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Is there a jobless recovery in Korea’s future?

[SERI FOCUS] The job-sharing policy could limit the magnitude of employment improvements during the economic recovery.

Dec 14,2009
Bolstered by government stimulus packages and inventory adjustment, the Korean economy has continued its recovery since bottoming out in the first quarter of 2009.

In the third quarter of 2009, Korean economic growth rose to 0.9 percent year-on-year, or 3.2 percent from the previous quarter, entering positive territory for the first time during the global financial crisis.

In contrast, the labor market remains sluggish: only 9,000 jobs were created in October 2009 compared to a year ago. Although there have been continuous improvements, the pace and magnitude of job creation is still insufficient compared to the pace of economic recovery. Therefore, an examination of the possibility of a jobless recovery in the future may be worthwhile.

First, the adoption and spread of the government’s “job-sharing” policy during the downturn will mean that the possibility of slow job creation or a jobless recovery increases during the upturn. In their effort to cut labor costs, companies made adjustments during the economic downturn by adjusting their capacity utilization rates, working hours and wages rather than the number of employees.

As a result, the maximum drop in the number of employees in the first quarter of 2009 was only 191,000, far lower than the 1.514 million plunge in the third quarter of 2008 during the Asian currency crisis. There is concern that the job-sharing policy may indirectly limit the magnitude of employment improvements during the economic recovery. This is because the policy was specifically designed to adjust working hours, capacity utilization rates and wages in return for a decrease in layoffs.

Thus, the policy will increase the likelihood that there will be only a marginal increase in employment and slower job creation and that overtime work will be fulfilled by existing employees instead of new ones.

During the Asian financial crisis, the manufacturing and construction sectors were hit particularly hard, shedding 485,000 and 273,000 workers, respectively; many of these were absorbed by the food/accommodation and wholesale/retail industries, which saw significant increases, growing by 200,000 and 159,000, respectively.

In the current crisis, however, a majority of the people who have lost their jobs have been absorbed by the public sector. The number of jobs in the construction and food/accommodation industries fell substantially, by 187,000 and 156,000, respectively.

With the economy gradually rebounding, there has been remarkable job growth in the areas of 1) public administration, national defense and social security and 2) health care and social welfare, with the number of jobs increasing by 360,000 and 260,000, respectively.

However, most of the new jobs seem to be temporary in nature and dependent on financial support from the government. Therefore, if the fiscal stimulus is reduced in 2010, there will be fewer jobs created in the public sector amid the economic turnaround.

In addition, continuous rises in labor productivity has resulted in the steady decline of Korea’s employment coefficient and employment creation coefficient, implying a decline in the Korean economy’s ability to create jobs.

In particular, the employment coefficient for the manufacturing sector falls short of those in the U.S. and Japan, meaning that Korea is less able than these advanced economies to create jobs. Moreover, the continued recovery of the economy has been led by exports, a sector that has a particularly small job-creation effect. For example, although the year-on-year rate of increase for gross domestic production in the third quarter of 2009 was 0.9 percent, net exports contributed 5.3 percentage points. As such, if the economic recovery continues to be led by exports, employment will improve relatively slower than the economy.

The writer is a research associate in the Macroeconomic Research Department at Samsung Economic Research Institute. For more SERI reports, please visit www.seriworld.org.


By Sohn Min-Jung




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