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Release of medium-to-long term outlook on respective agenda based
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Labor and Education

KDI FOCUS

Implications of the Performance Evaluation of the Job Creation Project

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  • Author YUN. Heesuk
  • Date 2016/09/26
  • Series No. KDI FOCUS No. 73, eng.
  • Language English
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SUMMARY □ Industrial restructuring and the advent of a 4th industrial revolution are posing challenges that cannot be resolved by conventional methods. However, despite the increasing significance of Korea’s Job Creation Project, which aims to foster adaptability and improve labor force mobility, practices remain outdated. Indeed, the project requires extensive reform to properly manage external challenges and to protect the individual not corporations, while stimulating the metabolic process within the economy.

- Business entry and exit rate, which remained above 20% until the mid-2000s, have receded to around 10%, and job creation is centered around low-paid and lessskilled occupations, implying a weakening of economic activities.

- The Job Creation Project should replace existing regulation-centered protection methods to encourage more activity, while eliminating concerns over change by protecting labor market dropouts.

- In other words, the project should serve as a substitute for existing regulations while complementing labor reforms.

- Of the target beneficiaries of the employment promotion subsidy, small-sized workplaces with less than five employees account for 54%, but given their constant difficulties of manpower shortages and poor employment conditions, it is almost meaningless to give them a subsidy in the name of employment promotion.

- Practices of supporting incompetent companies with various incentives for fear of fewer jobs is no different that intentionally prolonging their survival and thus discriminating potential entrants and hindering the economic metabolic process.

- Non-regular workers account for 32.5% of all employees, but only 1.8% were given training program provided by employers.

- Market function has not been fully active due to the tight control of quantity and pricing of training programs and the shortage of fiscal support targets. Consequently, of those who completed vocational training for the unemployed, only one of ten is hired for the job he/she was trained for.

- The strategy of predicting market trends, planning manpower supply and demand and selecting targets of government support might have worked effectively in the past, but it does not fit in with the present which demands individual creativity and voluntary conversion.

- The lack of a unified performance management system is the main reason behind persisting job creation projects that are scattered broadly across ministries. Besides, project performance indicators such as the employment rate and wage are relatively easy to compile but still, a unified system for comparison has not been established.

- Of 196 projects handled by 25 ministries, only 64% submitted basic statistics on users within the deadline of fact-finding survey, implying poor management.

- Instead of controlling the quantity and fees of vocational training programs and the contents of employment services, the government needs to acknowledge private service providers, while compiling full performance data and linking them to financial upport.

- A wide range of incentives must be made available to the disadvantaged who cannot gain employment without government support, and projects that merely support business because they are small or lack funds must be downsized.
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.

[Interview]
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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