KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR A Study of Efficient Utilization of Aging Workers

South Korea is expected to face a deceleration in its economic growth, mainly due to a significant reduction in its labor force, resulting from an exceptionally low fertility rate and a rapidly aging population. In response, some have proposed bolstering the country’s labor market by encouraging the participation of older individuals to mitigate the labor shortage. The effectiveness of this strategy depends on the extent to which the labor provided by older workers can substitute for the diminishing younger workforce. Despite numerous studies on this subject, there is still no clear consensus on the degree of substitutability between the two age groups. Furthermore, the mechanism determining whether different age groups are substitutes or complements in the labor market has not been extensively explored.

This study investigates the contributions of older workers to production and their substitutability with younger workers by analyzing the tasks performed in their jobs. These tasks provide rich information on the nature of work across various occupations, classified into five categories in this study: analytical, social, service, routine, and manual. This study assesses the intensity with which these tasks in each occupation and calculates a task-age profile to observe how task composition shifts as workers age. The findings reveal that older workers are more likely to engage in occupations with a lower intensity of analytical and social tasks but a higher intensity of routine and manual tasks. Interestingly, the shift in task composition with age is less pronounced among female workers, particularly in social and service tasks.

The study also examines age-related task heterogeneity that emerges when workers switch jobs following a period of unemployment. An event study demonstrates that the impact of unemployment significantly varies with age. Workers who became unemployed before the age of 50 did not show marked changes in the intensity of analytical and social tasks in their subsequent jobs. In fact, early-career unemployment actually increased the intensity of these tasks. Conversely, individuals employed after 50 tended to move jobs with a substantially lower intensity of analytical and social tasks compared to their previous jobs. Such trends suggest that later-career unemployment increases the likelihood of obtaining a job with a significantly different task composition, often lower on the occupational ladder. The event study also reveals a gender disparity: post-50 unemployment did not reduce the intensity of social tasks among female workers.

This study reveals significant task segregation in the South Korean labor market, showing the substitutability between older and younger workers heavily depends on the task composition of various occupations. The key findings suggest that it may be challenging for older workers to replace younger ones in occupations requiring intensive analytical and social tasks. Additionally, the analysis indicates that age-related task segregation often results from significant shifts in task requirements when older workers transition to new jobs. Therefore, mitigating task segregation and enhancing the substitutability between different age groups necessitates strategies to prevent premature retirement and expand employment opportunities for older job seekers.

Summary

Research Monograph KOR Providing Social Protection for Self-Employed Workers

This study examines whether expanding the pool of beneficiaries for unemployment insurance (UI) to the self-employed is a way to ensure better social protection. First, we document the self-employed’s income variability, job security, and job transition paths after a business closedown, also comparing these factors to wage earners. Second, we use model simulations to analyze the effects of mandatory UI for the self-employed on labor market tightness, fiscal soundness, and self-employment rate.

Our comparison of the self-employed and wage-earning employees, based on the Korean Labor and Income Panel Study (KLIPS) and the Survey of Household Finances and Living Conditions (SHFLC), yields the following findings: (1) the self-employed are constantly exposed to fluctuations in business income, which may lead to business failure; (2) there is no substantial difference between the self-employment duration of the self-employed and the employment duration of full-time employees; and (3) a significant number of self-employed individuals choose to start new businesses after their previous businesses close down.

Such results imply that the government may increase the coverage rate of the self-employed by increasing the unemployment benefit level or decreasing the contribution level without harming fiscal soundness. However, establishing an income verification system for the self-employed should proceed or coincide with expanding insurance coverage for self-employed workers to address pertinent concerns, including adverse selection due to lack of income information and moral hazard due to the difficulty of evaluating involuntary business cessation. Moreover, additional assistance is necessary for the self- employed who re-start businesses after closedown.

This study employs a model-based approach to estimate the impact of UI on entrepreneurs. Building on the standard search and matching framework, it incorporates the decision-making processes of entrepreneurs. A model-based approach offers several advantages, enabling analyses of the direct effects of policy changes on the economy and the indirect effects through entrepreneurs’ adjustment to those changes. Our results suggest that extending UI to self- employed entrepreneurs would lead to increased business closures and reduced hiring, causing a slack labor market and higher unemployment. This, in turn, would put pressure on the UI budget, and social welfare would decrease overall. Longer duration of unemployment and reduced government transfers offset increased welfare for former entrepreneurs from receiving UI benefits. However, the study also finds that social welfare can be improved by the government subsidizing UI contributions for entrepreneurs, especially when targeted financial support is provided to low-income entrepreneurs. In that case, UI for entrepreneurs achieves greater social welfare improvement than other social protection systems, such as unemployment assistance.

