Human Capital Development, Social Protection, and Income Gap in Post-Crisis Korea

Seok-Hyeon Choi, Tae-Jeong Lee, and Pan-Suk Kim Institute for Poverty Alleviation and International Development (IPAID) Yonsei University, Wonju, South Korea

This paper deals with institutions involved with workers’ human capital development and their influences on the Korean labor market, examining changes and developments of the provision of social protection after the Asian financial crisis of 1997 and the subsequent economic restructuring. In general, human capital development and social protection have been improved over the years. However, after the Asian financial crisis, corporate restructuring has been taken place widely so that employment and remuneration in the Korean labor market have become insecure and less predictable, contingent on factors that are under employers’ control. Furthermore, the trend towards insecure employment has been compounded by changes in the external labor market and national systems of employment and unemployment protection, which again serve to exacerbate job security in Korea. In addition, it is likely that human capital development in Korea is regarded as an individual responsibility rather than a responsibility of employers of government. Therefore, there is a constant risk and high possibility that those workers’ efforts for investments in human capital development are not likely to be rewarded. Moreover, even in cases of human capital investment failure, through lay-offs or personal accident, the institutional supports for recovery are very limited in the labor market. In summary, this research shows that the past-crisis social policies in Korea were not adequate for dealing with the new problems raised in the Korean labor market. In this study, we will focus on (1) the state’s neglect of its duties with regards to human capital development and (2) limited or discriminative service on social protection, and we will suggest possible remedies to these problems.

I. Introduction Korea has been going through structural changes since the Asian financial crisis in 1997. The economic growth of Korea has slowed down and the economic growth rate has become more volatile in the post-crisis period. The distribution of income has not only been more concentrated but also been bipolarized. In response to the sluggish growth, higher risks, more concentrated income distribution, and less mobility between the income groups, the government made efforts to improve the situation. Though the social protection policies have been expanded considerably in the postcrisis period, the first priority of the policy has almost always been placed on recovering economic growth rate to the pre-crisis level. In the policy discourse, the concern with efficiency tends to override that of equity. The market liberalization, which was identified with deregulation, was sped up, while the basic frame of social safety net was being installed and expanded.


Perhaps it was the practices in the labor market that went through the most significant change following the crisis. In the name of the flexibility of the labor market, the notion of permanent employment was abolished; the non-regular employment expanded; the incidents of lay-off increased sharply - the wage and the benefits diverged further between the SMEs and the LEs. In consequence, these changes in the labor market left the majority of workers on their own in dealing with the higher risk of the economy. More to the point, the businesses were able to dodge the risks by laying-off or hiring workers as they saw necessary; the workers were not properly protected from those risks. Such a change in the labor market, we believe, is one of the major factors that increased the income gap and decreased the mobility between the income groups. Of course, the government introduced various policy measures to help the less fortunate in the labor market by providing re-training programs and subsidizing in-plant education and training in the post-crisis period. Our argument is that these instruments were unable to shield the workers from the higher risks. In this paper, we focus on the human capital development system in the labor market, which was severely segmented after the crisis. The rest of the paper proceeds as follows. In Chapter Two, we examine how the structure of the economy in general and the labor market in particular has changed after the Asian financial crisis. In Chapter Three, we review the new social protection policies related to the human capital development, which were introduced after the crisis. In Chapter Four, we argue that the social policies discussed in chapter three were not adequate to protect the workers under the new environments. In Chapter Five, we provide policy suggestions for the inclusive growth of Korea in the future. II. Structural Changes in the Labor Market of Post-Crisis Korea 1. Structural Change in the National Economy of Post-Crisis Korea (1) Slower and more volatile growth Economic growth rate has decreased sharply after the Asian financial crisis and it is not likely to come back anywhere close to the pre-crisis growth rate. The average annual growth rate of real GDP over last six decades was exceptionally high, 7.6%. The ten-year annual average growth rate of Korea in the 1950s was only 2.7%. The ten-year average annual growth rate of Korea was dramatically raised in the 1960s to 8.8% and it continued to remain at a level higher than 10% in the 1970s and the 1980s. However, it declined in the 1990s to 7.0% and dived further down to 4.0% in the 2000s. Figure 1: Decade Average of Annual Growth Rates of Real GDP, Korea, 1954~2009 (%)


Source: T. J. Lee (2011)

In addition to the sharp decrease in the growth rate, there is another very important, but less visible, change in the growth performance of Korea after the Asian financial crisis. The economic growth performance has become more volatile after the crisis. The standard deviation of the annual growth rates of real GDP in the period of 1962 to 1996 was 3.55% but had increased to 4.15% in the period of 1997 to 2009. This means that the government as well as the individuals has to take the management of risk a lot more seriously. This aspect of the post-crisis change in the post-crisis Korean economy has not recieved enough attention from either researchers and the policy makers. In summary, after the Asian financial crisis the growth performance of Korea has not only slowed down but also has become more volatile. Post-crisis Korea, therfore, faces a two-fold problem; it has to jump-start the sluggish economy, and at the same time it has to manage the higher risk. Many discussed the former problem but few, if any, paid attention to the latter. Figure 2: Annual Real GDP Growth Rates of Korea (1954~2009) (%)

