Koreas Social Contract Undergoes Stress Test

By Maragtas S.V. Amante

Professor at Hanyang University

The current impasse on legislation to extend protection to non-permanent workers is a critical `stress test' on the viability of the social contract in Korea.

Korea's policy makers have a strategic choice to make: create the conditions for greater social inequality, or short-term labor flexibility, to sustain economic recovery and growth.

Depending on the creativity of the policy makers, the choices don't need to be mutually exclusive. It is also a question of who will bear the greater cost of this strategic choice: Korean business or society.

News reports say that Korea's National Assembly failed to pass new legislation after a two-year deadline. Many non-permanent workers will be dismissed unless they are rehired as permanent workers. Korea's Labor Ministry expects 700,000 to 1 million non-regular workers will be dismissed by businesses, unless the revision is made. Non-regular workers account for 37 percent of Korea's total workforce, according to labor statistics.

Since employment involves human beings, who are not commodities subject to the rough buy and sell of the market, job security for non-permanent workers is more than an ordinary business transaction.

The decision to hire people has social consequences. Public policy, and society expects that hard work and good performance, including loyalty to a business be rewarded with job security, fair treatment, dignity and status.

Hard work with a company comes with increasing tenure and ``property rights" to a job.

As business recovers, the economic surplus, meaning the increase in productivity, as well as profits should be also spread to society, in terms of good jobs, higher pay, and increase in living standards.

These are rational expectations, known as the 'social contract' in business and employment. A young generation of business people, their employees, their families, and other members of society work hard, acquire skills and competencies, observe the rules of fairness and justice, and build up a strong, prosperous society built on the efforts and sacrifices of the previous generation.

In most countries, the social contract in employment is provided in fundamental laws, to empower the state to provide protection to the weak, vulnerable workers including the non-permanent employees.

Part of the protection in employment laws is the guarantee to workers rights and decent work. There are also specific laws and policies on health and safety in the workplace, social insurance, security of tenure, humane conditions of work, and good wages to provide for the costs of living, as well as savings.

Non-permanent jobs are temporary. Korea's ``Temporary Worker Protection Act," enacted in 2006, gave job security to non-regular workers.

Temporary workers refer to those who work in non-regular, part-time, and contract-based jobs.

The temporary nature of these jobs is a source of anxiety among most non-regular workers. This law says that temporary workers should become regular after working two years in part-time jobs.

For employers, however, employing temporary workers is better for maintaining a flexible labor pool and keeping labor costs down. Company management can bypass the law by firing temporary workers after two years and hiring other temporary workers to fill the jobs. According to law, temporary workers can be either transferred to regular positions or laid off after two years.

Permanent Employment

Korea's labor law provides for a permanent and fixed-term contract of employment. These laws were enacted when Korea sustained industrial prosperity, and economic growth.

But in the aftermath of the Asian financial crisis in 1998, employment contracts became more flexible, with a reduction in the system of long-term employment guarantees. Labor laws were amended to recognize the managerial prerogative of companies to dismiss workers, based on business conditions.

Should the state, through legislation, intervene in employment decisions? There are two opposing views: the cause for protection of vulnerable non-permanent workers, and the business case for flexibility in employment as part of economic freedom.

Labor market flexibility helps employers in cutting down expenses and strengthening competitiveness. However, there are also disadvantages: high training and retraining costs, difficulties in matching incentives and motivation for non-permanent employees who don't see any point in working hard since there is no job security anyway.

In addition, non permanent employees constantly worry about the instability of their status, and the effects on their income, and family. A small number of workers may benefit from flexible employment and work hours, while most of other workers experience worries, suffering, low motivation and lack of commitment to their work.

The decision whether to extend the contract of non permanent employees is still with the employer. The dismissal of non-permanent workers, and pushing them into the streets is against the spirit of good business as part of the social contract.

Globally, Korea's social contract is well known as a model of good, industrial relations practice, to promote sustainable economic growth and employment, stimulate higher productivity among workers, and creation of more prosperity through decent jobs, higher wages and incomes ― and the reduction of income and social inequity.

The writer is an economics professor at Hanyang Univerisity in Ansan He can be reached amante2008@hanyang.ac.kr