Labor reform is needed

Deputy Prime Minister and Finance Minister Choi Kyung-hwan’s recently commented that the overprotection of permanent employees was causing a bottleneck in the labor market and a surge in the temporary work force. He said if it is made easier to lay off permanent workers, the job market will become more flexible. His comment set off a heated debate between the labor sector and employers. Some say actions are needed to overhaul the permanent employment system to ease rigidity and raise effectiveness in the job market while others are concerned about a decline in labor conditions that could only worsen the economy.

Korean companies are facing heavy challenges on the labor front. Firms have been ordered by the government and court to fix long-standing practices and customs on regular base salaries, retirement age and overtime. The revisions translate into sharp increases in labor costs.

According to the Korea Employers’ Federation, when companies count the Supreme Court ruling and include regular bonuses in common salary base, regular salaries in companies with employees of more than 1,000 will increase by 26.7 percent on average. The extension of the legal retirement age to 60 will be incrementally enforced from 2016.

But overall revisions in the wage system have been slow. The cost of keeping workers is becoming higher for Korean companies that still mostly stick to a wage system based on seniority rather than performance.

Interpreting holiday work as overtime still needs a final ruling from the Supreme Court, but legal revisions to reduce legal work hours and double overtime charges are pending in the National Assembly. Regardless of the highest court’s decision, maximum work hours will be reduced by more than 10 percent to 20 percent. Corporate viability and competitiveness will depend on how effectively companies can sustain or raise productivity with reduced working hours while responding quickly to changes in the business environment and consumer demand. Many small and midsize companies struggling with a lack of work force could be damaged or even have to shut down due to poorer productivity from shorter working hours.

Companies can do little about the impending spike in labor costs from the new changes. Effective management of the existing work force is essential. Large companies cannot adjust staffing because layoffs are considered tantamount to murderous acts. The cases of Ssangyong Motor, where management faced strong resistance from the union even as the company was on the brink of going bankrupt in 2009, and a crane-top protest to Hanjin Heavy Industries restructuring plan when it could not sustain its shipyard amid zero orders, raise questions about whether corporate restructuring in staffing is possible in Korea.

The extreme rigidity in the labor market is due to the strong and uncompromising nature of labor unions at large companies. They have gained so much power thanks to firm protection in employment and labor-related laws.

Legal job security for workers on a permanent payroll is among the highest level in the Organization for Economic Cooperation and Development. The country has a rare law that bans workers from being replaced while they are on a walkout. Due to rigid laws against layoffs, even those who have harmed the company or are deemed unfit for work cannot be easily dismissed.

Companies must hone competitiveness on wages, the labor force, working hour conditions and restructure operations before they come to the last resort of scaling down the work force. None of these self-saving efforts are possible without the approval and support from the labor union under local labor laws.

Companies constrained by labor unions cannot avoid hiring new permanent workers and opt for irregular workers who can settle for less pay and security. As a result, the polarization in the job market is worsening.

Reform in labor must be focused to ease recruitment bottlenecks in large companies to increase competitiveness and jobs for younger people. Only then will the job market become more mobile and flexible.

In countries like Germany and Britain, labor reforms were possible due to compromise with permanent workers and a strengthened social security net. We must do the same. Permanent workers in large workplaces must be the first to yield. If large companies can afford to increase recruitment and support for subcontractors, society in general will see growth in job opportunities and improvement in domestic demand.

Translation by the Korea JoongAng Daily staff.

*The author is a managing director of the Korea Employers’ Federation.

by Lee Ho-sung