Labor flexibility holds the key to recovery

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Labor flexibility holds the key to recovery

Published: 09 Oct. 2024, 20:21

Chung Jae-hong
The author is an international, diplomatic and security news editor of the JoongAng Ilbo.

In the U.S. presidential race, former President Donald Trump claimed that U.S. citizens are “suffering from soaring prices” because the Biden administration “destroyed the economy.” A number of Americans may agree with Trump’s accusation, but the U.S. economy actually outperforms those of major economies. Just look at the numbers. Achieving 2.5 percent growth last year, the U.S. economy is expected to show 2.6 percent growth this year, according to the IMF. Korea showed 1.4 percent growth last year and 2.5 percent is expected this year. Japan had 1.9 percent growth last year and 0.7 percent this year, Germany minus 0.2 percent last year and 0.2 percent this year, and Britain 0.1 percent and 0.7 percent, respectively. The U.S. unemployment rate is at 4.1 percent — nearly reaching perfect employment. That’s not all. The surging prices since the pandemic fell to 2.5 percent in September. America enjoys a Goldilocks economy — the ideal state of an economy which is not too hot or cold in terms of growth, employment and inflation.

Analysts attribute the U.S. economy’s successful performance to four factors: a business culture cherishing startups and innovation, excellent college education, an unceasing inflow of talented people and labor market flexibility. As innovation demands what Joseph Schumpeter called “creative destruction,” innovative business culture and labor flexibility are two sides of the same coin. U.S. enterprises can swiftly hire or fire employees when the need arises. The elastic labor market helps companies slim their workforce during a recession or bolster it when the economy rebounds.

Big tech companies often announce a plan to downsize their manpower while laying out a massive investment plan. Microsoft laid off more than 10,000 employees in January and expanded its investment in the AI sector as seen in its ambitious scheme to pour $10 billion into the promising field. Meta also fired 20,000 employees last year while investing $37 billion in AI. Google dismissed 12,000 workers after suspending its major projects, yet increased its investment in AI research and development to $45 billion.

In sharp contrast to the developments in the United States, Korean, Japanese and European companies can’t start timely restructuring in the face of various regulations on employment. Nokia started optimizing its overseas workforce last year, but should postpone the plan until 2026 because of tough labor regulations in Germany, France and Finland. German software giant SAP also downscaled its annual investment in AI to 500 million euro ($548.8 million) due to stifling regulations across Europe. The amount is dwarfed by Google’s $45 billion investment in that category.

Predicting the future of the IT industry is not easy due to the volatility of the sector. If a company makes a wrong judgement, it must change its course quickly. But if a company should hold on to a loss-making business with no future prospects, it can’t survive.

The gap in the cost for restructuring directly affects competitiveness in high technology. While IT companies in Europe must spend much money and time restructuring themselves, their American counterparts can speedily make decisions and carry them out. The difference in the cost is directly linked to making profits. A McKinsey survey shows that European conglomerates showed even less profitability than their American rivals. Another survey points to the cost of restructuring in Europe, which is 10 times larger than in America.

Korea’s labor market is as rigid as Europe’s. It’s almost impossible for companies to reduce their employees once they are hired. The rigidity of the labor market is being exacerbated by the stringent 52-hour workweek, suffocating regulations on finding factory sites around the capital and the anti-corporate sentiment among the public. The results are sluggish investments by local manufacturers who are relocating their plants to foreign countries. The Financial Times recently reported that Korean companies last year promised to invest a total of $21.5 billion in the United States, the largest amount in the world.

The Korean economy has lost vitality. As an increasing number of Korean companies are moving overseas, decent jobs are vanishing at home. Instead, more people turn to self-employment than ever before, worsening the tough self-employed market. To resolve the crisis, Korea must simplify the complex layoff procedure, ease the tough regulations on its non-regular workforce and relax the rigid 52-hour workweek. Given labor unions’ resistance, it’s not easy. But if Korea wants to escape from the trap of low growth, it must take the path of the United States, not Europe. Reforming the sclerotic labor market will be the first step toward reviving the economy.

Translation by the Korea JoongAng Daily staff.