significant impact on female employment. The stringency of employment protection regulations for permanent workers is also a significant factor in explaining female employment: more rigid regulation is associated with lower female employment rate.
29. Among the control variables, as expected, employment depends on the phase of the business cycle. The econometric results also confirm that certain structural transformations that may shift the demand for certain types of workers have a significant effect on employment. Higher education is also positively associated with employment rates for both men and women. Instead, the variable capturing the degree of unionization is found not to have a significant impact on employment.
Strictness of Employment Protection in OECD Economies
(Regular Contracts, 2013)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Strictness of Employment Protection in OECD Economies
(Regular Contracts, 2013)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.Strictness of Employment Protection in OECD Economies
(Regular Contracts, 2013)
Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A004
Source: OECD.30. The results suggest fiscal measures that can support employment in Korea. The evidence points to the effectiveness of family-friendly policies in promoting job market participation, especially among women. In Korea public spending on early childhood education and care was almost 0.9 percent of GDP in 2013, higher than the OECD average of 0.7 percent, but 0.5 percentage points lower than the average to the OECD countries that spend the most on this item.13 Given low female employment rate, it would be critical to boost this spending item further. Reducing the labor tax wedge to encourage individuals to keep working and seek employment does not seem as critical in Korea, as the country’s tax wedge is relatively low.
31. The results also suggest that female employment in Korea can also be supported by the relaxation in employment protection for regular workers, which was stricter than the OECD average in recent years. Korea has particularly tight restrictions on dismissal of regular workers. Fiscal measures can play an important role in facilitating the implementation of reforms to make the job market more flexible. Higher spending on ALMPs could accompany reforms to lower employment protection. As looser firing restrictions can initially result in higher unemployment, providing more job training and matching services can reduce the risk of extended unemployment spells. Several countries, including the Netherlands (2009), Finland (1992), and Portugal (1990) have simultaneously lowered employment protection and increased spending on ALMPs (IMF, 2014, 2016b).
Drivers of Employment: Regression Results
Drivers of Employment: Regression Results
| All | Women | Men | ||
|---|---|---|---|---|
| ALMP(-l) | 0.05 | 0.08 | 0.05 | |
| P-value | 0.00 | 0.00 | 0.00 | |
| Labor tax wedge | -0.18 | -0.16 | -0.14 | |
| P-value | 0.00 | 0.00 | 0.00 | |
| Childcare spending | 3.38 | 6.11 | 1.68 | |
| P-value | 0.00 | 0.00 | 0.00 | |
| Job-protected maternity leave | 0.02 | 0.05 | 0.01 | |
| P-value | 0.00 | 0.00 | 0.33 | |
| EPL | 0.53 | -2.17 | 1.86 | |
| P-value | 0.42 | 0.01 | 0.76 | |
| Output gap (-1) | 0.20 | 0.19 | 0.22 | |
| P-value | 0.00 | 0.02 | 0.00 | |
| Trade openess (-1) | 0.04 | 0.10 | 0.05 | |
| P-value | 0.00 | 0.00 | 0.00 | |
| Relative service employment | -0.04 | -0.03 | -0.05 | |
| P-value | 0.00 | 0.00 | 0.00 | |
| Union Density | 0.00 | -0.04 | -0.04 | |
| P-value | 0.94 | 0.30 | 0.27 | |
| Exposure to technology | 0.62 | -0.04 | 0.24 | |
| P-value | 0.00 | 0.90 | 0.10 | |
| Tertiary education | 0.10 | 0.15 | 0.11 | |
| P-value | 0.00 | 0.00 | 0.00 | |
| R-squared | 0.93 | 0.93 | 0.86 | |
| Estimation period | 1985–2014 | 1985–2014 | 1985–2014 | |
| Number of observations | 558 | 558 | 558 | |
Drivers of Employment: Regression Results
| All | Women | Men | ||
|---|---|---|---|---|
| ALMP(-l) | 0.05 | 0.08 | 0.05 | |
| P-value | 0.00 | 0.00 | 0.00 | |
| Labor tax wedge | -0.18 | -0.16 | -0.14 | |
| P-value | 0.00 | 0.00 | 0.00 | |
| Childcare spending | 3.38 | 6.11 | 1.68 | |
| P-value | 0.00 | 0.00 | 0.00 | |
| Job-protected maternity leave | 0.02 | 0.05 | 0.01 | |
| P-value | 0.00 | 0.00 | 0.33 | |
| EPL | 0.53 | -2.17 | 1.86 | |
| P-value | 0.42 | 0.01 | 0.76 | |
| Output gap (-1) | 0.20 | 0.19 | 0.22 | |
| P-value | 0.00 | 0.02 | 0.00 | |
| Trade openess (-1) | 0.04 | 0.10 | 0.05 | |
| P-value | 0.00 | 0.00 | 0.00 | |
| Relative service employment | -0.04 | -0.03 | -0.05 | |
| P-value | 0.00 | 0.00 | 0.00 | |
| Union Density | 0.00 | -0.04 | -0.04 | |