Source: T. J. Lee (2011) 3

(2) Industrial Concentration and Jobless Growth Figure 3: Sales of Top 30 Conglomerates, Smaller Business Groups, and Independent Businesses (Externally Audited Businesses Only)
Total Sales of Top 30 Groups and Others Total S ales of Independent C o. Total S ales of none top 30 grou Total S ales of top 30 groups






0 1988 1990 1992 1994 1996 year 1998 2000 2002 2004 2006

Source: T. J. Lee (2009)

The sales of the business groups increased much faster than that of the independent businesses. Though the number of businesses affiliated with the top 30 conglomerates is small, their sales were larger than the other types of businesses in the sample until 2001 and they expanded more quickly than the others until 2000. The largest 'chaebol', Hyundai, was divided into five smaller groups; Daewoo, the second largest, went bankrupt in 2000; Samsung, the third largest, was also divided into several smaller groups - as a result, the top 30 conglomerates' sales look smaller than those of the small conglomerates in 2002. However, Hyundai and Samsung affiliated businesses are still helping out each other rather than competing with each other the chart is a bit illusory. Figure 4: End-of-Year Number of Employees of Top 30 Conglomerates, Smaller Business Groups, and Independent Businesses (Externally Audited Businesses Only)


No. of Employees of Top 30 Groups and Others

Employees of Independent Co. Employees of none top 30 groups

Employees of top 30 groups

1.0e+06 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 1988 1990 1992 1994 1996 year 1998 2000 2002 2004 2006

Source: T. J. Lee (2009)

The major message is that the market share of the group affiliated businesses has been increasing throughout the 1990s and the 2000s. But it has increased even more rapidly in the 2000s. This implies that the market concentration has been intensified in the 1990s and the 2000s and more so in the 2000s. Figure: 5 Total Factor Productivity of Top 30 Conglomerates, Smaller Business Groups, and Independent Businesses (Externally Audited Businesses Only)
tfp of Independent Businesses tfp of none top 30 groups 400 350 300 250 200 150 100 50 0 1989 1991 1993 1995 1997 year 1999 2001 2003 2005 tfp of top 30 groups

Source: T. J. Lee (2009)

However, the number of employees in the firms affiliated with the top 30 conglomerates has been stationary throughout the 1990s and the 2000s. That is, the firms that took the larger market share failed to add more jobs to the labor market. This may be related to the phenomenon of growth without job creation in post-crisis Korea. That is, although the economy grew at the rate of 4% on average after the crisis, the job creation fell behind it. The total factor productivity (TFP) of three types of businesses all stagnated in the 1990s and the 2000s. None of them showed a healthy growth in the productivity. But if we compare the

TFP by Affiliation with Groups

level of TFP, that of the top 30 conglomerates is the lowest but most stable among the three. This indicates that the large conglomerates in Korea are not effective in increasing the efficiency of the affiliated businesses but they are effective in diversifying the risks among the affiliated the firms. In sum, the market share of the top 30 large conglomerates have increased but they have not contributed anything to the increase in employment. The total factor productivity of the large conglomerates is not higher than the others. It is not growing faster either. This means that the large business groups of Korea may not be able to play the role of growth locomotive. They are effective in hedging the risks, but only among themselves. 2. Bipolarization of Income Distribution In general, the income distribution was ramarkably equitable in Korea throughout the 1960s to the 2000s. The time series of Gini coefficients shows that the income distribution becmase more equitable in general except for the two sub periods of upward movement, one in the mid 1970s and the other in the period after the crisis. Figure 6: Gini Coefficients of Korea (1964~2008)

Source: T. J. Lee (2011)

In the mid 1970s, the government’s drive for heavy and chemical industrialization led to the concentration of the maket by a few large conglomerates. In the period after the crisis, the set of neoliberal economic policies adopted by the government unfettered the already large conglomerates and the market concentration was intensified. It is ratehr ironical that both the most aggressive interventionist policies and the most liberal market oriented policies in the history of Korean economic development led to the concentration of the market. These two incidents of market concentration coincide with two the sub periods of increasing Gini coefficients. Though the causality is not clear, the market concentration went along with the income concentration.

One of the reasons for the low income inequality in Korea must be the significant increase in the real wage from the early stage of economic development. In the figure below, real wage refers to the ratio of the real compensation of employees in GDP to the total number of employees. The data for compensation of employees was taken from the national income account and the data for number of employees was taken from the labor statistics of Korea, respectively. The annual average growth rate of real wage for Korea during 1964 through 2008 is 6.3%. Figure 7: Growth Rate of Real Wage, Korea (1964~2008) (%)

Source: T. J. Lee (2011) A closer look into the chart reveals that growth rate of real wage was lowered to 5.2% in the mid 1970s and to 4.2% in the period after the crisis. The two slow-downs of the real wage grwoth in the mid 1970s and in the 2000s again coincide with the higher concentration of income distribution. From 1980 through 2008 the average growth rate of the monthly income for both income groups was about the same at 10.9%. Howerver, a closer look reveals that there is a big difference between the periods before and after the crisis(1980 to 1996 vs. 1997 to 2008). Before the crisis, the monthly income of the bottom 10% grew faster than that of the top 10% at the rate of 15.5% and 14.8%, respectively. But this pattern was reversed after the crisis. The monthly income of the bottom 10% grew more slowly than that of the top 10% at the rate of 4.3% and 5.5%, respectively. Figure 8: Average Monthly Income of Urban Households (Korean Won)


