'Headstrong' unions drag down economy

Labor market rigidity undermines productivity

By Lee Kyung-min

Militant unions have become a major stumbling block for the Korean economy as they have increased labor market rigidity thereby undermining overall productivity.

Given that economic growth is a function of labor force growth and productivity, falling productivity, without fundamental changes, will become the Achilles Hill for Asia's fourth-largest economy together with its low birthrate, according to experts.

"This is a very serious issue for Korea," Sohn Sung-won, an economics professor at California State University-Channel Islands, said in an email interview.

"We are well aware of the demographic trend in Korea. Productivity will determine how prosperous the Korean economy will be in the future," he added. "Unfortunately, productivity growth has been decelerating, a worrisome omen for the economy."

An incident that took place at Hyundai Motor a year ago illustrates how a militant union can hamper productivity and drag down Korea's corporate competitiveness.

A group of union workers at the nation's largest automaker wrapped a steel chain around a conveyor belt in the firm's Ulsan Plant in November 2017 to protest against the firm's plan to increase production of the Kona, then new sub-compact Sports Utility Vehicle (SUV), ahead of exports to the U.S. days later.

The union said any process concerning its members' working hours and labor conditions must not proceed without their prior approval.

The two-day strike participated in by 1,900 members ― over half the 3,500 members there ― incurred a loss of at least 17.4 billion won ($10 million) equivalent in sales that could have been made from producing 1,230 new vehicles, the firm said.

"Under the law, company management is required to seek approval from union over decisions on production capacity increase including new models," Yun Chang-hyun, an economist at the University of Seoul said.

"It may sound absurd but it's how the system is structured," he added.

The incident came close to being repeated recently following reports on the carmaker's union members' opposition to increase production of Palisade, a newly launched mid-size crossover SUV.

While the firm said the union and the management are in talks to resolve a range of labor issues, few doubted that the strong union yet again resorted to "abusing" its right to protect its vested interests.

Foreign investment exodus

Experts said that without fundamental changes in labor policies and culture, chances are slim that the situation will improve in the near future.

"Why would workers spend time and energy learning new skills when they have no incentive to do so under the protection of well-established union? Once they know they are not easily laid off until retirement, they see no reason to work harder," Yun said

Investment and capital injection to boost productivity will be rendered useless under the current structure, worsening the vicious cycle of corporate competitiveness becoming undermined by continued inefficiency defined by low productivity and deteriorating profit.

According to the Korea Economic Research Institute (KERI), Korea's per-person labor productivity grew only 2.8 percent year-on-year between 2010 and 2017.

The institute cited data from the Conference Board, a 501 non-profit business membership and research group organization.

Korea came in 28th among 41 countries. Productivity growth was much lower than the 41 countries' average at 3.5 percent.

The institute said the figure is particularly worrisome because the rate prior to the global financial crisis was 7 percent between 2002 and 2009, which made Korea rank 5th out of the 41 countries.

Also, the average unit labor cost in Korea increased 2.2 percent year-on-year between 2010 and 2017, a stark contrast to an average of a 1.7 percent decrease in the 41 countries, the report showed.

China and India were the only two countries that saw their unit labor cost grow faster than Korea.

Yun said that a growing number of manufacturers are seeking to relocate their factories here and find cheaper alternatives overseas to avoid management risks such as frequent strikes, a way for unions to leverage a deal to increase wages to boost other employment benefits.

"Companies have to prioritize making a profit, but when the union continues make demands hurting such a goal, they are left with few options."

Investment by Korean firms in foreign countries far outstripped that invested with Korea from foreigners in 2018.

According to data from the Export-Import Bank of Korea (Eximbank), Korea's foreign direct investment (FDI) into overseas countries stood at $43.6 billion in the first nine months of 2018.

The amount is nearly four times greater than the $12 billion of FDI made into Korea over the same period.

According to Katrina Ell, an economist at Moody's Analytics, the situation is compounded by a nearly 30 percent increase in the hourly minimum wage over the past two years, a key economic policy of the Moon Jae-in administration.

"The problem with increasing the minimum wage is that it increases operating costs in important industries like manufacturing, thereby accelerating the existing trend of firms being forced to increase operating capacity offshore in lower labor cost countries," she said.

"Higher minimum wages without a corresponding increase in capacity lowers productivity eroding the long-term viability of an industry," she said."