Economic Survey of Korea 2008: Sustaining growth by reforming the labour market and improving the education system


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The following OECD assessment and recommendations summarise chapter 5 of the Economic Survey of Korea published on 17 December 2008.



Potential growth also depends on reducing labour market dualism…

The sharp increase in the share of non-regular workers, who now account for more than one-third of employees, has negative consequences for both growth and equity. Such dualism is largely explained by the rising share of temporary workers, from 17% of employees in 2001 to 26% in August 2008, almost double the OECD average. Not surprisingly, temporary workers receive less firm-based training than permanent workers, thus slowing human capital formation and productivity growth. Lower wage costs encourage firms to hire non-regular workers, who earn 30% less per hour than regular workers, with productivity differences explaining only part of the gap. The cost advantage is magnified by the low coverage of non-regular workers by the social insurance system. While three-quarters of regular workers were covered by national health and pension insurance in 2007 in their workplace, the share was only around 40% for non-regular workers. Firms also hire non-regular workers to achieve greater employment flexibility, given the relatively strict employment protection for regular workers. Dualism thus creates equity concerns as a significant portion of the labour force works in precarious jobs at relatively low wages and receives less protection from social insurance.

International comparison of temporary employment
As per cent of total employment in 2007¹

1. Reference year is 2004 in Mexico, 2005 in the United States and 2006 in Australia.
Source: OECD Employment Outlook Database.


…by liberalising employment protection for regular workers and extending the coverage of the social insurance system…

Reducing dualism requires weakening the incentives that encourage firms to hire non-regular workers. One priority is to liberalise employment protection for regular workers so that firms can achieve the necessary flexibility without depending as much on non-regular workers. A second priority is to increase the coverage of non-regular workers by the social safety net, thus improving equity and narrowing the gap in labour costs. The government has introduced reforms to harmonise the collection practices of the four social insurance systems, but the key to greater coverage is to create a unified collection agency. To reduce the use of non-regular workers, a new law, which is being gradually phased in since mid 2007, prohibits “unjustifiable discrimination” against them and states that workers with fixed-term contracts are considered to be regular employees after two years. However, there is a risk that this law will decrease total employment. In fact, the number of non-regular workers has declined since 2007. The law should be closely monitored and revised as necessary as its full impact becomes apparent.   

… and increasing labour inputs by boosting the labour force participation rate of women…

Raising the female participation rate would help sustain output growth in the face of a declining working-age population. Although it is on the rise, the rate for women in the 25 to 54 age group is still the third lowest in the OECD area. The measures recommended above to reduce labour market dualism, as well as to move away from seniority-based wages, would support female employment by creating better job opportunities for women who interrupt their careers for family responsibilities. Greater availability of high-quality childcare would help as well. This would require phasing out price controls that discourage private-sector suppliers. Lengthening maternity leave and ensuring that eligible persons are able to take such leave, as well as parental leave, is also important. Another factor discouraging female employment is the extremely long working hours in Korea, which make it difficult to combine employment with family responsibilities. Encouraging the development of family-friendly workplaces would boost female employment and the fertility rate, which currently stands at only 1.3 children per women.

International comparison of female labour force participation rates
Rates in 2007 for women aged 25 to 54

Source: OECD (2008), Employment Outlook 2008, OECD, Paris.


…and youth…

The employment rate of youth between the ages of 15 to 29 has been falling and is well below the OECD average. In addition, the proportion of youth who are neither in education nor training is relatively high, especially for those with higher education, who account for the majority of youth. Labour market dualism is again a factor, as it reduces wages below the reservation wage of many youth. In addition, active labour market policies should focus on facilitating the school-to-work transition, while avoiding employment subsidies, which tend to have high deadweight costs.

International comparison of employment and participation rates for young people
As a per cent of youth aged 15-29 by gender in 2007¹


1. For France and Germany, data are available only for 2006.
2. Employed as a percentage of the population in the age group.
3. Labour force as a percentage of the population in the age group.
Source: OECD Employment Outlook Database.


… in part by upgrading the education system

Perhaps the key problem for youth employment is the degree of mismatch between skills provided in tertiary education and those required in the labour market. Around 30% of graduates of tertiary education do not find jobs in their field of study. It is important to increase links between universities and companies and to strengthen competition between educational institutions through regulatory reform and more transparency about their performance. In addition, public support for tertiary education could be increased from its exceptionally low level. However, the scope for additional outlays is limited by the fact that education spending is already the third highest OECD-wide, even without including the 2% of GDP spent on private tutoring institutes (hakwon). Increasing the quality of education at all levels would lower the demand for such institutes, thus easing the pressure on students and the financial burden on families. Allowing universities more autonomy in the student selection process would also reduce the importance of the standardised exams that make private tutoring useful.

It is also essential to promote the employment of older workers

Finally, it is important to raise the age at which employees leave firms, which is typically around 55, well before the pension eligibility age. Early retirement reflects the seniority-based wage system, which makes older workers expensive for firms. Abolishing mandatory retirement would help to flatten the wage-seniority profile, given that firms accept seniority-based wages on the condition that they can force older workers to leave, and thereby extend the length of employment. In addition, it is important to phase out the mandatory lump-sum retirement allowance, which increases the cost of keeping older workers. The government launched a company pension system in 2005, but less than 9% of firms have adopted it thus far. One stumbling block is that employers and employees must agree on whether to introduce a defined-benefit or a defined-contribution scheme. The generous tax treatment of the retirement allowance system should be reformed to accelerate its phasing out and encourage the introduction of defined-contribution schemes, which would also enhance labour market mobility.


How to obtain this publication                                                                                   

The Policy Brief (pdf format) can be downloaded in English. A Korean version is also available (pdf format). It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Korea 2008 is available from:


Additional information                                                                                                  


For further information please contact the Korea Desk at the OECD Economics Department at  The OECD Secretariat's report was prepared by Randall S. Jones and Masahiko Tsutsumi under the supervision of Vincent Koen. Research assistance was provided by Lutécia Daniel.




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