Older workers

Early retirement results in underemployment for many senior workers

While older workers in Korea are likely to remain in the labour force longer than many of their OECD counterparts, they tend to retire early from their main career jobs, beginning at around age 50. They then move into “second careers” that often represent an extended period of underemployment. This pattern explains why average employment tenure peaks at 11 years in the 45-49 age group and then falls sharply, whereas the tenure peak in most other OECD countries occurs in the 55-64 age group (Jones and Tsutsumi, 2009). Early retirement for career jobs also explains why more than two-thirds of workers over age 50 worked in firms with less than 100 employees in 2007 and fewer than two-fifths were regular workers. Similarly, 34% of workers over 50 are self-employed, as against 13% of those under that age. Indeed, a study of early retirees found that about three-quarters of departing employees become self-employed, primarily in services with low productivity.

These second careers typically last numerous years, as underscored by the fact that the average effective age of retirement for men in Korea is 71, the second highest level among OECD countries. During this period, workers earn much less than during their earlier career job (Figure 3.18, Panel B) and a recent work by the Korean Labor Institute (Phang, 2010) shows that there is also a strong deterioration of working conditions for self-employed workers after retiring from wage work. These patterns raise concerns about both the risk that older workers will fall into poverty and the unnecessary loss of productive potential the economy suffers. The sharp increase in household debt during second careers provides another indication of the financial difficulties confronting many middle-aged and older workers in Korea, both during their second careers and after they retire from the labour market.³⁶

Figure 3.18. Wage profiles in Korea,“ 2000 and 2010

a) Wages for “20-29 year-olds” and for “Less than a year” equals 100 in 2000 and 2010. Source: Ministry of Employment and Labor, Wage Structure Survey.

While early retirement of regular workers from the career jobs has many adverse consequences for both the workers and the overall productive potential of the economy, it is firmly entrenched in the human resources strategies of large firms and industrial relations practices. As can be seen in Panel A of Figure 3.18, the compensation practices of Korean employers result in wages that increase sharply with job tenure. Since other benefits, such as the retirement allowance, also increase strongly with seniority, the costs of employing workers begins to exceed their productivity well before the age at which most workers retire from the labour market. This provides strong incentives for employers to induce early retirement and explains why that is one of the main ways that large firms adjust their workforce (OECD, 2013a). One key to reducing the incidence of early retirement is thus to tie wages more closely to productivity and less closely to seniority. Another factor encouraging widespread use of early retirement is the strong employment protection that regular workers enjoy, especially in large firms where unions have stronger presence. Relaxing EPL on regular workers could also contribute to phasing our early retirement by offering employers other ways to adjust to declines in labour demand for regular workers (see Section 3.4 above).

Table 3.12 summarises the obstacles that employers identify to employing older workers. Consistent with the notion that linking compensation to seniority creates a disincentive to employ workers beyond a certain age, 43% of the firms surveyed cite high wages relative to productivity. However, employers also cite a large number of beliefs about ways in which older workers are less productive or more difficult to manage. For example, the most frequently cited barrier to employing older workers was that they have ability to adapt to change (57% of firms). It is difficult to judge the validity of these beliefs, but comparison with employment practices in other OECD countries where most workers remain in their career job until they retire from the labour force altogether, suggests that Korean employers may underestimate the ability of older workers to continue to be highly productive when given the necessary support to do so.

Table 3.12. Reasons given by firms as obstacles to employing older workers

In 2008“

a) The survey included 648 firms. Firms were allowed to give three answers.

Source: Korea Labor Institute (2008), Survey on Firms Implementing the Wage Peak Compensation Scheme 2008.