Why labor market flexibility matters

\Kim Jin-young

The author is a professor of economics at Korea University and a member of the economic division of the JoongAng Ilbo’s Reset Korea campaign.

Group of 7 (G7) economies have been rebounding from pandemic disruptions since 2022, though at distinctively varying paces. The GDP of Germany edged up 0.2 percent in the second quarter of 2023 compared to the fourth quarter of 2019, before the pandemic outbreak. The U.S. GDP jumped 6.1 percent during the same period. Coming next are Canada with gains of 3.5 percent, Japan with 3.0 percent, Italy with 2.1 percent, the United Kingdom with 1.8 percent and France with 1.7 percent.

European majors are recovering slower than the United States due to their relatively restrictive fiscal spending during the pandemic and the spike in fuel and raw material prices as a result of Russia’s war in Ukraine. Another decisive difference is their labor market structure.

North American countries with flexible labor markets saw unemployment rates jump from their usual 4 to 5 percent level at the onset of pandemic. The rate in the United States peaked at 14.7 percent in April 2020, and at 14.1 percent in Canada in May 2020. The jobless rate in European G7 economies rose just 2 percentage points versus the pre-pandemic period. The unemployment rate in North America surged because layoffs and relocations were easier than in Europe during the time when companies were hard-up.

The U.S. government spent heavily on unemployment benefits to support those who lost jobs through colossal fiscal stimuli. But European companies under rigid labor market could not easily cut payroll, which worsened their earnings during the pandemic. Their governments used fiscal means to subsidize companies in trouble.

After the pandemic subsided, U.S. companies normalized, and people returned to the labor market in search of new jobs. The unemployment rate dipped at a fast clip to record the lowest in 50 years. The European major economies also saw their unemployment rate return to their normal figures. But in the Unites States, workers were relocated to industries with higher productivity, leading to improvement in labor productivity and faster economic recovery. Thanks to its flexible labor market, the country was able to respond to the economic volatility and recover faster to lessen the economic cost from a recession.

A flexible labor market is essential to raising adaptability to economic fluctuations and achieving growth potential. The economic theory over the last 40 years proved that growth is fueled by human capital, or the workers and their accumulated knowledge and technology. A flexible labor market enables efficient allocation of human capital to assure growth by responding quickly to changes in the global economy, and creates new and quality jobs. Companies can capitalize on the flexible market by recruiting workers they need to improve productivity and profit.

A flexible labor market also provides big returns for workers. Individuals must find the right job for their capabilities, and this is possible in a market where relocation and recruitment are easier. When the labor market is rigid, job searching can be hard, making it difficult for people to find jobs they want. Job searching is particularly important for young people with less experience.

The Yoon Suk Yeol administration has been trying to flex the labor market since the president took office. But its measures have been limited. The plan to ensure more flexibility in the statutory work hours and pay system has been stalemated due to lukewarm support from stakeholders. The anxiety over the increased flexibility in the labor market stems from the fear of changes. The move to flex the labor market amid lacking social security net can aggravate public anxiety.

The government must pursue flexibility while strengthening our social security net. The Seoul Metropolitan Government’s project to enhance the social security net through a safe income project can be an exemplary benchmark.

Translation by the Korea JoongAng Daily staff.