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KDI FOCUS South Korea Needs More Big Company Jobs February 27, 2024

KDI FOCUS

South Korea Needs More Big Company Jobs

February 27, 2024
  • KDI
    Youngsun Koh
|   Related information   |
Salary, bonuses, welfare, corporate culture, facilities, equipment, budget, atmosphere, temperature, humidity, etc...
It's a well-known fact that working for a large corporation comes with its benefits.
However, compared to other advanced countries, the proportion of jobs in large corporations in South Korea falls short.
How can we increase the number of jobs in large corporations?

 Author : Youngsun Koh, Senior Fellow at KDI


South Korea stands out among OECD countries for its lowest proportion of jobs in large enterprises. Good jobs, often synonymous with employment opportunities in large enterprises, are in short supply. This shortage prompts various societal issues: the overheating of college admission competition, a decline in social mobility, decreased birth rates, stagnating employment rates for women, and increased concentration in the capital area. There is a pressing need to identify and address policy barriers to company scale-up.


Ⅰ. Current Job Distribution by Establishment Size

In South Korea, young adults show a distinct preference for employment in large corporations over Small and Medium-sized Enterprises (SMEs). A 2023 Korea Chamber of Commerce & Industry (KCCI) survey reveals evident inclinations: just 16% of college students aspire to work for SMEs, whereas 64% favor large corporations, and 44% prefer roles within the public sector. However, such lopsided preference contrasts sharply with the actual job market landscape, where SMEs are the predominant employers. Table 1 shows the distribution of employment by business establishment size in 2021, indicating that while only 14% of the entire workforce is employed by establishments with 300 or more workers, representing 18% of all wage earners, a substantial portion of the workforce, particularly 46% of all employees and 31% of wage earners, find employment in businesses with fewer than 10 employees.

Despite the stronger employment preference among young adults in large enterprises, the majority of available job opportunities are actually in smaller businesses.

Korea’s job distribution is notably skewed towards SMEs on a global scale. This trend stands out when compared with the Organisation for Economic Co-operation and Development (OECD), which sets the threshold between SMEs and large enterprises at 250 employees. As shown in Figure 1, Korea has the lowest share of such businesses in the labor market among OECD member countries. Firms of this scale account for only 14% of total employment in Korea, a substantial contrast to the figures observed in Germany (41%), Sweden (44%), the UK (46%), France (47%), and the US (58%).

Over time, the employment landscape in Korea shows that the job share from larger firms has seen limited expansion. Figure 2, which charts the job distribution by establishment size from 1993 to 2020, highlights a contraction in employment within large firms around the 1998 Asian Financial Crisis. Although there was a recovery in the number of jobs, subsequent growth remained stagnant, with no significant upward trajectory observed.

Working conditions significantly vary depending on establishment size. Figure 3 illustrates wage disparities correlated with firm size, using firms with 300+ employees as the basis for comparison. In 2022, individuals at firms staffed with 5~9 workers earned only 54% of what their counterparts at 300+ firms did, while those in 100~299 firms earned 71% of the larger firms’ wages. This wage gap has seen steady growth since the early 1990s, and despite narrowing slightly after 2015, remains significantly high. However, as seen in Table 1, individuals at these larger establishments represent only a minority, or 18%, of the workforce, underscoring the pronounced wage inequality across different business sizes within the Korean labor market.

Other than lower wages, workers in SMEs encounter poorer working conditions. Consider, for instance, the case of maternity leave—both prenatal and postnatal—and childcare. The Labor Standards Act (Article 74(1)) and the Employment Opportunity and Work-Family Balance Assistance Act (Article 19(1)) stipulate legal obligations on employers to provide such leaves and time-offs. Even with legal safeguards in place, in practice, it is chiefly workers at larger firms who benefit from these provisions. Workers at smaller firms often face considerable barriers in accessing these statutory guarantees.

Table 2 reveals that in establishments with fewer than 30 employees, approximately 30% reported that all or some individuals requiring maternity leave were unable to utilize it, and this issue extends to 50% for childcare leave. Given that nearly half of all wage earners are employed in firms of this size, as shown in Table 1, a majority of these workers face challenges in accessing maternity protection benefits.

Larger establishments tend to offer higher wages and better working conditions.


Ⅱ. Shortage of Good Jobs and Intensified Competition for University Admissions  

The shortage of job openings in large enterprises triggers additional problems, and the fierce competition for admissions into top universities is a prime example. Despite extensive efforts to reform the admissions system, the heated pursuit of prestigious university slots continues unabated. It suggests that the crux of this issue might not lie within the admissions process itself but rather in the scarcity of positions at large firms.

