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Law and Economics


Employment Incentives: Issues and Solutions

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  • Author PARK. Yoonsoo
  • Date 2016/09/26
  • Series No. KDI FOCUS No. 74, eng.
  • Language English
SUMMARY □ As of 2016, 20 employment incentives are in operation in Korea under four ministries with a budget of 2.8 trillion won. However, instead of creating new jobs, these projects mainly aim to maintain and improve existing jobs, unlike most OECD countries. Moreover, the scope of target groups is too broad and conflicts with the core principle of providing selective support to vulnerable job seekers. Therefore, efforts must be made to enhance policy efficiency by placing stronger emphasis on new job creation and support for the vulnerable.

- As of 2016, 20 employment incentives are currently in operation under four ministries with a budget of 2.8 trillion won.

- This paper discusses the effects and limitations of Korea’s employment incentives and intends to suggest a direction for improvement.

- Employment incentives are government- subsidized budgetary projects that aim to increase employment throughout the economy.

- According to the OECD, employment incentives are classified into three types: recruitment incentives, employment maintenance incentives and job rotation and sharing.

- Under normal conditions, recruitment incentives are effective, but at a time of crisis, maintenance incentives and job rotation and sharing projects could serve as effective policy measures.

- The abuse of employment incentives would lead to several side effects, and thus should be used selectively for the vulnerable who are in desperate need of government support.

- Korea’s budget for employment incentives relative to GDP is lower than the OECD average but higher than advanced economies in the West, such as the US, the UK, Germany and France.

- OECD countries have operate employment incentives to complement new hiring, whereas Korea focuses on maintaining and improving existing jobs.

- According to a multiple choice survey conducted on operators of employment incentives regarding the main beneficiaries, ‘no particular target’ was the most common answer.

- Analysing the target selection process used in major employment incentives reveals a lack of selective support for the vulnerable.

- The final goal of employment incentives, must be clarified further, and more support should be given to new jobs.

- One suggestion for selective support is to grant a subsidy to only for those who have engaged in job seeking activities via employment support programs for a certain period of time but have failed to find employment.
KDI VOD Report
Job creation programs for boosting employment have been on the rise in Korea following the 1997 Asian financial crisis.
Currently, 196 programs are in operation under 25 ministries,
with a budget of 16 trillion won in total.

The job creation programs can be classified into six categories:
Unemployment Benefits provide the unemployed with financial assistance for living expenses.
Employment Services provides information to and support to those searching for employment.
Vocational Training and Start-up Support help foster capabilities needed gain reemployment.

For cases these programs do not help much,
the government provides subsidies for employment,
and even directly provides temporary jobs in the public sector.

In early 2016, the government and KDI thoroughly examined the full set of job creation programs for an overhaul.

Vocational training is an important public program which is designed to make the unemployed to have the right skills demanded in the market.
However, because of tight control over training fees and procedures,
the training agencies fail to provide the skill that matches market demand.

As a result,
the program participants have a very low chance of finding a job after completing the training.
Furthermore, among those who find a job, only one out of ten ends up with a job requiring the skills she is actually trained for.
If the problem is not a mismatch nor information shortage, then the government provides subsidies for employment.
The employment subsidies have to be given for a clearly targeted group
because they may generate unintended consequences that subsidized workers crow out non-recipient workers.

Unfortunately, in Korea, about 90% of the subsidies are used to support existing jobs whereas only 10% of the subsidies are used to create new jobs.

Exactly the opposite is true for other OECD countries:
9% of the subsidies go for existing jobs
and 91% go for newly created jobs.

Social security subsidy program is another example of a poorly targeted subsidies.
The program was designed to reduce the coverage gap in social security
using subsidies that match social contributions
of low-wage workers and their employers.

However, the subsidies are paid out to any eligible workers
and employers regardless of the worker’s coverage at the time of subsidy application.
The number of recipients rose quickly reaching 0.9 million in 2015
and the annual fiscal cost amounts to 0.5 trillion won.

To measure the effects of the subsidies on the number of covered workers,
we compare over-time change in the number of covered workers in pilot regions
with that in non-pilot region.

The estimated effect implies that for every 1,000 subsidized workers, the subsidies generated just 15 additional covered workers.

Only 1.5% of the public money used contribute to closing coverage gap
and the rest are used simply as income transfer,
especially for employers in small establishments.

To reduce coverage gap in social security,
the government needs to make serious efforts to integrate tax and social contribution collections under tax collection agencies, instead of pursuing subsidization policy.

In conclusion, most of 16 trillion-won-budget has to be spent for core programs such as employment service and vocational training that can create new employment.

On the other hand, creating temporary jobs in the public sector at normal times
has to be avoided, which may discourage the unemployed to seek a better job in the market.
In addition, employment subsidies and social security subsidies need to be scaled down, which support small marginal firms rather than create employment.
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