Source: T. J. Lee (2011)

The comparison of the top 10% and the bottom 10% of households’ monthly income shows clearly that divergence of income between the two income groups became far more pronounced after the Asian financial crisis. 3. Structural Change in the Labor Market of Post-Crissis Korea (1) Unemployment Rate before and after the Crisis Figure 9: Unemployment Rates of Korea, 1963~2009 (%)

Source: T.J. Lee (2011)

The long term average of unemployment rate of Korea over the period from 1970 to 2009 is 3.6%. The average unemployment rate before the crisis is 3.5%, while that after the crisis is 3.9%. Thus, the level of unemployment does not seem much different between before and after the crisis. However, a closer look into the details reveals that there were significant changes in the structure of unemployment.

Before the crisis, the unemployment rate for high school graduates was lower than that of college graduates. This trend reversed after the crisis. It is not clear why the unemployment rate of high school graduates became relatively higher than that of college graduates. One plausible explanation may be the massive bankruptcy of the small and medium businesses in the post-crisis period, which usually provide jobs for the high school graduates. It needs to be investigated further. If this is the case, the reversal is another consequence of the market concentration. Figure 10: Unemployment Rate by Level of Education, 1982~2010 (%)

Source: Unemployment rate by education,, Korea Statistics Office

The level of unemployment rates of high school and college graduates are not much different from that for the entire labor force. But if we go deeper, there is a significant difference between the overall unemployment rate and those for high school and college graduates. When the unemployment rates of high school graduates and college graduates are further examined by age, the unemployment rates for the younger generation show a different pattern. For the younger generation between the ages of 20 to 29, the unemployment rates of high school graduates and college graduates are about twice as high as the overall unemployment rate. This implies that the unemployment rates of older college graduates and older high school graduates are lower than the overall rate. That is, young college graduates and young high school graduates have a much harder time in finding job than the older generation.

Figure 11: Unemployment Rate of the Younger Generation Between the Ages of 20 and 29 by Level of Education, 2000~2010 (%)


Source: unemployment rate by age and education,, Korea Statistics Office

The difficulty of getting a job is intensified after the crisis for all of the younger generation. Though the overall unemployment rate returned to the pre-crisis level, the unemployment rate of the young generation remains at the higher level: the average unemployment rate was 5.7% before the crisis (1982~1996), while that after the crisis was lifted up the 7.5%. Figure 12: Unemployment Rate of the Young Generation of Age between 20 and 29, 1982~2010 (%)

Source: unemployment rate by age,, Korea Statistics Office

(2) Less Job Security after the Crisis Perhaps, in the context of labor market it may be the job security that has gone through the most pronouncing change after the crisis. During the period from 1993~1997, the average growth rate of the number of dismissed and retired workers per month was 1%. But it increased to 4% in the post-crisis period of 1998 to 2007. Figure 13: Monthly Average Number of Dismissed or Retired Workers, 1993~2007, (Persons)

Source: Number of dismissed and retired workers,, Korea Statistics Office

The average tenure was on the rise before the crisis at the rate of 5% on average in the period between 1992 and 1997. After the crisis, however, it is decreasing at the rate of -1%. It should be noted that the change in the average tenure differs between large businesses and the small businesses. For the large businesses the average tenure is still increasing even after the crisis but only at a lower rate of 1% compared to 4% before the crisis. Figure 14: Average Tenure by Size of Businesses

Source: Tenure by size of businesses,, Korea Statistics Office

On the other hand, for the small businesses, the average tenure is decreasing after the crisis at the rate of -1% whereas it used grow at the rate of 9% before the crisis. There seems to be bipolarization of the job security between the large businesses and the small businesses after the Asian financial crisis.

These reflect the change in the employment practices after the crisis: In the name of increasing the flexibility of labor market, (i) the notion of life-time employment was abandoned; (ii) the employers were allowed to dismiss a large number of workers if they find that it is necessary in order to save the business; and (iii) the workers do not get a stigma even if they change the job seeking for a better deal. (3) Structural Change in Employment after the Crisis In 1998, one year after the Asian financial crisis, the number of wage workers dropped and then increased in the following years. In this process, the composition of the wage workers also changed. In 1996, the fraction of the full time workers in the wage workers was 56.8%. But it decreased down to 47.9% in 2000. Since then, it has slowly recovered reaching 57.1 % in 2009. Briefly in the period of 1999 to 2002, the fraction of temporary workers exceeded the fraction of the full time workers. Figure 15: Composition of Wage Workers (%)

Source: Wage worker,, Korea Statistics Office

This structural change in the employment indicates that the unemployment rate may represent quite different situation of the labor market after the crisis. One should note that even if the unemployment rate returned to the pre-crisis level very quickly after the crisis, the quality of employment was deteriorated. It must be the case that the problem of underemployment became more serious after the crisis.


