Policies to reduce overall labour market duality

Labour market duality has become one of the key issues in the Korean political debate, including in the context of the recent Presidential election. Most of this debate is dominated by issues with social equality, job insecurity and discrimination, amid growing concerns about polarisation in income distribution (Chapter 2). While addressing labour market duality is important for reasons of social equity, a well-designed package of labour and social policies to tackle the dualism of the labour market is also essential to help boosting economic efficiency, especially thanks to the lower level of labour and job turnover that it can induce, and the resulting positive impact on human capital accumulation and, ultimately, the potential for economic growth (Grubb et al., 2007).

The broad challenge of reducing labour market duality in Korea in the long-term requires a multi-pronged approach. This chapter focuses on the role that labour market policies can play, but a comprehensive approach would also need to address lagging productivity in the services sector and SMEs (e.g. through measures to increase product market competition). The key labour market reform priorities for reducing duality are:

• • Balancing employment protection legislation (EPL) across different types of employment;
• • Narrowing excessive wage differentials;
• • Strengthening the role of activation policies to raise employability; and
• • Improving the industrial and labour relations framework.

Korea can alter the balance between regular and non-regular jobs by adjusting policies in these areas. Indeed, many reforms intended to improve the employment prospects and working conditions of non-regular workers have already been introduced. These include a series of measures to tackle labour market duality that were adopted between 2011 and 2012, providing confirmation that the government intends to move further ahead on this important issue. However, these measures have been rather fragmented, resulting in few synergy effects. In addition, some reform measures have met with strong objections from trade unions and/or business groups, resulting in certain legislative initiatives - such as the 2007 legislation to reverse the trend towards overuse of temporary employment - being blocked for considerable time in the National Assembly. On the other hand, the strong interconnections between employment protection, activation, informality and labour relations underline the need to make progress on several fronts simultaneously to reap mutually reinforcing effects of different measures. This section reviews the role that key aspects of labour market policies play in reducing duality, focussing on implementation challenges and possible trade-offs. The next and final section complements this discussion by looking into group-specific issues. In the wake of the recent global economic crisis, a number of other OECD countries have engaged themselves in comprehensive labour market reform approaches that are intended to tackle some of the issues that will be discussed in this and the next section (see Box 3.1).

Box 3.1. Recent examples of comprehensive labour market reforms

Several OECD countries have recently made important efforts to speed-up long overdue labour market reforms, with Italy, Spain and Mexico being key examples. While the structural labour market characteristics of these three countries are not directly comparable, one common denominator is a high degree of segmentation. As far as Italy and Spain are concerned, comprehensive labour market reforms were introduced as part of a broad effort to restore competitiveness, amid a backdrop of long-lasting difficulties that are closely intertwined and mutually reinforcing: a poor underlying growth rate, high public debts, and limited lending power of financial institutions. For Italy and Spain, these sources of pressure were compounded by the confidence crisis in the European monetary union and the related risk of contagion from the euro area crisis.

Box 3.1. Recent examples of comprehensive labour market reforms (cont.)