Slower growth becomes 'new normal' for Korea

This is the fifth in a series of interviews with economic experts who analyze the state of the Korean economy and make policy suggestions. ― ED.

Labor flexibility needed to boost productivity amid aged society

By Park Hyong-ki

Kim Jung-ho, professor of economics at Ajou University

There has been a heated debate over whether President Moon Jae-in's income-led growth policy should be blamed for the worsening economic situation.

His strategy with an overweight focus on distribution may partly be to blame, but Kim Jung-ho, a professor of economics at Ajou University in Suwon, Gyeonggi Province, said the dismal numbers should be taken as the “new normal” for the Korean economy.

Kim stressed that Korea needs to accept the reality that the economy is going to grow older and slower going forward.

Asia's fourth-largest economy cannot turn this predetermined fate around, hoping the market here will grow stronger, younger and bigger like in the old days.

The reality is the population is not only getting older, but also will decrease. There will be fewer young people entering the job market in the near future. As a result, the “size” of the job market will get smaller.

“We will be seeing the number of jobs created in the market fall into negative territory soon. Within five years, the market is likely keep on seeing negative figures,” labor and demographic economist Kim said.

“And this will negatively affect physical production, output and growth. We need to get used to the reality that the economy will grow slowly and older, and devise policies that can help people live and adjust accordingly. ”

But Kim, who was a former researcher for the Korea Development Institute (KDI), said he would not call the latest job figures “shocking” as many, including the press, have said.

The numbers ― 5,000 jobs created in July and 3,000 in August ― were definitely “low, but expected.”

There were many reasons behind the fall including corporate restructuring amid the downturn of shipbuilding and automobiles that once used to lead economic growth.

Demographically speaking, the population of the young entering the job market has decreased as the effect of the country's birthrate that started to slide about 15 years ago is kicking in. This is one of the reasons the number of jobs offered to the young is falling and will continue to fall.

“Fifteen years from now, the effect will be bigger amid the continuous falling birthrate.”

But another key index measuring overall employment remains the same as last year at over 60 percent. This means six out of 10 people are still working as before. In August, the employment rate stood at 66.5 percent, down 0.3 percentage points from a year ago.

“Again, with less people entering the job market, the size is shrinking. But the rate, which many have overlooked, shows the same level of employment as last year. It would be a shock if we saw this rate falling to around 50 percent,” Kim said.

Besides boosting innovation, another way to counter the expected decline in productivity is making the labor market flexible, the labor economist said.

He generally agrees with Finance Minister Kim Dong-yeon and his predecessors, who have all said the labor market here is “too rigid.”

Kim said it needs to be flexible, but not as much as that of the United States, and not too rigid as some European countries such as Germany.

“We need to find the right balance that will fit our economy, enabling workers to find jobs and re-enter the market after they were let go,” said Kim.

“This is not a zero-sum game in which one group comes out a winner and the other a loser.”

The social safety net should be further expanded for workers, while giving more leeway to companies to let employees, who fail to meet expectations and in times of an economic downturn, go.

The labor market is split into two distinctive groups ― regular and irregular workers.

This dualism with a high share of irregular workers is not only increasing inequality, but also making corporate employers more “cautious and slow” in hiring, Kim explained.

Thus, it is making the market rigid under a legal system heavily protecting regular full-time workers and taking advantage of irregular workers.

The International Monetary Fund (IMF) classifies irregular, or “non-regular” employees as those who are temporary workers, daily workers, the self-employed and unpaid family workers. They account for more than 50 percent of the total workforce here.

Korea's rigid system is also increasing job mismatches, according to the IMF.

Even though some people are not suitable or qualified to do their jobs, they do not quit and try to find other jobs due to fears of prolonged unemployment and the weak social safety net.

All these need to be addressed as society moves step by step toward developing a more flexible market, and it should stop debating whether the aged population is bad for the economy.

“There are no data that show when a person turns 40, 50 and 60, that their productivity will decline. People are living longer and healthier. Developing an ideal flexible market can help enhance productivity,” Kim said.