III. Introduction of Social Protection after the Asian Financial Crisis To raise the skilled labor force, Korean government enacted the “Vocational Training Law” in 1967 (KOL, 1973 #1716). Based on the law, all the vocational training was initiated and directed by the government. The Korean Vocational Training Management Agency (KVTMA) was in charge of the public vocational training facilities. However, Korean government chose not to encourage the modernization of the artisan sector through the standardization of apprenticeship, which required long-term training. Besides a public vocational training centre, there have been other training systems such as in– plant training undertaken by employers directly and authorized training carried out by social welfare or non-profit organization. Among these non-governmental training systems, the most important part was in-plant training undertaken by employers of the large firms or the key industries. In-plant training was carried out for at most six months to get mono-skilled workers through apprenticeship programs. Though the reliable public training system was absent, the businesses hired young unskilled workers and trained them within the firm. As a result the workers were able to acquire the skills while they were working for the firm. Because it was crucial to ensure sufficient supply of skilled and qualified workers, the managers tried to reduce the turnovers of workers by giving them proper incentives in the forms of monetary and on-monetary benefits. Especially in the rapid development era of 1960s to 1970s when the skilled workers were relatively more scarce, the businesses made much effort to keep the skilled workers. (Bae and Rowley, 2001, Kim and Park, 1997). LEs trained new recruits and then kept them from being bid away by competing firms. This spurred the development of training and compensation systems like permanent employment system, where the wages and benefits were proportional to length of employment(Lee, 1998). However, employers of SMEs had not enough financial room to run such compensation system or on-job training system. In this respect, workers in pre-crisis time depended solely upon individuals and companies for their human capital development in the labor market. Therefore, opportunities for the human capital development were not given equally. Large company workers were guaranteed the skill development under employment insurance scheme whereas small or medium size company workers were excluded from the advantages. The government’s employment protection programs also enforced disparity between large and medium company workers that it has legislated protection act only for large company workers neglecting medium company workers’ employment protection. In fact, thanks to the rapid economic growth of last three decades official unemployment rate had not been considerable. Thus, unemployment problem did not attract people’s attention. What’s more, Korean government believed that the only solution to unemployment problem was the rapid growth of the economy (MoHS, 1974). As a matter of fact, the authoritarian regimes did not have financial resources to support the unemployed and the employers’ intended to keep the workers with

the marginal wage. In the 1990s companies faced a different set of environment in which increase in average wage and decrease in profit that evoked their strategic needs to employ experienced workers all year around than to protect and train workers. Therefore, they discovered their needs to call for institutionalized set of regulation that would both lower the level of protection of their workers and resolve unemployment. Eventually, even though the employment insurance system (EIS) implemented from 1995 by Ministry of Labor and trade unions’ initiative, it has somehow served to meet large firms’ best interests, facilitating employees’ lay-offs. Introducing employment insurance to the labor market led by the government has spread rationalization of management by capital, promoting labor flexibility, supplying low cost labors in accordance to the market demand. This was mainly due to fall in net profit on investment that further intensified in 1997’s thereafter financial crisis. Therefore, it can be concluded that EIS has been implemented to support and increase flexibility in labor market to render structural shift in the capital accumulation and stability (see Figure 5). In this respect, backgrounds for bringing employment insurance to labor market can be seen as it has originated from the policy implementation of the employers’ interest. That is, first, reducing the burdens of employers’ pressure to hiring and firing, at the same time building up wide pool of labor power. Secondly, to provide supply of labors that can fit into everchanging technological advances through continuous training and education. Thirdly, target to prevent deviation from labor market through unemployment aid provision especially to involuntary unemployed and to promote re-entry to job market. According to employment insurance law, EIS has three components: employment stabilization schemes, job ability development schemes, and unemployment benefit schemes. Table 1: Contents of the EIS in Korea


Note: The top rows in the right column for each subprogram show the original subprograms since beginning of the EIS Source: Ministry of Labor, White Book of Employment Insurance System, 2009; Kim (2010): 6.

In early introductory stage of EIS, subscription terms and conditions were strict by industry and by size, however, it has gradually expanded the coverage of subscription that by 2005 daily on-call workers were obliged to be in the employment insurance scheme Table 2: Expansion of Employment Insurance in post-crisis Korea


Source: Korean Ministry of Labor Homepage. Available: English/Employment/Employment_Insurance_Rate.jap; Kim (2010): 5.

Under this scheme, EIS is concentrating on providing support to SMEs workers who have not received opportunities for human capital developments previously. In Korea, OJT can be divided into employment insurance funded private institution-led training and on-site employees training. Insurance funded training subsidizes regular workers 80% of the training fees whereas 100% of non-regular workers to promote their participation. OJT Training eligibility is limited to small-medium workers, and non-regular worker thereby setting an institutional environment that would decrease human capital development disparity between LEs vs SMEs, and regular workers vs non-regular workers. An unemployed worker who found a job before half of his or her vocational training allowance was paid out, was entitled to one-third of the remaining amount. They had to have been unemployed for 18 months, a difference of six months. If the vocational training allowance was lower than the minimum wage, eligible applicants received 50% of the minimum wage. The hiring incentive fund was limited to employers which hired workers laid off by firms designated as depressed or ailing. The scope of the fund has been expanded to include employers which hire workers who have lost their jobs due to the closure or bankruptcy of their companies in the course of restructuring (MoL, 2005). Despite introduction of EIS, workers who are under benefit of the program reach only 58 %. Subscription rate of regular worker is 67.2% which is 1.5 times the proportion of non-regular workers (42.1%). Subscription rate of companies with 300 and more employees is three times that of companies with 1-4 employees (KEIS, 2010). This clearly shows that workers who are already unstable in terms of their employment status are not receiving unemployment insurance benefits. Non-wage workers are not eligible for subscription to the unemployment benefit that self-employed workers and care workers who are 30% of working population are not subscribed to employment insurance. Also as Table 3 down shows Korea’s payment of unemployment benefit which can be up to 8 months maximum unlike developed countries such as Norway (24months), France