Summary

Policy Study KOR The Labor Market Impacts of Delayed Mandatory Retirement

This study empirically investigates the impacts of delayed mandatory retirement on the Korean labor market. The minimum mandatory retirement age (MMRA) was set at 60 in 2013 and the new MMRA was implemented stepwise since 2016. The primary interest of this study is how this policy change have affected youth employment.

The second chapter reviews the backgrounds and rationales of delaying retirement in South Korea. The third chapter shows most business establishments complied the new MMRA, but only near or at the onset of the new MMRA. The fourth chapter finds the policy actually increased employment rates near the new MMRA for the affected birth cohorts, using a research design based on cohort discontinuity. The fifth chapter investigates the impact of the increased presence of older workers on youth employment at the establishment level. Youth employment decreased by approximately 0.2 for an additional older worker in the establishment owing to the change in the MMRA.

The last chapter concludes and makes the following policy suggestions. First, the process of delaying retirement must be very gradual in order to mitigate the possible negative consequences, particularly those on youth employment. Second, seniority-based wage schemes need to change. By allowing various modes of delaying retirement such as the introduction of a wage peak system or reemployment, a wage should more closely track the actual productivity of the worker. Finally, it is necessary to provide a more favorable environment for creating jobs that meet the needs of older workers.

Summary

Policy Study KOR Long-Term Effects of Initial Job Placement: Implications for Active Labor Market Programs for Youth

This study investigates the problem of rising youth unemployment in Korea, one of the major social problems in the country. The examination shows that it is unlikely that the problem has been caused by excess supply or deficient demand. Rather, the polarization in labor demand combined with non-market factors is at the root of the current problem. Particularly, the long-term effects of initial job placement play a key role in the social problem. Based on the empirical results on the long-term effects, several points of improvement for active labor market programs (ALMPs) for youth are presented.

Chapter 2 shows both the unemployment rate and the NEET rate among aged 15-29 have sharply increased. Particularly, the duration of landing on one’s first job after graduation has notably prolonged.

Chapter 3 delves into the reasons behind worsening job situation for youth with a review on previous literature. The recent youth unemployment issue cannot be explained simply by excess supply or deficient demand. Rather, polarization in labor demand due to technological changes occurring globally and conglomerate-centered economy in Korea may act unfavorably against youth, as combined with non-market factors such as incomplete school-to-work transition and strong employment protection legislatures.

Chapters 4 and 5 estimates the long-term effects of the duration from graduation to landing on one’s first job and the characteristics of the first job. Empirical results indicate that the duration of school-to-work transition does not have significant effects on later labor market outcomes for high school graduates, but does have a long-term negative impact on earnings for college graduates. On the other hand, earnings at the first job can explain future labor market outcome very well, for all education groups. The reasons for the persistent effect of initial earnings, however, may differ across the groups. For high school graduates, no long-term impact of observed characteristics of their first job other than earnings are observed—therefore, initial wage level itself or some unobserved job characteristics related to the wage level have causal effects on later outcomes. For college graduates, on the contrary, initial firm size and contract type matter for later outcomes, showing that the dual labor market structure, which is centered around firm size and contract type, has particularly large influence for this education group.

Chapter 6 provides an overview of the Korean government’s measures to tackle youth unemployment and makes three main suggestions for improvement based on the empirical findings in the previous chapters.

First, active labor market programs (ALMPs) for youth must be designed and implemented based on the fact that the job characteristics in the beginning phase of a career have persistent effects on later labor market outcomes. Second, ALMPs for youth must recognize that youth group is not homogeneous. This research, in particular, points out that the contents of the ALMPs need to be different by the education level of the targeted group. In the case of high school graduates, raising the minimum quality of jobs, such as increasing initial wage and reducing working hours, is important. For college graduates, employment service and start-up support programs will be relatively more effective, and strengthening ‘flexicurity’ in labor market, which allows another try after some failures in the beginning of one’s career, is the fundamental solution. Third, evaluation and feedback system for each youth employment support program needs to be strengthened. To find the most appropriate forms of the ALMPs, a creative and comprehensive approach is needed based on solid understanding of what youth want. At the same time, it is necessary to design a policy experiment and to construct a long-term micro-data.