| P-value | 0.94 | 0.30 | 0.27 | |
| Exposure to technology | 0.62 | -0.04 | 0.24 | |
| P-value | 0.00 | 0.90 | 0.10 | |
| Tertiary education | 0.10 | 0.15 | 0.11 | |
| P-value | 0.00 | 0.00 | 0.00 | |
| R-squared | 0.93 | 0.93 | 0.86 | |
| Estimation period | 1985–2014 | 1985–2014 | 1985–2014 | |
| Number of observations | 558 | 558 | 558 | |
D. Conclusion and Policy Implications
32. Boosting employment is a priority for Korea both in the near and longer term. The Korean government has in place and is implementing a number of policies to support job creation, including transfers to SMEs to create or preserve jobs, ALMPs, and an expansion of public employment. The review of measures in place suggests that there is scope to enhance their design and implementation.
33. Korea has set up a large number of fiscal programs to support of SMEs, with the aim of creating or preserving jobs. To maximize the effectiveness of these measures it is critical to review their impact periodically. There may be a need to establish a comprehensive and integrated database on the different programs. To make SMEs more attractive to youngsters, it is important to focus on fiscal incentives that could help SMEs to become more productive and dynamic. Given that R&D tax incentives for small firms are particularly effective in promoting their investment, consideration should be given to re-orient some other forms of fiscal support currently extended to SMEs toward their R&D activity, which would help SMEs to become more profitable and dynamic. Moreover, rather than providing subsidies based only on firm size, focus should be on firms that are more likely to experience improvements in productivity and long-term profitability and produce long-lasting employment gains, such as young and innovative firms.
34. ALPMs could be enhanced and used more effectively to boost employment in Korea. Public spending on training and employment services that support job-matching is small in international comparison and could be boosted. It would be important to periodically review the effectiveness of employment incentives and reassess whether they are properly targeted.
35. There is scope to increase public employment, given that Korea’s share of public sector employment relative to total employment is low. Nevertheless, job creation in the public sector should be driven by the need to develop or expand services that cannot be provided adequately by the private sector. In expanding public employment, it would be important to assess and consider the possible impact on public sector productivity. To minimize the risk that expanding public employment may result in the crowding out of private jobs, wage setting and hiring conditions in the public sector should take into account the compensation differential vis-à-vis the private sector.
36. The empirical analysis on the determinants of employment in OECD economies provides an indication that fiscal policies that can support employment in Korea. There is scope to increase public spending on early childhood education and care, given its effectiveness and Korea’s low female employment rate. Korea’s employment, especially among women, can also be supported by easing regulation on regular contracts, which has been comparatively strict in recent years. Fiscal policy can play an important role in facilitating reforms to enhance the flexibility of the job market.
Appendix: Variable List, Definition and Data Sources
Employment Rate: The ratio of employed people to the population in primary age, age 15–64. Source: OECD employment database.
Output Gap. Source: WEO.
Exposure to Technological Progress: The interaction between the relative price of investment and the country’s exposure to routinization through its initial occupational mix. The latter consists of scores that rely on occupation-level measures by Autor and Dorn (2013), which order occupations by their share of routine tasks, and then use the employment shares of these occupations to construct country-level measures of routinizability. Source: Chapter 2 of the April 2018 WEO.
Ratio of Employment in the Service Sector Relative to Employment in the Industrial Sector. Source: Chapter 2 of the April 2018 WEO.
Share of Urban Population. Source: World Bank, World Development Indicators database
Education: Share of Population within Each Gender Group with Tertiary Education. Source: Barro-Lee Educational Attainment data set.
Labor Tax Wedge: Ratio between the average tax paid by a single-earner family (one parent at 100 percent of average earnings with two children) and the corresponding total labor cost for the employer. Source: OECD Tax database.