Figure 4 presents wage premiums across the hierarchy of university tiers by categorizing four-year universities into five quintiles based on scores from the College Scholastic Ability Test (CSAT), Korea’s university entrance exam. This study calculates average wages for graduates from each quintile by age, along with wage gaps by comparing the bottom (first) quintile against the higher ones. The analysis shows that the wage gap between the top and bottom quintiles for individuals aged 40~44 can be as much as 50%. Such a marked wage differential explains the overheated competition for spots in elite universities, as top-tier university graduates not only secure higher wages but also benefit from more stable employment conditions, better access to large corporations, and longer career tenures.

 

Such intense race for university spots breeds a fertile ground for private education. The Korean government’s exhaustive efforts to limit its growth were met with no success, and this phenomenon is likely rooted in the shortage of desirable jobs. In addition, this hypercompetition muzzles social mobility, as wealthier parents tend to invest heavily in private education, often leading to higher academic outcomes for their children (Min, 2022). Essentially, this dynamic enables the transmission of wealth from one generation to the next through the conduit of education.

The marked wage gap between graduates of top and bottom universities intensifies competition for admission to top-ranking schools.


Ⅲ. Shortage of Good Jobs, Low Birth Rate, and Low Female Employment Rate

The low birth rate, a critical concern in Korean society, is also intricately tied to the limited jobs in large enterprises. As previously shown in Table 2, employees in SMEs face considerable challenges in utilizing maternity protective programs. The divide between smaller and larger firms stresses that, despite supportive policies and regulations in place, their enforcement is fraught with stumbling blocks in the field. This implies the importance of promoting a climate for female workers to enhance access to these maternity benefits onsite by expanding job openings at large corporations.

A survey by the Ministry of Gender Equality and Family shows that, on the whole, job quality tends to decrease for women reentering the workforce after a career break (Table 3). Specifically, there is a considerable shift away from regular employment by 36.7%p, alongside increases of 9.7%p in temporary positions and 16.4%p in self-employment without employees. This data suggests that women face considerable challenges in finding quality employment when reentering, leading many to either postpone childbirth to remain in the workforce or exit the job market altogether after having children. Consequently, the scarcity of desirable job opportunities is a probable determinant contributing to both low childbirth rates and the underrepresentation of women in the workforce.

In addition, independent of childbirth and childcare, subpar jobs themselves seem to be driving women out of the workforce while deterring their return. According to the Seoul Foundation of Women & Family (2023, Table III-26), the main reasons for women leaving their jobs include pregnancy (21.3%), childbirth (19.8%), and childcare (13.9%), which jointly accounts for 55.0% of the departures. However, unsatisfactory working conditions account for another 26.1% of cases. The impact of employment circumstances is especially pronounced among women aged 25~29 (77.5%) and 30~34 (43.4%), suggesting that poor working conditions contribute to young women's decision to stop working.

The scarcity of good jobs results in both low utilization of maternity protection programs and female underemployment.


Ⅳ. Shortage of Good Jobs and Balanced National Development 

Regional development imbalance, particularly the concentrated growth around the capital, presents another pressing concern in Korea. This concentration is thought to stem from a relative scarcity of large-firm employment opportunities outside the capital area. To examine the potential link between the size of firms and labor productivity at the city and province levels, the study undertakes the following regression analysis:

(1) L P ijt = β1SEijt + β2LEijt + γit + δjt + ijt .


Here, LP represents labor productivity (per worker in constant prices in 2015, in million won), SE is the employment share (%) of small firms with fewer than 20 employees, LE is the employment share (%) of large firms with 300 or more employees, γ represents year fixed effects by city/province, and δ represents year fixed effects by industry. The subscripts i refers to the city/province, i to the industry, and t to the year. This study is interested in β1 and β2, where if a larger firm size correlates with higher labor productivity, then a relationship of β1 < 0 and β2 > 0 is expected. That is, the higher the employment share of small businesses (SE ), the lower the labor productivity (LP ), and the higher the employment share of large businesses (LE ), the higher the labor productivity (LP ).

Table 4 presents the regression analysis outcomes for formula (1). Columns (1)~(3) display results for 16 industries, whereas columns (4)~(6) focus on 10 service industries. Given that service jobs constitute 70% of all employment, a separate regression analysis for the service industry was conducted. The findings align with the anticipated β1< 0 and β2> 0 relationship, indicating that larger firms tend to have higher labor productivity. Specifically, column (3) reveals that a 1%p decrease in SE corresponds to an annual increase in LP of 0.84 million won, while a 1%p increase in LE results in a 0.41 million won rise in LP . For instance, if LE decreases by 10%p while LE increases by 5%p, and the employment share of medium firms (20~299 employees) also increases by 5%p, then LP would increase by 10.44 million won.