From the insights found above, a number of areas of improvement can be pointed out for each type of the ALMPs. First, direct job creation program for youth should reduce its scale unless the economy is under a crisis and narrow the scope of beneficiaries down to anti-discrimination in the labor market. As for the hiring incentives currently managed separately by each ministry, it is desirable to unify them into one program or to integrate management after reviewing its effectiveness. Next, employment service for youth should shorten the duration of the program and concentrate on providing customized information and income support conditional on continuing job-seeking activity. Vocational training programs need to clearly set mid- and long-term policy direction and give preferential support for the firms which work as stepping stone through skills accumulation. Lastly, start-up support programs for youth should strengthen the aim of increasing youth employment level, encourage low-income and female more, and provide more opportunities to former employees of small and medium enterprises.

Summary

Research Monograph KOR Business Growth Dynamism and Youth Jobs

Job creation for the youth population has been a part of the Korean government’s top priority agenda for almost twenty years. Nevertheless, there still does not exist a consistent policy direction nor an agreed-upon diagnosis of the problem. This report takes an empirical approach and analyzes all data sets available to identify the causes of youth employment drop since the 2000s. The employment rate, i.e. the employment to population ratio, has dropped most conspicuously among young men aged between 25 and 29. In comparison, the fall has been more moderate for those in the 30 to 34 age group as well as for young women. On the other hand, the quality of job, including real wages, for young workers have significantly improved during the period. For this reason, this report focuses on young men aged between 25 and 29 and brings to light the rapid drop in their employment rate.

To summarize, the drop mirrors the rise in age at completion of final stage education. The employment rate among young men prior to this stage remains at around 50 percent while hazard model estimation results show that the transition periods from graduation to first-time employment have not become longer as well. Consequently, the overall average employment rate falls. The rise in age at graduation is mainly concentrated in the middle group. More of them attain college education while staying outside the labor market longer. As of 2016, half of all young men have bachelor’s degrees or more.

The result poses two questions. The first is, why do these young men seek higher education when they do not acquire professional positions? And second is based on the observation that continually rising age at graduation means corresponding reduction in the supply of graduates to the year’s job market. The market is different from that for students. In fact, the average age at graduation rose by 0.13 years every year on average during the last fourteen years, maintaining the supply by 13 percent lower than the cohort population size. The effect is much more substantial than that of the population size reduction, which gauges in at just one percent per year. Indeed, a reduced supply of graduates means a reduced number of jobs created for them. So, what has caused the decline in jobs?

Production jobs have decreased rapidly for young male high school graduates. As their selection for jobs narrows, many of them have chosen to acquire additional education. Among college graduates, despite the increase in numbers of graduates, professional jobs and clerical jobs have not increased. In clerical jobs, the total number has decreased, and it becomes harder for the less educated to get clerical positions. The general pattern of job creation for the youth indicates the effects of technological shift. The burden of the shift is borne by the youth population and further, the total number of jobs for them is decreasing. The response has been to acquire additional higher education in order to raise their chances of obtaining the positions. During this process, the supply is reduced, securing an equilibrium under the circumstance.

The trend of clerical jobs in the economy by age and gender groups is very confusing in labor force survey data. This report avails itself of the Employment Insurance System database and shows clearly that clerical job openings, which were on an upward swing until the mid 2000s, have reversed past trends and are on the decline. Clerical jobs serve as a port of entry for the young. In the past, many entered the labor market as clerical workers, obtaining knowledge about the business world and moving onto other occupations or self-employment. Now, clerical workers tend to stay in their positions longer and new openings have decreased.

Business growth dynamism refers to the vigor of job creation and destruction. According to the Census of Establishments panel data, job creation and destruction rates have been on a generally declining trend since the early 2000s. The fall is most evident in the private corporate sector due to declining job creation by startup firms while in the sole proprietorship sector, the fall has been very mild. Firm entries have been active in the early 2000s, in electronics, retailing, and business services, but there has been an overall downward trend ever since. Jobs are created by young firms in their growing stages. As these startups mature, business growth dynamism also stagnates. Since the Census of Establishments does not contain information on individual workers, we use the Employment Insurance System database to find out its effects on youth jobs. Shares of young workers are higher in young firms but the difference with older firms is small and narrowing. Young firms contribute to youth jobs via their active job creation and not by their preference for younger workers.

Summary

Policy Study KOR Effect of Working Time on Labor Productivity: Evidence from Korean Manufacturing Sector

Although the impact of workweek reduction on various labor market outcomes has been discussed by many scholars, surprisingly little effort has been made for understanding how it affects firm productivity. Exploiting variation in timings of workweek reduction across manufacturing establishments in Korea, we estimate the impact of workweek reduction on establishment-level productivity in Korean manufacturing industry. We find tentative but suggestive evidence for a conclusion that workweek reduction improves productivity of the manufacturing establishments.

