KAEA Policy Forum: Economic Outlook and Reform Challenges for the Korean Economy

• Dongchul Cho, president of KDI, attended the 2024 Allied Social Science Associations (ASSA) Annual Meeting held in San Antonio, Texas on January 7, 2024. Dr. Cho, as a debator at the KAEA Policy Forum,  has provided insight into the problems of the Korean economy and its causes.

  President Cho began his lecture by saying that after IMF intervention, Korea has obsessively focused on financial stability, like a trauma, while complex social issues have been neglected.
  
  He stressed that intertwined various social problems lead to the era of unprecedented low fertility.
   

• “The labor market must be flexible in wages, employment, and work-hours”

  
  AThe labor market flexibility as the first step to solving our deeply entangled social problems, he mentioned. The rigidity of the labor market leads to various problems in conjunction with the Korean culture, where attending a prestigious university is highly regarded.
  
  The labor market in South Korea is characterized by a lack of flexibility. Strict employment regulations make it difficult for employers to hire and fire workers. When firing becomes difficult and expensive, companies are incentivized to be more selective and rigorous in their hiring process. When you hire entry-level employees with minimal experience, companies prioritize graduated from prestigious universities. This could be natural at the entry-level, when other practical skills or proven ability are unsure. 
  
  However, this hiring culture in the lack of labor flexibility can bring negative consequences. Experienced workers from non-prestigious backgrounds may struggle to find new jobs, despite their practical skills due to difficulty in replacing mismatched hires. It raises concerns about talent being overlooked, limited opportunities for some, and ultimately a less efficient and dynamic labor market. If the value of a prestigious university diploma in other countries has a valid period for three years, it will last 30 years in Korea.
  
  The salary system is also rigid. The seniority-based compensation system in Korea, which prioritizes experience above everything else, generates a harmful spiral. High salaries for senior employees, irrespective of productivity, discourage flexible workforce adjustments and limit opportunities for younger workers. This intensifies competition for a secure first job (often in a large company) and admission to a prestigious university, leading to parental sacrifices for their children’s education. This cycle widens the income gap (between large and small companies), discourages families from having children, and ultimately threatens the pension system.
  
  Despite the misconception of a Chaebol-driven economy, Korea has the smallest proportion of large enterprises compared to other OECD countries, with a rate of only 15%. While supporting highly productive companies for job creation seems rational, current policies prioritize protecting small and medium-sized enterprises (SMEs). Unfortunately, SMEs, fearing loss of government support, hesitate to expand their operations or hire more. In the end, growth potential of SMEs is hampered by the very safeguards meant to protect them. It’s a collective “Peter Pan Syndrome”, president Cho said. 
  
  President Cho underlined we must now speed up social reforms. Labor market flexibility can help improve productivity in South Korea’s economy: (1) Promote flexible working hours to enable parent-employees to manage child-rearing and professional duties (2) Extend retirement age through flexible wage and employment options (3) Shift towards a culture that values practical skills or real-world experience over a diploma from an esteemed university (4) Expand opportunities for young people facing obstacles to re-enter the workforce or establish themselves. At last, he recommended abandoning overly SMEs-focused regulations that actually limited their ability to thrive. Policies should now aim to scale up SMEs rather than just protect them. 

Written by:
Bojeon Kim, Research Associate at the President Office,  044-550-4003, kbj@kdi.re.kr