Social trust cures 'jobless growth' disease

By Dr. Jeffrey I. Kim

On Nov. 9, President Moon Jae-in replaced two economic policy chiefs. His new picks are presidential chief of staff for economic policy Kim Soo-hyun and finance minister nominee Hong Nam-ki.

Kim, who served as presidential social affairs secretary, succeeded Jang Ha-sung who was sacked for failing to create jobs and reinvigorate the slumping economy. Kim vowed to support Hong who will serve as an economic "control tower" when he officially replaces Kim Dong-yeon as economy and finance minister after undergoing a National Assembly confirmation hearing.

Kim told the reporters, "I will go anywhere and meet anyone if my visits help create more jobs."

Hong, a veteran economic bureaucrat who is currently serving as chief of the Office for Government Policy Coordination under the Prime Minister's Office, publicly pledged to carry out President Moon's three key policies ― income-driven growth, innovation, and fair competition.

The two new policy chiefs seem to have a strong belief that income growth will surely bring about many new jobs.

However, not many people are aware there would be a long and rough road going from growth to hiring. Job creation depends on an increase in investment which is contingent upon business expectations. If firms have a bleak business outlook, they would not undertake large-scale investment projects. Instead they may invest their money in the stock market.

Top policymakers in any country have a strong interest in raising employment during their term.

Arthur Okun, the late economics professor at Yale, served as chair of the Council of Economic Advisers in the late 1960s. He was the very person who coined Okun's law. He first noticed there was a close connection between falling unemployment and the growth rate of real GDP. Employment tends to increase and the unemployment rate tends to decline when the real GDP growth rate is high.

Okun's law states that unemployment remains constant when real GDP growth rate is 3 percent, unemployment declines when real GDP is above 3 percent, and unemployment increases when GDP growth is below 3 percent.

Statistical regularity about the relationship between income, growth and employment may vary from country to country. For some periods of time, Okun's law was globally popular but it is not as relevant now because the economic structures in many countries have changed.

In September, Statistics Korea and the Bank of Korea released a gloomy report that the employment elasticity of GDP growth sharply dropped from 0.395 in 2015 to 0.132 for the second quarter of 2018.

This elasticity refers to the employment growth rate divided by the GDP growth rate. The conventional economic principle states that economic growth leads to the expansion of employment. But this principle seems to have lost its validity.

The relationship between GDP growth and job growth has been weakening and its elasticity has been constantly declining in Korea. The nation's economic performance in the past decade has been weakening mainly due to its exports of semiconductors, petrochemical products, and automobiles.

These products are highly capital intensive or technology intensive. The manufacturing of these products requires people with high levels of skills and experience because hiring people with no work experience causes too many safety accidents.

Along with globalization, offshore outsourcing has increased immensely. To be price competitive, manufacturers purchase goods and services from places where they are supplied at the lowest costs.

The outsourcing, with all its benefits, results in loss of jobs to other countries. In addition, many large-scale companies are not willing to expand their business investments because they are discouraged by anti-chaebol sentiment in Korea.

In this manner, Korea is suffering from a "jobless growth" disease. But there is one critical factor, "social trust," with which we can cure the disease.

Social trust is faith in the honesty, integrity, and reliability of other people. In 2007 the Pew Research Center in the U.S. conducted a telephone survey asking 2,000 adults to measure their level of social trust.

The survey results are: People with higher family incomes are more trusting than those with lower family incomes. The married are more trusting than the unmarried. The middle-aged and the elderly are more trusting than the young.

The survey also showed that people who live in rural areas are more trusting than those who live in cities. These findings can provide us with insight. In order to raise the level of Korea's overall social trust, the government should take proper policy measures.

There is plenty of empirical evidence supporting the hypothesis that trusting people are healthier and happier and live longer than distrusting people. A nationwide campaign for raising social trust can significantly increase the value of employment elasticity of income growth.

Dr. Jeffrey I. Kim (ickim@skku.ac.kr), former foreign investment ombudsman, is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago and taught at the University of Colorado, Boulder, and the American University, Washington, D.C.