One of the early protagonists of the struggle against the coronavirus was South Korea. The densely peopled peninsula, just a short hop away from the Chinese trade centers of Shanghai and Qingdao, was ravished early on. By mid-February, South Korea was the nation with the highest count of new infections after China. Since then its numbers have slipped to a few dozen, but clusters of the disease have resurfaced across the country, often in regulatory blind spots such as at church congregations, fitness dance classes, night clubs, and a logistics warehouse. South Korea remains on the brink of a new nationwide outbreak.
Despite a resolute response by the government, including a comprehensive border quarantine system, an aggressive pursuit of infections and a 270 trillion won ($228 billion) fiscal stimulus, COVID-19 has wreaked havoc on the South Korean economy and the labor market that is yet to subside. The outbreak shut down South Korea’s borders, and scared customers away from streets, stores, and entertainment venues. Businesses shut down of their own volition as a prevention measure and as a response to the cancellation of orders and drying up of overseas sales. Exports fell by nearly a quarter year-on-year in April, and by nearly half in May, highlighting South Korea’s heavy reliance on foreign trade, and exposure to the events in its largest trade partners, China, and the United States.
A bellwether of consumer confidence and the general health of manufacturing in South Korea, Samsung saw a 23 percent dip in smartphone sales in the first quarter, followed by further contraction in the second quarter. But the service sector took a great pummeling. Service provider revenues remain at an estimated 50 percent of their pre-January levels. In high-technology services, such as Seoul’s notorious plastic surgery industry, 95.1 percent of providers report to have been affected adversely, as their revenues plunged typically 30 percent or more. Employers responded by furloughing or laying off workers.
This poses a great challenge to workers amid the drying up of job opportunities, particularly because the country’s markets remain severely fragmented between the industry and service sectors, and establishments of different sizes. When an economic sector goes through mass layoffs, those dismissed have a hard time finding vacancies to which they would be well matched.
The South Korean labor market at large has been bleeding since January. In March alone, 1.6 million workers were forced to take temporary leave from work following business closures. During April, 467,000 workers lost their jobs. The headline unemployment rate, a conservative measure of joblessness, ticked up to 4.2 percent in April, and 4.5 percent by May. These figures further mask a significant rise of informality among those who managed to keep their jobs: workers involuntarily transitioning to temporary or seasonal jobs, or reducing their hours to less than full time.
Adding underemployed workers to the count of unemployed, an estimated 830,000 workers transitioned to less secure jobs or to unemployment in April, leading to a jobless rate of 14.9 percent (4.42 million out of 29.68 million adults). The additional scores of workers who were sidelined to less preferred positions (albeit still contract, full-time posts) and those who received a pay cut or pay freeze cannot be estimated. Anecdotal evidence suggests it could be in the millions.
The employment prospects are more dire still among fresh graduates and those lacking proper job experience and skills. Even before COVID-19, these workers were largely consigned to temporary and irregular positions. Under COVID-19, as all job opportunities dried up and firms struggled to accommodate their regular contract workforce on some basis, the number of temporary staff fell dramatically, by half a million in May (from 7.5 million in 2019). 9.3 percent of youth workers are now officially unemployed, and another 17.3 percent are in precarious jobs, likely dreaming of better work. Regional Employment and Welfare Plus Centers have become inundated with lines of job seekers.
The impacts differ between sexes. Men’s headline unemployment rate has notably risen, as men scramble to find alternative employment under Korea’s male breadwinner social model, while the women’s unemployment rate has abated, as those laid off have become discouraged from the labor market. Importantly, unemployment figures only capture those out of working but seeking to become employed, not those who have given up the chase.
A prolonged break from service will inevitably increase youth and female unemployment. Given the existing structural obstacles in accessing decent jobs, young people and women will face challenges in re-entering the job market. Their prospects of receiving training are currently non-existent, which is further depriving them of opportunities to learn and gain key skills. Pockets of underutilized workers are likely to endure long-term hardship due to mismatches between their deteriorating skill sets and the (potentially harder-to-fill) available jobs. This highlights the divergence of economic fortunes – or even polarization in these critical times – across South Korean society.
The impacts of the pandemic have fallen unevenly across different types of employers and workers. The heaviest losses were incurred by traditionally vulnerable groups including small and medium size enterprises (SMEs) providing consumer and business services, and temporary and irregular workers lacking adequate credentials or integration in social networks that would enable them to hang onto their jobs. The productivity of these merchants and workers was impaired even under preexisting market norms, and they were easily made redundant following the economic slowdown.
The unraveling of the economic impacts has thus further exposed structural faults and vulnerabilities that had weighed down certain enterprises and workers even before COVID-19, and had given rise to a state of dualism across economic sectors, referred to as the primary and the secondary markets.
The primary market is made up of business conglomerates (chaebol) and their subsidiaries, typically engaged in manufacturing and industry. These firms have been sheltered from COVID-19 impacts by their cash holdings and cross-ownership, and their long-term contracts and relationships with government, which in some cases amount to eyebrow-raising bail outs.
The secondary market is populated by SMEs and smaller mom-and-pop merchants, mostly service providers and subcontractors to chaebol. SMEs, being ultra-competitive and competing on cost rather than on uniqueness of their product, are unable to finance innovation or transformation in the face of market changes. That leaves them at the mercy of the business cycle.