The wedge between the tax rates of second earners and single individuals is computed as the ratio of tax second earner to tax single individual, following Chapter 3 of the April 2016 WEO. Source: OECD.
Public Spending on ALMP: active labor market program spending per unemployed person in percent of GDP per capita. Source: OECD
Trade Openness. Source: WEO
Union Density: net union membership as a proportion of wage earners in employment. Source: OECD employment database.
Public Spending on Early Childhood Education and Care as percent of GDP. Source: OECD.
Job-Protected Maternity Leave: total number of weeks of job-protected maternity, parental, and extended leave available to mothers, regardless of income support. Source: OECD.
References
Acemoglu, Daron, and David Autor. 2011. “Skills, Tasks and Technologies: Implications for Employment and Earnings.” In Handbook of Labor Economics, edited by Orley Ashenfelter and David Card. 4: 1043–171. Amsterdam: Elsevier.
Algan, Yann, Pierre Cahuc and André Zylberberg, 2002, Public Employment and Labor Market Performance, Economic Policy, Volume 17, Issue 35, 1 October 2002, Pages 553–569.
Ayyagari, M., A. Demirguc-Kunt, and V. Maksimovic, 2011, “Small vs. Young Firms Across the World: Contribution to Employment, Job Creation, and Growth, Policy Research,” Working Paper No. 5631. (Washington: World Bank).
Bassanini and Duval, 2006, “Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions”, OECD Economics Department Working Paper No. 486.
Caponi Vincenzo, 2017, The Effects of Public Sector Employment on the Economy. IZA World of Labor 2017: 332.
Chang, Woo Hyun, 2016, “Is Korea’s Public Fining for SMEs Achieving its Intended Goals?”, KDI Focus.
Cheon, Byung Yoo, et al., 2015, “A Study of Reform for Effectiveness Improvement of Employment Incentives,” Ministry of Employment and Labor, Commissioned Paper, 2015 (in Korean).
Chirinko, R., 2002, “Corporate Taxation, Capital Formation, and the Substitution Elasticity between Labor and Capital,” CESifo Working Paper No. 707 (Munich: CESifo).
Crépon, B., M. Dejemeppe and M. Gurgand, 2005, “Counseling the Unemployed: Does It Lower Unemployment Duration and Recurrence?”, https://halshs.archives-ouvertes.fr/halshs-00590769
Das, Mitali, and Benjamin Hilgenstock, 2018, “Labor Market Consequences of Routinization in Developed and Developing Economies.” IMF Working Paper 18/135 (Washington: International Monetary Fund).
Fiori G., Giuseppe Nicoletti, Stefano Scarpetta and Fabio Schiantarelli, 2012, “Employment Effects of Product and Labor Market Reforms: Are There Synergies?”, The Economic Journal, Vol. 122, No. 558, pp. 79–104.
Fougère, D., F. Kramarz, and T. Magnac, 2000, “Youth Employment Policies in France,” European Economic Review No. 44, pp. 928–42.
Garibaldi P. and P. Mauro, 2002, Anatomy of Employment Growth, Economic Policy, April.
Haltiwanger, John Ron S. Jarmin, and Javier Miranda, 2013, Who Creates Jobs? Small versus Large versus Young”, The Review of Economics and Statistics, May 2013, 95(2): 347–361
IMF, 2012, “Fiscal Policy and Employment in Advanced and Emerging Economies,” International Monetary Fund, Washington, D.C.
IMF, 2014, “Can Fiscal Policy Do More for Jobs?”, Chapter 2 of Fiscal Monitor. International Monetary Fund, Washington, DC.
IMF, 2016a, “Managing Government Compensation and Employment-Institutions, Policies, and Reforms Challenges”. International Monetary Fund, Washington, D.C.
IMF, 2016b, “Time for a Supply Side Boost? Macroeconomic Effects of Labor and Product Market Reforms in Advanced Economies”, Chapter 3 in World Economic Outlook (April), International Monetary Fund, Washington, DC.
IMF, 2018a, “Youth (Un)employment in Korea: Recent trends and Drivers”, Republic of Korea Selected Issues, IMF Country Report No. 18/41.
IMF, 2018b, Labor Force Participation in Advanced Economies: Divers and Prospects, Chapter 2 in World Economic Outlook (April), International Monetary Fund, Washington, DC.