(23months), and Germany (12months). Most of recipients get 6 month of benefit. Benefit per day reaches 40,000Won which is normally 20-44% of average worker’s wage. This is compared to that of Germany’s 90%, the Netherland’s 30-113%, and France’s 30-224%. This low benefit from EIS program reveals its low capacity to provide workers with resources for human capital development. Table 3: Payment Duration of Unemployment Benefits (Days)

Source: Korean Ministry of Labor, English/Employment/Employment_Insurance_Rate.jsp; Kim (2010): 26.

IV. Unequal Opportunities for Human Capital Development, Inadequate Social Protection, and Widening Income Gap in Post-Crisis Korea After the Asian financial crisis, there were significant structural shifts: The growth momentum was lost; the macroeconomic risk increased; the unemployment rate of the young generation, including college graduates, increased; job security deteriorated; and the quality of employment declined. These are the new problems that post-crisis Korea faces. The economic environments after the crisis require the labor force to invest ever more in developing the human capital in the form of continuous adult education, and training, in addition to the regular school education. After the crisis, the government of Korea tried to deal with the new problems by expanding the existing welfare policy, and installing new institutions and policies to help out the less fortunate. In particular, the government has introduced EI to raise the level of unemployment protection while allowing labor market flexibility. In spite of these institutional changes, we can observe further proceed of segmentations in the Korean labor market in terms of employment status and firm size after financial crisis of 1997. In this chapter, we argue that the current institutions and policies are not effective in dealing with the new problems. First, the government has not paid attention to the problem of excess supply of college graduates, which is a source of high unemployment rate for the young college graduates. Second, because most of the cost of human capital development is paid by the individuals, the less fortunate households and the small and medium business employees who cannot afford the human capital development are deprived of the opportunities. No doubt, this situation in the Korean labor market contributes to the income disparity after the Asian financial crisis.

1. Excess supply of the college graduates? The fraction of the educated population in Korea increased most sharply in the second half of the 1950s: by 1960 the fraction of the educated population reached 70% and it continued to increase but only gradually since then. From the mid 1960s, the participation in the secondary education started to increase rapidly in Korea. In 1980 those who received the secondary education took the largest fraction in the population. From 1995 on, however, the fraction of the population who received the secondary education started to decrease. Meanwhile the fraction of those who received the higher education continues to increase rapidly in Korea. The 2005 census shows that more than 30% of the entire population older than 6 years of age has received a college education. Figure 16: Level of Education for Korea, 1955-2005 (from Census data) (%)

Source: T. J. Lee (2011)

The healthy increase in the high school graduates’ wage in comparison with that of college graduates was broken off and it has been leveling off if not decreasing. Such change makes college education a more profitable investment and most of the high school graduates would advance to colleges. But because only a certain fraction of jobs are suitable for college graduates, this situation leads to the serious mismatch between the supply and demand in the labor market. Figure 17: Ratio of Monthly Salary of High School Graduates to That of College Graduates (%)


Source: Monthly wages by education,, Korea Statistics Office

However, the problem with college graduates at the entry level of labor market is far more complicated than the excess supply. A simple comparison of the number of college graduates and the number of jobs for them fails to give us the proper sense of how grave the problem is. It is not just the jobs but the “attractive” jobs that matters and the number of attractive jobs is, of course, far more limited. Today, about 83% of high school graduates enter university or college, the highest rate among OECD countries . The Korean businesses, especially the LEs, have relied upon educational credentials when selecting employees, believing that workers with higher educational backgrounds will adapt more easily to workplaces and improve the skills. The competition among the college students for a better job encourages them to invest a lot more than the regular college expenses in order to acquire extra credentials and licenses. Figure 18: College-University Enrollment Rate (%)

Source:, Korea Statistics Office

First, the college students stay at school longer than the regular school years, and spend extra money to acquire skills and credentials that the businesses look for from their employees. As of 2010, a government survey revealed that the labor market participation rate for those who are

15 to 29 years old is only 40.9 % and the unemployment rate for that age group is 7.3 (KSO, 2010). The combination of low participation rate and high unemployment rate implies that structural entry barriers to the labor market exist for the young workers. One of the causes of low participation rate is the extended school years. As shown in Figure 18, of those are 25 to 29 years old, around 12.6% are still enrolled in the formal education institutions. Many students actually put off their graduation in order to acquire skills or credentials to impress the employers, hoping for a better chance to get a good job. As shown in Figure 19, 39.7% of university graduates have experienced leave of absence. Among them, 19.3% left to prepare for various job-related examinations, 14.8% to acquire language training or work experience, and 12.8% to make money for the tuition fees. Acquiring training and preparing for examinations outside the college incur them extra cost prior to enter the labor market. No doubt, those who cannot afford the extra cost would have a disadvantage at the phase of entering the labor market. Figure 19: Reasons of Leave of Absence (%)

Source: Economic Surveys for Korea (2010), KSO

Segmentation may occur especially because of shortage in the government subsidy for employment training programs. The government survey result that 64.9% of those who have received training went to private institution whereas only mere 8 % received training from the public institutions shows how poor the government support is (KSO 2010). Summing up, these results show that the bipolarization among the young generation occurs already at the phase of entry into the labor market. Without public programs, the chance of getting a good first job relies upon the economic ability of the potential worker’s parents. Indeed, Figure 20 shows that the household expenditure on education depends to a great deal on the household’s income level. Under these circumstances, children are very likely to inherit the socio-economic status of their parents.

