Economic Survey of Korea 2005: The labour market: enhancing flexibility and raising participation


The following OECD assessment and recommendations summarise Chapter 5 of the Economic Survey of Korea 2005 published on 5 October 2005.

It is essential to boost labour force participation rates…

Population ageing also makes it crucial to boost the labour force participation rate. If participation were to remain at its current level, the labour force would decline by 15% by mid-century, thus increasing the burden of ageing. One key is to raise the participation rate of prime-age women, which is one of the lowest in the OECD area. Increasing support to families for childcare and extending the length of publicly-financed maternity leave from one to three months would help to increase female participation. It is also important to increase, or at least maintain, the labour force participation of persons over the age of 50, who will account for half of the working-age population by mid-century. One priority is to extend significantly the age of retirement from companies beyond the current practice of around age 50. Most workers leaving firms become self employed workers, primarily in the service sector. Raising the effective retirement age from enterprises would limit the inflow of labour into this low-productivity sector. The key is to transform the seniority-based wage system, which makes older workers relatively expensive, into a remuneration system more closely linked to productivity levels. While wage systems in firms are decided by collective bargaining, the government should voice support in the Tripartite Commission for productivity-linked wage systems and introduce them where appropriate in the public sector. In addition, the authorities should discourage the use of mandatory retirement ages in firms, which would increase pressure to reform the seniority-based wage system.

The size of the labour force over the long-term depends on the participation rates
of women and older pesons

1. The participation rates for men and women remain at their current levels for each age group.
2. Female participation rates reach current male rates in each age goup by 2050.
3. The participation rates converge by 2030 to the maximum value in the OECD for each gender and age group over 50, while the rates for younger workers remain at heir current levels.
4. The participation rates converge by 2030 to the average value in the OECD for each gender and age group over 50, while the rates for younger workers remain ai their current levels.
Source: OECD (2004a), Ageing and employment policies: Korea.

… and implement a well-designed company pension system

Replacing the current retirement allowance system with a company pension system would reduce the incentive of firms to retire older workers, while increasing private savings for retirement. The recently introduced framework for company pensions allows employers and workers in each firm to adopt a defined benefit or defined contribution system. In order to facilitate labour market mobility, company pension systems based on defined contributions should be encouraged, while at the same time phasing out the traditional retirement allowance system.

To reverse the trend towards dualism, it is necessary to expand the coverage of the social safety net for non-regular workers …

The government has increased subsidies to encourage the employment of older workers, as well as other groups. However, given the large deadweight costs of this approach, employment subsidies should be reduced. Instead, the priority should be to bring the effective coverage of the Employment Insurance System, currently at about half of employees, more closely into line with the law, which mandates coverage for 85%. Currently, only one in four unemployed persons receives unemployment benefits. In addition, it is important to expand the coverage of work-based social insurance programmes, including health and pensions, to non-regular workers.

… and increase employment flexibility for regular workers 

Better coverage of non-regular workers by the social safety net would reduce the cost advantage that encourages firms to shift from regular to non-regular workers, who now account for one-third of employees. Perhaps as important, non-regular workers provide greater employment flexibility for firms. Stopping or even reversing the rising share of non-regular workers, while ensuring overall flexibility in the labour market, requires increased employment flexibility for regular workers. The 1998 reform to allow collective dismissals of regular workers for managerial reasons has not created enough flexibility in practice. The Supreme Court decision specifying acceptable criteria for dismissal -- including to prepare against future crises -- needs to be incorporated into the law to ensure enhanced flexibility. The effort to obtain a consensus among the social partners on reform of labour laws and practices has been frustrated by a difficult industrial relations climate. The government should develop a more harmonious environment by implementing the roadmap to resolve remaining industrial relation issues. In sum, a comprehensive package is needed that includes less employment protection for regular workers, greater coverage of non-regular workers by the safety net and an improved industrial relations environment. 

The proportion of workers classified as non-regular risen significantly in Korea
Per cent of wage employees

1. At least 85% of fixed-term wokers had contracts of one year or less
for each year 2001 at 2004.

Source: Ministry of Labour.


Return to the Economic Survey of Korea 2005

A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.

To access the full version of the OECD Economic Survey of Korea:

  • Readers at subscribing institutions can go to SourceOECD, our online library.
  • Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop. 
  • Government officials can go to  OLISnet's Publication Locator.
  • Accredited journalists can go to their password-protected website .

For further information please contact the Korea Desk at the OECD Economics Department at  The OECD Secretariat's report was prepared by Randall Jones, Yokoyama Tadashi and Yongchun Baek under the supervision of Wilhelm Leibfritz.





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