This is the seventh in a series of interviews with economic experts who analyze the state of the Korean economy and make policy suggestions. ― ED.
(Related story on Page 11)
By Kim Jae-kyoung
President Moon Jae-in should reform the job market and develop the services sector to reverse the dismal unemployment situation and rehabilitate the Korean economy, a Washington-based economic expert said Wednesday.
He stressed Moon won't be able to achieve his goal of improving the lives of middle- and low-income families without tackling those two challenges.
“Korea should focus on labor market reform, increasing labor productivity, and improving the services sector,” Troy Stangarone, senior director at the Korea Economic Institute (KEI), said in a recent interview.
He pointed out that Korea's dual labor market suppresses wages for workers who are on short-term contracts.
“Labor market reform to increase labor flexibility and provide some protection to contract workers is one step that could be taken,” he said.
“Easing rules for FDI in the services sector, lessening the burdens of failure on entrepreneurs, and providing SMEs with financial assistance are also key steps that should be considered.”
He advised Moon to ensure that his economic policies are designed to encourage growth and a graduation from government assistance rather than incentives for firms to stay small.
From Stangarone's perspective, while compensation in Korea's manufacturing sector is the second-highest in the OECD, the country lags toward the bottom in the services sector.
“This is a function of the underdevelopment of the services sector, which includes many of the retail stores and restaurants that have struggled with the reduction of working hours and the increase in wages,” he said.
He believes increasing the Moon administration's focus on entrepreneurship, innovation and SME growth will help to add jobs and raise wages as firms compete for workers.
Stangarone said Moon should realize that if the minimum wage does not rise with increased labor productivity, firms are incentivized to shift to either fewer workers to boost labor productivity or shift away from labor and utilize more automation for production.
Additionally, he explained that if productivity is low but wages are similar or higher than other countries, there will be an incentive to move production abroad.
Balance between growth, distribution
“To avoid these shifts, as Korea pursues an income-led growth strategy it will need to balance this with policies that will maintain economic growth,” he said.
He thinks one way to do that would be to use alternative tools to improve income distribution.
In his view, tax policy is one area where Korea could expand income in the lower tax brackets through an Earned Income Tax Credit similar to the United States or by experimenting with negative tax rates.
He also suggested that rather than using fiscal policy to provide corporate subsidies to support a higher minimum wage, the Moon administration could provide tax incentives to firms for hiring additional workers similar to the U.S.'s Work Opportunity Tax Credit.
He pointed out that in regards to the minimum wage, Korea has lower labor productivity than the U.S., but is on course to have a minimum wage higher than America's.
“One alternative to balance productivity and rising wages would be to tie future increases to inflation and future productivity gains to help ensure workers don't fall behind, but to ensure companies don't face shocks from sharp increases in the minimum wage that will give them an incentive to move production offshore,” he said.