Summary

KDI FOCUS Promoting Good-Quality Job Creation in the Sector of SMEs

□ Why are low-quality jobs created at SMEs? It is because the large companies hand over labor-intensive production to lower-level companies, causing exponential creation of new businesses amongst the lowest-paying bracket.

- Large firms have transferred a portion of their production process to lower-level companies in order to boost their price competitiveness.

- Because the jobs created at SMEs today are found in low-level companies, such as those with 5-19 employees, the quality of employment of SMEs as a whole is inevitably low.

- The rate of increase in per capita value-added for large firms was made possible by a steep decline in the rate of increase for employment.

- After the Asian Financial Crisis, SMEs began to catch up with large firms in terms of the rate of increase in R&D investment.

- The fact that Korea has excessive number of companies in comparison with other countries implies that Korean companies are generally smaller in scale than those in other countries.

- SMEs that are specialized in terms of key capabilities should establish a new group in which labor is divided on an equal footing.

- Lower-tier companies should be able to form business relationships with multiple high-level companies.

- The most urgent task is eliminating unfair subcontracting transactions.

- Price calculation method must be developed that reflects intangible creative and innovative activity.

- Innovative SMEs must be able to establish collaborative relationships with service firms without going through large businesses.

Summary

KDI Policy Forum The Korean Foreign Worker Admission System

□ The current foreign worker admission system divides workers into the two categories of “professional” and “nonprofessional” workers, and is thus not very successful at resolving labor shortages at varying skill levels.

- If the unskilled worker requires significant job training due to his lack of skills, it might reduce his productivity and generate inefficiencies compared to hiring a worker who already has the required skills.

- The “professional” category includes jobs with widely varying duties and skill levels, thereby making it difficult to implement differentiated policies among them.
- There has been a lack of differentiation by skill level and labor shortage.

□ Admission of nonprofessional foreign workers is subject to an annual quota which is determined based on fragmented data on labor shortage and economic conditions.

- Other indicators that could help assessing the labor market situation as a whole, e.g. employment and wage growth rates, are not being taken into account.

- Admission of foreign workers is linked with labor shortage which is currently assessed primarily based on employer-reported statistics.

□ Reform towards a system that differentiates foreign workers by skill level and determines eligibility based thereon should be of high priority.

- Employment of nonprofessional foreign workers should be strictly based on demand.

- The “professional” category of foreign workers, which currently includes a wide range of highly skilled professionals as well as skilled workers, needs to be divided into subcategories according to occupation. At the same time, priority should be given to those in occupations that are hard to fill in the short-run and the highly skilled.

- To this end, consideration should be given to the establishment of an integrated migration committee that can oversee and coordinate various foreign worker related policies and determine the need for foreign workers based on thorough labor market reviews.

□ Labor market tests should be implemented more widely so as to prevent the deterioration of working conditions of native workers.

- The current admissions system needs to be divided by skill level and labor market tests need to be implemented more rigorously as the crowd-out of native workers may occur as the economy shifts more towards the service industry and as the economically active population currently classified under professional visas becomes more highly educated.

- Labor market tests can be strengthened by requiring employers to indicate on the job advertisement specific working conditions such as wages.

- One way to check whether employers participating in the employment permit system are displacing native workers is to link the foreign worker database and the employment insurance database or to perform verification during regular supervisory visits by government officials.

Summary

Policy Study KOR A Study on a Green Tax System

This study aims to canvass the adoption of carbon tax in other countries and to provide basic research on themes as to its design. Policy implications drawn from foreign cases are as follows. First, the introduction of carbon tax was accompanied by an overall tax reform on energy tax, income tax and corporate tax, among others. Second, along with the adoption of carbon tax, measures of credit provision, cuts on income and corporate taxes and reduction in corporate dividend for social security costs were implemented to promote the effect of double dividends. Third, carbon tax was designed considering the conformity and complementary relation with the emissions trading system. Sectors that are not covered by carbon tax are taxed in overall terms, but necessary adjustments are made to prevent a double burden, and there are some cases where carbon tax is linked to carbon price in order to sustain fairness between carbon and general taxes. Fourth, in theory, carbon tax rates must be equal in all sectors since they are determined by the emissions amount, but like the emissions trading system, concerns over vulnerable sectors and social classes were reflected and hence differential tax rates are allowed. Fifth, carbon tax revenues have been used to develop public goods-oriented clean technologies or to finance low-income classes and SMEs.

