Asia Economy
South Korea: A rich/ poor country - grim model for future world of irregular work?
By Michael Hennigan, Finfacts founder and editor
Jul 11, 2014 - 7:38 AM

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South Korea and Japan lead the developed world for the ratio of their workforces in low-paid irregular/ temporary work and they already provide a grim scenario of a future world of irregular work where countries are both rich and poor.

Japan has up to 40% of its workforce in irregular work with few rights and earning less than the Irish minimum wage of  €8.65 ($11.80) in an expensive country.

The Japanese government has proposed removing the three-year limit on dispatching temporary workers to the same job, thus ensuring that numbers that traditionally have little job security and less pay than regular employees will grow - - a toxic development in an ageing society when young people cannot afford to have children.

In April Toyota, which has many temporary workers, raised its monthly base pay for workers by 2,700 yen ($26.17) on average, or about 0.8% of total monthly pay, marking the first increase in base wages in six years but falling short of its union's demand for a 4,000 yen increase.

It was the biggest pay rise in 21 years.

In April 2011, a month after the devastating earthquake and tsunami in Japan with the resultant nuclear fallout at the Fukushima Daiichi plant, The New York Times reported that of roughly 83,000 workers at Japan’s 18 commercial nuclear power plants, 88% were contract workers in the year that ended in March 2010, the nuclear agency said. At the Fukushima Daiichi plant 89% of the 10,303 workers during that period were contractors. In the year before the nuclear disaster, the contractors were exposed to levels of radiation about 16 times as high as the levels faced by direct employees of Tokyo Electric, according to Japan's Nuclear and Industrial Safety Agency.

Finfacts 2011: Japan's 'Homer Simpson' returns to take charge of nuclear crisis

Finfacts 2013: Japan's Labour Market: Lifers, temps and banishment rooms

The Asia Sentinel says that before the financial crisis of 1997-98 in East Asia, there was no word in the Korean language for “irregular worker” - - workers with no guarantees of job security or promotion, working on short-term contracts.

Permanent jobs were the norm until the tumult of the late 1990s (invariably referred to as “the IMF crisis” by South Koreans) set in motion changes in the nature of employment that are now jeopardizing the country’s middle class and social cohesion.

The Sentinel says that prior to the crisis, South Korean workers were organized in militant trade unions. Under the Trade Union Law, only one union was allowed per workplace and laying off workers was almost impossible. In the crisis’s wake, a tripartite agreement was reached between the IMF, trade unions and debt-ridden businesses to amend labor laws to make hiring and firing more responsive to changes in the market. The chaebol, Korea’s giant conglomerates, adopted “worker flexibility” as a mantra.

The Hankyoreh, a South Korean newspaper, wrote in May this year that in the wake of the Sewol ferry tragedy when at least 292 people died, including more than 200 high school students, it was learned that a significant number of the ferry’s crewmembers, as well as the captain, were contract workers, once more illuminating the excessive use of irregular workers in South Korean society.

The newspaper said that an analysis of data provided by Statistics Korea showed that 45.9%, or 8.37m, of South Korea’s total 18.24m workers are irregular, including short-term, hourly, dispatch, contract, special employment, and temporary workers at small businesses. "In fact, this figure has dropped from its peak in March 2007, at the end of former president Roh Moo-hyun’s term in office, when 55.8% of South Korea’s workers were irregular."

It added: "The lives of these workers, who prop up half of the South Korean economy, are vulnerable...they earn only about 49.7% of the wages of regular workers."

South Korea's remarkable rise

Beginning in the 1960s, South Korea has set economic-development records with a growth formula that focused on heavy-industry and manufactured exports. GDP (gross domestic product) has tripled in just the past 20 years, and South Korea became the first nation to go from being a recipient of aid from the Organisation for Economic Cooperation and Development (OECD) to being a member of its donor committee. South Korea is the leading supplier of LCD screens, memory chips, and mobile phones and is the world’s number-five carmaker.

However, despite the stunning economic success of state-guided capitalism focused on export-led manufacturing, the economic miracle is no longer working for many Koreans. While GDP has  jumped, real wages have grown by less than half the rate. More than half middle-income households are paying out more than they earn. Divorce rates have jumped; fertility rates have fallen to the fourth-lowest among advanced nations and the suicide rate is the highest of all 34 mainly developed countries that are members of the OECD. The government think-tank said that South Korea has plenty of room to boost welfare spending from the current (2013) level of 9.6% of GDP - - much lower than the OECD average of 22.1% - - to reduce income inequality and poverty.

The nation’s GDP growth is increasingly decoupled from the lives of its middle- income citizens. The number of middle-income households - - earning 50 to 150% of median income - - has fallen from 75.4% of the population to 67.5% since 1990, and more than half of middle-income households are cashflow constrained when the full costs of housing payments are counted. The squeeze contributes to trends that could affect future growth, including a plummeting personal-saving rate and one of the world’s lowest fertility rates. Beyond Korean style: Shaping a new growth formula, [2MB] a 2013 report from the McKinsey Global Institute (MGI), explored the causes of these economic challenges and makes specific recommendations for combatting them. Among the report’s findings:

  • South Korea’s largest industrial corporations have continued to grow rapidly, but mostly in new global markets; their domestic employment has fallen by 2% annually for 15 years, leaving job creation to small and medium-sized enterprises (SMEs) and Korea’s underdeveloped service sector, where wages are just 55% of manufacturing pay.
  • Spending on housing and education have soared (see chart above). The median price for a home in South Korea is 7.7 times the median annual income - - more than twice the US multiple. South Koreans also pay much more to finance their home purchases because low loan-to-value limits often force homebuyers to seek supplemental, high-interest loans. Spending on private education is extremely high as well (around 9% of GDP) because South Koreans believe admission to a top university is the only path to success for their children.

But South Korea can take specific steps to strengthen its middle-income households, increase domestic demand, and build a more balanced economy. Namely:

  • Reduce housing payments. By switching to mortgages with looser loan-to-value limits, MGI estimates that South Korean homeowners could save $8bn annually in payments. South Korea can also encourage more investment in rental housing and can consider shared ownership programs.
  • End the education “arms race.” Even though Koreans continue to sacrifice to prepare their children for university, unemployment rates are higher for South Korean college graduates than for graduates of vocational high schools. And when costs are factored in, the net present value of the lifetime earnings of a privately educated college graduate is lower than those for a graduate of vocational high school. To help parents consider alternatives to a university education, MGI suggests higher investment in vocational education and expansion of the Meister school program, in which employers collaborate with schools to create job-relevant curricula. A dual-track system would enable students to continue on to college degrees as they progress in their careers.
  • Build up services and SMEs. South Korean services are dominated by low value-added enterprises, particularly local services (for example, restaurants, real-estate sales, transportation). South Korea can build on the success of sectors that are already globally competitive, such as construction engineering, and help expand sectors such as health care, tourism, and financial services.
  • Create an entrepreneurial SME sector. Most SMEs are very small, and few mid-sized enterprises become large companies. Structural problems are partly to blame, but South Korea also lacks an entrepreneurial tradition and offers limited support for innovative risk-takers. South Korea can work to expand access to capital, increase intellectual-property protections, teach entrepreneurism, and update bankruptcy regulations. These initiatives will take a concerted effort by policy makers, business leaders, and South Korean citizens. But the result could be a new growth formula that complements the current model, reverses the erosion of middle-income households, and builds a sustainable future for all South Koreans.

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