Primary sector firms operate under the direct glow of regulatory headlights, and employ workers with the best credentials, backgrounds and alma maters, subject to contracts with full protections and benefits. Their workers have been weathering the storm relatively unscathed with certainty of having a position to keep or to return to. Secondary sector workers, on the other hand, have found themselves out of jobs, and out of job prospects for the months to come.
This state of market dualism is maintained by inconsistent, unevenly-enforced regulations, inadequate and unequal social protections, and unbendable norms of employer-worker and chaebol-subcontractor interaction in the South Korean economy. Such norms are grounded in Confucian culture, as well as in structural realities. Specifically, the government does little to protect and empower entrepreneurs, or to promote integration of non-mainstream workers. Despite measures that ostensibly promote SMEs, government still relies heavily on repeated large-scale procurement from chaebol, and the flagship chaebol are still the country’s goodwill ambassadors to the rest of the world. The government also burdens service providers, including banking, consulting, and legal outfits with restrictive regulations. Lack of employment protection of irregular workers, and weak anti-discriminatory provisions and enforcement perpetuate the precarious existence of secondary-sector workers.
Call for Smarter Policy Targeting
The gravity of the economic situation in parts of the South Korean economy calls for a significant government response to alleviate suffering, keep economic sectors in gear, and provide a boost needed for a recovery. On the other hand, the response should not come at the expense of the country’s fiscal solvency, or burden future generations of taxpayers and borrowers. The government should also consider taking advantage of the slowdown to tackle structural problems, during the time when reforms are the least disruptive and can be gradually fine-tuned. A prudent response should thus supplement broad crisis alleviation measures with targeted fiscal injections channeled to specific socio-economic groups, and market-integrating and equalizing structural reforms.
The South Korean government’s emerging policy incorporates some elements of this framework, but further rebalancing and some specific legislative interventions would be warranted. To the extent that the South Korean response serves as a paragon to other affected countries worldwide, it is useful to outline its strengths and weaknesses.
The South Korean government responded to the outbreak of COVID-19 with a rigorous public health regimen, taking testing, contact tracing, quarantining – and a civic lockdown – to an overdrive. The government was also as quick responding to the economic repercussions of the lockdown. The Bank of Korea reduced borrowing rates twice, all the way to 0.5 percent, the lowest rate since the disastrous 1998 financial crisis, in order to prevent bankruptcies, and promote liquidity and investment. A 270 trillion won (14 percent of GDP) fiscal stimulus was rolled out in phases to ostensibly support poor and middle-income households with their living needs, and plug in the revenue hole for local entrepreneurs and SMEs. The fiscal stimulus included a system of vouchers of 400,000 to 1 million won ($360–900) per family depending on family size and annual income, distributed to some two-thirds of all families. The vouchers – in fact prepaid cards, gift certificates and even deposits to people’s credit and debit cards – had a limited validity in terms of time and venues, in order to maximize the impact propensity in local markets.
This large-scale financial injection was possible thanks to the ability of the South Korean government to use its fiscal space as needed, and to mobilize additional fresh funds. The targeting of specific economic sectors, and the accommodation of people’s payment preferences was possible thanks to the remarkable degree of integration of institutional databases under the government’s command, and the suspension of personal rights of South Korean residents. Alas, the scale and the precision of targeting of the program may not be fully replicable in other countries due to institutional constraints.
The voucher scheme has generally helped South Korean small merchants, and poor and middle-class families, but evidence suggests that the targeting has been imprecise. On the recipient side, the program has been too broad and insufficiently progressive, making it costly and wasteful. A large bulk of the voucher purchases simply replace existing spending by middle-class households, while there is no guarantee that the vouchers will supplement essential consumption among the poor. In other words, the goal to alleviate poverty by stimulating the purchases of essentials by the poor, and to invigorate the markets by encouraging the purchases of non-essential domestically-produced goods by the middle class, has had limited success. Meanwhile, funding the program has become a strain, and the government looks for creative solutions such as a “solidarity” levy on the super rich, without stirring a political storm.
On the supply side of the economy, the program has had unintended beneficiaries, as the sellers of imported and luxury items (such as wine) have reported a rise in demand. On the other hand, the program has not managed to keep SMEs from shutting down. There is little evidence that the fiscal stimulus has spurred job growth, or assisted the most-needy workers with filling some of the emerging vacancies. The near-universal cash transfers amount to a half-hearted attempt to supplement the weak social protection system.
The South Korean government has also so far shied away from economic reforms needed to usher in more fluidity, transparency, and healthy competition among firms and workers. Such reforms are long overdue, but are not even in the pipeline for the coming months. As workers vie for the small number of jobs in their pre-assigned narrow market segments, and others are systematically overlooked because they do not fit the industry fold, significant human resources are wasted and discouraged from growing. Cash transfers have a limited power to counter that. The most effective way to reignite growth in the economy is to promote innovation and fresh investment by underutilized firms and workers. As a foundation stone for this effort the government should carry out market-integrating and equalizing structural reforms.
Vladimir Hlasny is an associate professor in the Department of Economics at Ewha Womans University in Seoul.
This piece is an expansion of an earlier article published by the East Asia Forum.