The Koreas

How Korea’s Labor Market Breeds Social Inequality

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The Koreas

How Korea’s Labor Market Breeds Social Inequality

Structural flaws in Korea’s labor market trap workers and perpetuate social inequality.

Labor markets are typically not paragons of fluid, competitive markets leading to the most desirable outcomes, and Korea’s is no exception.

The Korean labor market is nontransparent, fragmented, and dysfunctional at matching talent with its best uses. Firms cannot expand in size and across markets, because of financing constraints and market regulation. Notable pockets of systematically underutilized workers endure due to mismatches between their skills and jobs, and a lack of opportunities for self-improvement. Social norms hinder negotiation and flexible problem resolution. The economy’s failure to empower entrepreneurs and integrate non-mainstream workers affects economic productivity as well as – through workers’ skill-acquisition and family-planning decisions – social mobility and long-term demographic trends. Vulnerable workers (including the elderly, women of child-bearing age, the long-term unemployed, and other groups) are trapped in particular industrial sectors and career paths, with nonnegotiable working conditions, not because of their skills and potential, but because of structural barriers in the market.

Labor-market imperfections in Korea are accentuated by a unique interdependence between business conglomerates (chaebol), small and medium-sized enterprises (SMEs), and the government; inconsistent, unevenly-enforced regulations; inadequate and unequal social protections; and unbendable norms for employer–worker interaction. At the core of Korea’s labor market structure is the dualism between primary versus secondary sectors, and regular versus non-regular employment.

The primary market consists of too-large-to-fail publicly-owned manufacturers and firms with a government stake in them summarily referred to as chaebols. These capital-intensive and export-oriented businesses traditionally had exclusive access to the best public contracts and financing options. They hold on to their superior market position and performance by innovation, dynamism, and leading in their product offering. They also operate under tight regulation. They attract experienced, dedicated workers and comply with regulation by offering regular employment that is secure, carries generous benefits and career-growth opportunities, and is subject to strong protection of labor standards and equal-opportunity laws.

The secondary market is populated by SMEs, mostly labor-intensive service providers working as subcontractors to chaebols. SMEs rely much less on innovation, and compete on cost rather than uniqueness of their product. Chaebols have a holdout power over them, curbing their profitability and preventing them from becoming a competitive threat. Bankruptcy and reorganization rates are high among SMEs. The government’s support system for the SMEs, with eligibility based on firm size, further dampens their incentives to grow. The existing social contract sees SMEs regulated much more loosely than chaebols, and effectively exempted from labor standards. SMEs offer non-regular, non-unionized employment that is insecure and wage-only, with limited training and growth prospects or social protections.

SMEs are prevented from competing with chaebols because of their low capitalization, limited reputation, and inability to comply with industry regulations and standards. Disadvantaged workers are excluded from participating in the primary sector because of their inability to demonstrate their skills and motivation. They cannot stay on track with their privileged peers because their technical skills become eroded in non-regular jobs. Expecting to land in secondary-sector jobs reduces their incentives for skill acquisition in the first place.

A state of dualism thus reigns under which employers and workers compete within but not across market segments. Capital and talent are trapped, prevented from finding their best uses. Small firms remain small (if they survive), and medium-sized firms remain medium-sized. Primary and secondary market firms subsist with chronically different workforce composition and corporate hierarchy.

An inadequate conflict resolution system between employees and firms prevents the parties from agreeing on the terms of employment flexibly before hiring, and settling disputes efficiently. Market norms and regulations provide for limited arbitration, and allow for limited civil damages for law violations and contract breaches. Employers are left with nontransparent, informal ways to ensure hiring productive workers – reliance on a set of imprecise signals (applicant profiling on, say, parents’ work history as a signal for workers’ uncertain skills) or labor-standard bypasses (reliance on third-party certifications or subcontracting). Firms facing significant restrictions on their labor practices outsource to headhunters or subcontractors who are less regulated – but who also have other objectives, at a cost to the workers and employers alike.

The implication of uncertainty over workers’ skills is that even equally skilled workers may attain vastly different careers. Employers may hire a wrong number and type of workers, distorting workers’ incentives for skill acquisition. Workers who cannot demonstrate their qualities effectively invest in easily observable signals instead.

The mismatches between workers and jobs and the regulatory exceptions afforded to non-regular employment contracts lead to a chronic dispersion in incomes and working conditions in the economy. Workers trapped in wrong jobs and those who stray from their career path do not receive a second chance. The existing public support system is inadequate. Workers with special needs, including career-interrupted workers, youth with nontraditional backgrounds, or mothers with children, are relegated to non-regular jobs, rather than being offered alternative schedules or retraining. The problem of unequal opportunities accumulates throughout workers’ lives, as the skills of underutilized workers become eroded, and even across generations, through spillovers to the opportunities for skill acquisition by workers’ children.

Clearly, policy intervention is needed. Policymakers formerly tried to address inequities in the market without disturbing the social compact among industry participants. Transfers and lip-service concessions were offered to victims, while the existing market organization with its non-transparencies and fragmentation was propped up, to sidestep an overhaul that would surely be challenged by business and labor groups. Korea enacted a full set of equal-opportunities laws, labor standards and safety-net provisions, but with insufficient resources backing them and lax enforcement. This has proved unsustainable, as problems including productivity stagnation, social polarization, and a prospect of demographic implosion loom larger over time.

A comprehensive policy reform is needed to break market barriers for firms and workers, promote transparent market practices, and encourage labor mobility across sectors and career paths. The competitive field among firms should be leveled and firms should be empowered to expand in size and across sectors. Labor policy should promote reducing the working-conditions gap between regular and non-regular workers, facilitating labor mobility, and reassuring workers in regard to their skill investment.

Expanding the welfare net should help improve the outcomes of marginalized workers and combat polarization in workers’ opportunities by offering (re)education to disadvantaged workers, providing infrastructure including childcare for special-needs workers, and conditioning of assistance on one’s participation in retraining or job search. An ongoing tripartite negotiation over equitable and efficient market organization is another good step forward. However toothless the voluntary, open-ended deliberation is, the novel all-parties-inclusive exchange may help to clarify parties’ positions and stakes, and through the created knowledge and goodwill may help to heal the deepest faults of today’s market organization.

Vladimir Hlasny is an Associate Professor in the Department of Economics at Ewha Womans University in Seoul. This piece is adapted from a longer essay published in the Korea Economic Institute of America’s Academic Paper Series. The full-length essay can be viewed here.