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Efficiency of the Labor Market Allocation of Human Resources

Kim Dae Il 2015/05/11
Efficiency of the Labor Market Allocation of Human Resources
Kim Dae Il, Fellow at KDI

Summary and Implications

■ Strong employment protection for regular employment is believed to be a major contributing factor to the gradual decrease in the effectiveness of the human resources allocation mechanism in the Korean labor market.

○ An increase in productivity does not lead to job creation but increases the wage levels.

○ Higher adjustment costs arising from strong employment protection contribute to concentrating labor allocations on temporary contracts; and it is evident that this phenomenon leads to the greater use of capital input instead of increasing the labor stock.

■ Such labor market rigidity hinders the efficient use of human resources in our society, thus it is likely that labor market rigidity can be a growth inhibitor while also exacerbating dichotomization.

○ The smooth shift of workers from a relatively low-productivity industry to a high-productivity industry will ensure the efficient use of limited labor resources, but it is also likely to ease social issues such as wage inequality.

■ Therefore, both a reduction of employment protection for regular workers and the implementation of policies to minimize any discrimination against non-regular workers are required to ensure more efficient allocation of labor resources and reduce labor market dualism.

○ The key element for labor market flexibility lies in reducing employment protection for regular positions.

- Considering the current dichotomy between regular and non-regular workers resulting from strong employment protection for regular workers, policies aimed at enhancing labor flexibility solely through the deregulation of the use of non-regular workers will likely to provoke serious social conflict.

○ Under the premise that employment protection for regular workers is relaxed, minimizing discrimination against non-regular workers while implementing policies to extend the labor supply will serve as a more sustainable solution for higher efficiency of resource allocation in the labor market and greater social integration.

- If employment protection for regular workers is not reduced, policies aimed at controlling the expansion of non-regular workers such as limiting the length of non-regular job contracts will likely make refusals to renew non-regular workers’ contracts more common.

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