Chapter 3 applies a micro-approach to analyzing appropriate tax rates and refund methods. Results find that in the case where carbon tax and refund rates are designed to achieve an exogenous reduction target instead of the principle of maximizing social welfare, tax rates tend to be set higher as targets and refund rates get higher. Not only that, when private costs are smaller than public costs, high tax rates and low refund rates are chosen as the optimal policy. Higher emissions factor produces higher tax rates and lower refund rates. This implies that if the government’s investment in clean technology could contribute to reduce private companies’ emissions factors, this would make it possible to lower tax rates and raise refund rates, thereby serving as a favorable policy alternative to reduce deadweight loss.

This study ponders distortions that occur when government goals and tendency differ across ministries, and finds that even with policy coordination by a neutral third party it may not be possible to choose the optimal alternative.

According to Chapter 4, when the government is under the pressure of mitigating GHG by a certain degree with the aim to reduce carbon emissions, it would be socially optimal to impose equal carbon tax to all goods in the case of a perfectly competitive market and the optimal relative tax structure between products is irrelevant to elasticity. On the other hand, in the case of an imperfectly competitive market, the optimal tax structure that minimizes deadweight loss would be to impose comparatively lower tax on the market with comparatively larger price markup and comparatively higher tax on the market with higher elastic demand and smaller price markup. In the sense of fairness, this type of tax structure can be interpreted to mean that an industry with less competition and larger excess profits is taxed less, whereas an industry with fierce competition and smaller excess profits is taxed more heavily, which could lead to undermining the income distribution structure. This also implies that environmental tax should not be determined based on cost-effectiveness alone.

In many countries, a large part of carbon tax revenues has been added to the general account, but a certain amount of it has been often used to finance environment-related projects. Chapter 5 deals with the merits and demerits of using carbon tax as an ear-marked tax from a theoretical perspective. Under the premise that the decision of raising and using the government’s financial resources is carried out simultaneously, this study set up a model that explicitly reflects the two types of policy conditions―social planning and public choice―and through this it compares ear-marked and general taxation methods, unlike other preceding studies. The analysis reveals that in the case of a transformation from general tax into ear-marked tax, both choice variable and constraints are found to increase. In particular, the increment in the former exceeds that in the latter, thereby making it possible to pursue a socially more desired distribution of resources. Above all, under the policy condition of public choice, in which individual income conditions and preferences are better reflected, there is a directly evident preference for ear-marked tax, and thus it may be concluded that excluding ear-marked tax unilaterally is not recommended.

Summary

Policy Study KOR Foreign Workers and Immigrants: Labor Market Impact and Policy Options

Korea is undergoing a transformation from a traditional migrant- sending country to one that not only sends a large number of students, workers and investors abroad but also attracts foreigners larger in numbers and more varied in type than ever before. This study provides an in-depth analysis on the labor migration system in Korea. The current system can be characterized by its duality, where entry routes for employment are divided into employment in either low-skilled or high-skilled jobs. Each path is distinctly characterized by corresponding restrictions and benefits owing to the entry status, as set down in the respective law. As efforts to attract skilled foreign workers have been unsuccessful in the past, inflow of foreign workers mainly consisted of low-skilled workers entering through the Employment Permit System(EPS).

The key argument in this study is that the current system needs to be reformed in order to better meet labor demands at various skill levels. While the EPS was designed to provide unskilled workers to employers who were otherwise unable to hire domestic workers, survey data shows that a substantial share of foreign workers is working jobs that require at least some skills. This indicates that the current system that supplies low-skilled workers is not able to meet actual labor demands on the market and improvement is required to achieve a more efficient matching. On the other hand, workers under professional employment categories enjoy varying extents of favorable treatment regarding mainly their terms of stay and the possibility for permanent residency, however, many of them are concentrated in English-language teaching jobs and a handful of occupations in the services industry, with few working in high-value occupations. We propose that the current dualized system be revised, to take account of the shortage at varying skill levels. Importantly, labor shortages should be accurately evaluated based on an array of labor market indicators. Decisions to introduce foreign workers should be made after taking into account domestic labor market policies to train and supply domestic workers, and the labor market impact as well as social integration prospects of foreign workers needs to be considered.

In line of the same argument, several measures to improve the labor market test(or other measures with similar goals) are proposed. In the short-run, the labor market test itself can be strengthened by adding requirements as to specify detailed employment conditions and by confirming that market wages are offered, for example. In the long-run, performance of labor market tests are likely to improve with a more effective public employment service. In addition, we also argue for the need to require a labor market test for some workers currently falling in the high-skilled workers category.

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