International Tax Dialogue, 2007, “Taxation of Small and Medium Enterprises,” Buenos Aires, October.
MOEF, 2018, “Economic Policies, H2 2018”, Press Release July 18, 2018.
MOEF and KIPF, 2018, “Tax Credit for SMEs Investment.”
MOEF and KIPF, 2018, “Tax Credit for R&D Expenditure and Investment.
MOEF and KIPF, 2018, Income Tax Deduction for SMEs Employee.
Neumark, D., B. Wall, and J. Zhang, 2011, “Do Small Businesses Create More Jobs? New Evidence from the National Establishment Time Series,” The Review of Economics and Statistics, Vol. 93, No. 1, pp. 16–29 (Cambridge: MIT Press).
OECD, 2015, Taxation of SMEs in OECD and G20 Countries, OECD Tax Policy Studies, No. 23, OECD Publishing, Paris.
OECD, 2017, R&D Tax Incentives: Korea, OECD Publishing, Paris.
OECD, 2018a, Towards Better Social and Employment Security in Korea, Connecting People with Jobs, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264288256-en
OECD, 2018b, OECD Economic Surveys: Korea 2018, OECD Publishing, Paris. http://dx.doi.org/10.1787/eco_surveys-kor-2018-en
OECD, 2018c, Towards Better Social and Employment Security in Korea, Connecting People with Jobs, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264288256-en
Park, 2016, “Employment Incentives: Issues and Solutions”, KDI FOCUS September 26, 2016 (No. 74).
Park, Kang, Lee and Pyol, 2017, “Performance Evaluation of SME Support Program”, KIPF Research Paper.
Pedersen, J., M. Rosholm and M. Svarer, 2012, “Experimental Evidence on the Effects of Early Meetings and Activation”, http://ftp.iza.org/dp6970.pdf.
Poste-Viney, Fabien, 2015, Does it Pay to be a Public-Sector Employee? IZA World of Labor 2015: 156.
Schauer, Johanna, 2018, Labor Market Duality in Korea, IMF Working Paper, WP/18/126, (Washington: International Monetary Fund).
Prepared by Edda Zoli.
An analysis of Korea’s labor market duality is presented in Schauer (2018).
IMF (2018a) provides a thorough analysis of policies to support youth employment specifically.
The definition of SMEs in Korea has changed over time. Until 2014, it was based on the number of regular workers, sales, capital and total assets, with the thresholds varying by industry. To reduce firm incentive to stay small to continue receiving the favorable SME treatment, the definition was changed in 2015 to total assets and sales.
The international evidence on job creation by SMEs is mixed. For example, Ayyagari and others (2011) find higher job growth in small firms in a panel of 99 countries, including emerging economies, but other studies do not support these findings. For example, Haltiwanger, Jarmin, and Miranda (2013), using a large set of U.S. companies find that once firm age is controlled for, there is no systematic relationship between firm size and employment growth. This result points to the important role of business start-ups and young businesses, rather than small firms, in job creation.
These include, for example, accelerated depreciation for facility investment by SMEs, allowing SMEs to carry back losses to apply against income in the previous year (OECD, 2015).
Korea’s spending on employment incentives may be even higher. According to Park (2016), Korea’s spending on employment incentives in 2016 was about 0.2 percent of GDP, with 20 employment incentives in operation under four ministries for a total budget of 2.8 trillion won.
The government is planning to expand public sector jobs by 810,000 by 2022 (MOEF, 2018). In the 2019 budget the government indicated the intention to increase social services jobs by 60,000 to 94,000 and civil service jobs (e.g., policy officers and) by 21,000.
A detailed variable list, with definition and sources is presented in the Appendix.
From a theoretical point of view, the net effect of higher taxes on labor supply is ambiguous. As higher labor taxes reduce net wages, individuals may respond by working more to maintain their income. On the other hand, by lowering the relative return to work, higher taxes may lead to lower participation.
Disaggregated spending on different ALMPs (e.g., training, employment incentives, etc.) was also included in some model specifications. However, because of limited data availability, empirical results were not robust.
IMF (2018b) offers a thorough discussion of possible drivers of long-lasting changes in demand for workers’ skills, including the secular expansion of the service sector and technological progress that allow automation of routine jobs.
2013 is the latest year for which cross-country comparable data on public spending on early childhood education and care is available for most OECD economies.