Figure 20: Average Annual Spending on Education by Household Income Level (Korean won)

Source:, Korea Statistics Office

Second, it also takes a considerable time after graduation for the college graduates to get the first job. It takes about ten months for a university graduate to be employed for the first time after graduation, according to a government report. For around 14% of university graduates, it took them more than two years until they got the first job, as seen in Table 6. This shows that students are not only enrolled in school longer than the regular school years, but it also takes a considerable amount of time after the graduation for the college graduates to get the first job. Moreover, it is lamentable that the average employment duration in the first job is only a year and seven months and that many youth workers fail to successfully enter the labor market (KNSO, 2010). Table 4: Time Spent after Graduation until Finding the First Job
less than 3 month 2006 2007 2008 2009 2010 53.5 55 52.1 53.5 52.6 3-6 month 11.5 10.7 12.5 12 13.7 6 month1 year 9.2 9.2 9.8 9.5 9.6 2-3 year 2-3 year more than 3 year 10.2 9.2 9 8.8 8.3 Total


10.3 10.5 11.4 11 10.4

5.3 5.4 5.3 5.3 5.4

100 100 100 100 100

Source: Economic Surveys for Korea (2006-2010), KSO

Third, the imperfect information in the labor market aggravates the problem. As shown in Table 5, the young job searchers of age between 15 and 29 gather the information on employment mostly from internet and public bulletins, and only rarely from public employment information centers. Because the recruitment information is limited, the young jog searchers utilize personal information channels such as social or family networks.

Table 5: Source of Job Information (15-29 years of age)
Family & relatives Colleague Teacher Public media Entrance exam Headhunter Others
Source: KSO (2008-2010)

2010 20.7 12.3 8.4 28.2 19.5 3.7 7.3

2008 21.5 12.5 8.8 27.1 20.4 3.6 6.1

2009 20.7 12.3 8.1 27.8 21 3.6 6.6

Fourth, after the crisis LEs, such as conglomerate, public corporations and financial institutions changed their recruitment pattern: They now prefer hiring experienced workers to fresh college graduates who just enter the market. This change in employment practice implies that it became more difficult for the new college graduates to find a good job when they first enter the labor market Figure 21: Fraction of Fresh College Graduates in the Total Recruitment (%)

Source: Ministry of Labor (2008)

After the Asian financial crisis, the unemployment rate of young college graduates increased not merely because the excess supply became more serious but also because the opportunities at the stage of entrance to the labor market became more inequitable. The government should have made a lot more efforts to alleviate the problem by sharing the extra cost of education, disseminating the information more effectively, and educating the college students about how the job market environment s have changed. 2. Unequal opportunities for human capital development in the labor market In the post-crisis labor market of Korea, the variation in wages and the non-monetary benefits

across different types of jobs became larger and it made the opportunities more unequal and the mobility weaker. (1) Investment in human capital by businesses As Becker notes (1993: 33-34), most on-the-job general training presumably increases the future marginal productivity of labor in the firm that provides the training. However, it would be the case only when the trained workers stay with the firm. If the trained workers move to other firms, it is not the firm that provided the training but the firm that succeeded in scouting the trained worker that receive the benefit of training. This is exactly reason why the SMEs are reluctant to provide training to their workers even if they have enough financial resources to do so. Thus, if one is employed by an SME, he may not have opportunities for further human capital development that are provided by the employer. The lack of investment in employee training and education by the SMEs, therefore, is the typical public good problem, where everyone wants to be a free-rider. In order to improve the situation, the government should intervene and provide the public training and education for the SME workers. But the government of Korea has not made enough efforts of this sort. Figure 22: Fraction of Firms with In-plant Training Facility by Size

Source: Ministry of Labor (2008, 2009)

By contrast, the workers in LEs can continuously augment their human capital, through aid from social insurance, or a within-business training system. LEs are more willing to provide training and education for their workers because they believe that they can retain the benefits within the firm. Note that the tenure in LEs (300 employees or more) is twice as long as in smaller firms (100 employees or fewer) (see Figure 14). Figure 22 and Figure 23 show how different the investment in worker training is between the SMEs and LEs. Figure 23: Expenditure on Employee Training per Person by Firm size (Thousand Korean Won)

Source: Ministry of Labor (2001-2010)

