Labor market flexibility

As pointed out by Grubb, Lee and Tergeist (2007), the Korean labor market is suffering from aduality between the core and the periphery, with the former showing high inflexibility and the latter high insecurity (Table 6-6).

Table 6-6. Flexibility and security in the Korean labor market

At the core is agroup of workers who mostly have regular jobs in the manufacturing or public sector or in large corporations. They often have labor unions to represent them, enjoy ahigh level of employment protection, are covered under the social safety net (public pensions, unemployment benefits, etc.), and participate in active labor market policies (training, etc.). Numerical and functional flexibility is very low as firms have difficulty in adjusting labor inputs in response to changing demands. ¹⁾ The core is structured around the unionized segment of the labor market, which is small in Korea compared to those in other countries (Figure 6-33).

Figure 6-33. Labor union participation rate in OECD countries (2008)

In contrast, the periphery of the Korean labor market is populated by the workers who usually do not have regular jobs, work in the service sector and/or in SMEs, enjoy avery low level of employment protection, and are excluded from the coverage of social safety net and active labor market policies (ALMPs). Their job security is very low and functional flexibility is irrelevant to them.

In international comparisons of labor market flexibility, Korea shows an average performance. For example, in acomparison of 33 OECD countries, Korea ranked 21st in the dismissal of permanent workers, 19th in the regulations on temporary workers, and 6th in collective dismissal, taking the 16th place in the overall ranking (Table 6-7).

Table 6-7. OECD employment protection index (2008)

Such comparisons, however, should be made with care. First of all, as the OECD index is focused on regulations concerning dismissal and temporary employment, it does not take into account wage or functional rigidities within the internal labor market of large corporations that result from aseniority-based pay scheme, labor union interference in managerial decisions (such as the deployment of workers), and other inappropriate practices.

On the other hand, the statutory employment protection loses much of its meaning when applied to the periphery of the labor market where market forces take precedence over laws and regulations that lack an effective enforcement mechanism. The overall labor market flexibility can therefore be substantially higher than implied by the OECD index.

The rigidity seems concentrated at the core that has very militant labor unions and is protected from competition by their monopolistic position in the product market.

Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.

NOTE

¹⁾ Broadly speaking, numerical flexibility refers to the ability of a firm to adjust its quantity or timing of labor inputs to accommodate changes in demand, whereas functional flexibility relates to the ability of a firm to deploy workers between tasks as demand for different types of labor changes.

References

· Grubb, David, Jae-Kap Lee and Peter Tergeist, “Addressing Labor Market Duality in Korea,”OECD Social, Development and Migration Working Papers, No. 61, 2007.