The findings suggest that, provided that larger firms tend to have higher labor productivity even at the city/province level, regions with a greater number of large enterprises are likely to enjoy higher wage levels and experience less population outflow to the capital area. The regression analysis in Table 4 indicates that the current trend of population concentration in the capital area can be attributed to the relative scarcity of high-productivity and large-scale enterprises in non-capital regions.

Even at the city and province levels, larger establishments are observed to have higher labor productivity.


Ⅴ. Policy Implications

The size of business establishments is influenced by a myriad of factors. For example, the technological characteristics of specific industries play a significant role. Industries like manufacturing, construction, and information and communication technology (ICT) naturally require substantial capital and technological investments, predisposing towards larger operations. In contrast, sectors such as wholesale and retail trade, as well as food and accommodation services, may consist of smaller-sized firms. Managerial expertise is another crucial factor. The availability of skilled management capable of efficiently running large organizations significantly impacts the share of large firms in the economy. Additionally, regional demographics influence establishment size. Densely populated areas, with high demand for goods and services and a robust labor market,
can support larger enterprises, whereas maintaining such enterprises in less populated regions is more challenging.

The advancement of ICT also affects the size of business establishments. As Coase (1937) highlighted, production activities involve transaction costs for participating entities. When these costs are high, firms find it more advantageous to manage production internally within a hierarchical structure, which typically results in scaling up. However, advancements in ICT have shifted this dynamic by reducing transaction costs, thereby encouraging the outsourcing of production activities and consequently leading to scaling down. Additionally, the adoption of automation technologies, such as robots, further contributes to a reduction in the number of employees required, promoting a trend toward scaling down.

While governmental influence on these factors might appear limited, there are substantial opportunities for intervention. Assisting SMEs while imposing regulatory constraints on larger firms could discourage companies from expanding, where retaining SME status is preferred. Moreover, it is necessary for SMEs lagging in productivity to be phased out to allow those with higher productivity to evolve into larger firms, boosting overall industry productivity (Haltiwanger et al., 2013). However, excessive policy support could stifle this dynamic. Furthermore, the relative ease of forming labor unions in larger enterprises might lead them to outsource non-essential operations to subcontractors to avoid workforce expansion. While this approach may mitigate labor union concerns, it could foster hostile and adversarial labor-management relations, posing additional obstacles to growth.

Operating under the premise that job quality improves firm size, the government is tasked with cultivating an ecosystem conducive to business scaling. South Korea is currently implementing a wide array of SME support policies, necessitating a thorough evaluation of their effectiveness. If any of these policies inadvertently hinder business scaling, they require revisions for improvement. Likewise, policy measures aimed at checking the economic powers of large corporations, including the SME-suitable Industry Designation Scheme and Restrictions on Operating Hours for Large Retailers, need reassessment in this light. At the same time, drawing upon the lessons learned from advanced economies, the labor relations system should be reformed and supplemented to promote productivity and reasonable practices. In undertaking these initiatives, local governments should collaborate with the central government to the extent possible.

The implications of these initiatives will be far-reaching across society. Tackling the intricate challenges of reducing hyper-competitive university admissions, advancing social mobility, boosting female employment and birth rates, and promoting equitable development beyond the capital region requires more than isolated policy efforts. Policymakers and the broader public need to understand that scaling up businesses is essential for driving widespread improvements on all these fronts.

Identifying and addressing policy barriers that impede company scaleup through targeted policy improvements is a necessary course of action.

ReferencesBulow, Jeremy I. and Lawrence H. Summers, “A Theory of Dual Labor Market with Application to Industrial Policy, Discrimination, and Keynesian Unemployment,” Journal of Labor Economics, Vol. 4, No. 3, Part 1, 1986, pp.376~413.
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Haltiwanger, John, Ron S. Jarmin, and Javier Miranda, “Who Creates Jobs? Small versus Large versus Young,” Review of Economics and Statistics, Vol. 95, No. 2, 2013, pp.347~361. 
Koh, Youngsun, “Wage Inequality: How and Why it has Changed over the Decades,” KDI Policy Forum, No. 274, 2019.
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CONTENTS
  • Ⅰ. Current Job Distribution by Establishment Size

    Ⅱ. Shortage of Good Jobs and Intensified Competition for University Admissions

    Ⅲ. Shortage of Good Jobs, Low Birth Rate, and Low Female Employment Rate

    Ⅳ. Shortage of Good Jobs and Balanced National Development

    Ⅴ. Policy Implications
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