Without the proper intervention of the government, the stratification and segmentation of the young workers at the phase of labor market entry is reinforced and prolonged after they enter the market. The evidence indicates that the type of employment in the first job tends to continue in the second job. It is reported that 62.2% of those who were in non-regular occupation have again a non-regular position in the second job. By contrast, 68.7% of the young workers who began their first job as a regular worker would also be a regular worker in the second occupation. Table 6: Labor Market Mobility of College Graduates (20s-30s)
1-4 Firm size (present employer) 1-4 5-9 10-49 50-99 10299 More than 300 35.0 24.2 25.1 6.3 5.4 3.9 5-9 24.1 23.7 28.7 7.5 10.2 5.8 Firm size(first employer) 10-49 50-99 15.3 14.0 37.6 12.3 11.0 9.8 12.8 12.4 25.2 24.0 13.2 12.4 10-299 10.4 10.4 25.2 15.8 25.2 13.1

More than 300 7.0 7.9 21.5 13.1 15.0 35.5

Source: KEIS (2009)







The status of the worker in the first job tends to continue in the following jobs. Those who are hired by the LEs will enjoy in-plant training opportunities to develop their abilities further and can receive higher wages, whereas the counterparts at the SMEs cannot. Even though the Korea of Korea tried to expand the social protection after the crisis, the human capital development system in the labor market serves only a small part of the workers. That is, the vocational training subsidy of EIS failed to overcome the segmentation of the labor market

between the workers of the LEs and the SMEs. (OECD, 2007b: 74-75). (2) Government support 1) Support for within-firm training The Korean government introduced a public training program in 1999 to address the increasing unemployment rate and to reduce firms’ in-plant training costs. This program was originally intended to integrate LEs’ in-plant training into a public training program. The Korean government insisted that this integration would enable all workers to benefit from on-the-job training. Nevertheless, all costs for operating the program came from employers, who subscribed to employment insurance fund introduced back in 1995, not directly from the government. That is, the public training program under the EIS includes firms’ long-existing in-plant training schemes, and it is designed to support and encourage on-the-job training based mainly on employers’ financial contributions. Figure 24: OJT Spending by Firm Size (Korean Won)

Source: KEIS (2009)

This arrangement may demonstrate that the Korean government still thinks that developing employees’ human capital is essentially the responsibility of either employers or individuals. Agian, the shortcoming of this program is that small, less well-off firms are reluctant to subscribe to employment insurance, which leaves workers in SMEs outside the new public onthe-job training scheme. In other words, as regards on-the-job training the segregation between LEs and SMEs still persist. Though all employees became officially entitled to employment insurance coverage in principle, many are still not protected in practice. About half of the wage workers still fall outside the system, and 67% of all workers, including those who are selfemployed, new entrants, re-entrants to the labor market, and those outside the labor force, cannot receive the benefits.1

Like the Korean case in the 1990s, most advanced economies face the dilemma of how to reorganize their human capital development systems to meet the rapid change and instability caused by new technologies and intensified international competition. Crouch argues that human capital development systems work best in a situation in which all participants in the market can expect skill changes in the mid- or long-


The rate of utilization of EIS-supported OJT is recently widening between regular and nonregular workers. OJT use by regular workers is dwarfing that by non-regular workers. This may be partly due to their difference in subscription of employment insurance. Regular workers can develop their human capital continuously whereas non-regular workers especially those in the SMEs are deprived of such opportunities. Table 7: Present Situations of Employment Insurance by Employment Status
Number of insured workplace 2007 Regular Non-regular 17,23 9 1,458 2008 121,37 0 14,402 2009 146,97 3 35,624 2010 142,97 8 59,936 2007 306,460 7,189 Number of participants 2008 1,979,02 1 93,201 2009 2,233,702 147,813 2010 2,009,969 194,696

Source: KEIS (2010)

2) Support for unemployed training The public re-training program has not been effective in enabling the unemployed to learn new skills to become viable in the labor market and motivate them to actively search for jobs. For instance, in 2005 a government report on the effect of re-training on wages for the unemployed showed that the participants in the re-training program had a slightly lower quality jobs, and also that the duration of the program affected wages and job attainment negatively. Table 8: Outputs of Vocational Training Program for the Unemployed under the EIS (%)
2008 Comple tion Jobseeker 53.18 Employ ment 45.89 47.93 certifi cate 47.13 46.64 comple tion 61.07 59.16 2009 employ ment 54.44 47.42 certifi cate 52.52 46.99 comple tion 66.66 65.78 2010 employ ment 51.10 45.55 certifi cate 45.60 41.44

First-time 53.46 jobseeker Source: KEIS (2010)

This result gives workers the impression, first, that obtaining skills from re-training for the unemployed is difficult, and, second, that long-term training may involve drawbacks in the labor market. In short, the public re-training program may be functioning merely as a path to downward mobility, strengthening the dual structure of the market rather than encouraging flexible upward mobility. Therefore, as Table 8 shows, the employment rate in re-training program for the unemployed under EIS is relatively high, meaning that many participants in the
term. However, where there is great uncertainty and instability in the market, government and employers tend to avoid the responsibility of training workers.


program may not be satisfied with its quality. Ⅴ. Conclusion After the Asian financial crisis in 1997, the labor market practices of Korea changed significantly to increase the flexibility. Such a change was motivated by the neo-liberal way of thinking – a flexible labor market improves the efficiency and makes the businesses more competitive in the international market. Though this argument itself is controversial, Korea chose this route. However, it should be noted that the other side of the flexible labor market is the higher risk for the labor force. Given that the macroeconomic performances became more volatile after the crisis, the introduction of flexible labor market made the worker exposed to even higher risks. It is true that the businesses can dodge the bullet better if the labor market flexible. But those bullets will fall on the laborers if no bullet-proof shield is installed. The firms enjoy insurance without paying the fees, while all the burdens are taken by the laborers. This aspect of the structural change in the post-crisis labor market of Korea has never received enough attention and the government of Korea has failed to establish an adequate social protection apparatus. In this paper we argued that the current structure of labor market and the lack of social protection for the human capital development at the labor market are not a major reason only for the widening income gap but also for the low mobility across income groups. Currently, there is segmentation among workers even at the stage of entry into the labor market. The segmentation takes place in several dimensions; employment with LEs vs. SMEs, regular jobs vs. non-regular jobs, and employed vs. unemployed. Those who started with low-wage low-benefit jobs are systematically deprived of the opportunities for investing in their human capital, thereafter, so that the labor market segmentation is reinforced and prolonged. The disadvantaged and less protected group suffers from the lower income and at the same time they remain more vulnerable to the ramping risks. What does it take to break this chain? We suggest the following policies. ■ The education policies (1) To strengthen vocational education at the high school level The efforts to strengthen the vocational high school education in the 1960s and in the 1970s discontinued in the 1980s. The revival of the competitive vocational education at the high school level would narrow the wage gap between the high school graduates and the college graduates. It enables to supply the competent technicians to the labor market. (2) To increase the public spending on the tertiary education. Korea’s public spending on tertiary education is the lowest amongst OECD countries (OECD,

2008: 11), while the private expenditure on the tertiary education is the second highest among the OECD countries (OECD, 2008: 3). Without increasing the government spending in tertiary education, the children from the less well-to-do family are likely to inherit the poverty. In order to encourage them to pursue career and human capital development, the government should expand the spending in the tertiary education. This will make the opportunities at the entry level of labor market more equitable. (3) To expand scholarships and loans on need basis Realistically, Korean government is not capable of finance all the cost of the tertiary education. Even if it is capable, such policy is not desirable because one can obtain sizable private returns from the college education. When only a fraction of education cost is covered by the government the students from the poor families are still exposed to the unequal opportunities. Thus, it is necessary to expand the scholarships and the loans on the need basis. ■ The polices for training and educating the laborers (1) To support the training and education of the SME employees The workers with SMEs are systematically deprived of the opportunities for augmenting their human capital, compared to those work for LEs. SMEs cannot make investment in training and educating their employees either because they cannot afford the cost or because they have the free-rider problem. In this sense training and educating the workers for the SMEs is similar to providing a public good. If the government design and implement this policy it will improve the efficiency as well as the equity of the society. (2) To provide the training and re-training for the unemployed It is important to train or re-train the unemployed so that he or she can improve his/her quality that suits the job requirement. Given that the technology progresses so quickly and the industrial structure shifts very rapidly in the 21st century, it is imperative that the laborer take continuous adult education to keep up with the trend and stay competitive. But the unemployed may not have enough resources to invest in his/her human capital. If the reeducation is delayed it would be far more difficulty to come back to the workplaces. Thus, the government should design and manage the train and education program for the unemployed. In addition, under unemployment protection, Korea paid the unemployed 50 per cent of their pay for 6 months, while the Danes paid the unemployed 80 per cent of their pay for one year. Of course compulsory unemployment scheme which forces the unemployed to return labor market as soon as possible can make unemployment rate fell. However, the threat of compulsion jolts people into taking available jobs instead of jobs they hope for, which may lower job satisfaction and make workers less secure. In this regard, the main training program should be designed to help people to improve their work related skills through the

provision of training and structured job consultancy in line with individual career paths. In short, the government must play a more active role both in training workers and in implementing a policy designed to integrate and reintegrate the whole population in the labor market. ■ The Policies for disseminating information in the labor market (1) To effectively intermediate the job search and the manpower search Thanks to the internet, we can access information, including labor market related information, far more easily than in the past. However, there are still those who are not connected to the IT network. Disproportionately more people from the disadvantaged group are isolated from the network. They are the information poor. Likewise, SMEs have little resources that they can spend in searching for the right manpower. Table 9: Share of Labor Market Related Spending in Government Budget, 2007 (%)
S. Korea Japan UK US Germany France Sweden OECD Average

Total Active Labor Market Policy Unemployment Insurance Source: OECD (2009)

0.41 0.14 0.27

0.49 0.16 0.33

0.48 0.32 0.16

0.43 0.13 0.31

2.4 0.77 1.63

2.16 0.92 1.24

1.79 1.12 0.66

1.32 0.56 0.75

Thus, it is necessary that the government plays the role of intermediating the information poor and the SMEs. According to the Korean government’s own figures, as of 1997 only 15 per cent of Korean workers who registered for public job search support succeeded in finding a job: this figure was much lower than 75 per cent in Germany and 87 percent in the UK (MoL, 2005: 581). This indicates that the current public job search support has not been effective in addressing the needs of workers in terms of career development. This is not surprising when we compare with the other countries, a shown in Table 9, how much Korean government spend for the labor market related activities. Therefore, Korea’s public job search support should be re-designed so that the intermediation is implemented on the personalized, intensive, flexible and long-term basis.

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