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360. For Whom is This Choice: Labor Reform

Choi, Ji-young, Mun, Yu-jeong 기자2015.11.24 20:47:28


In 2014, the employment rate in Korea exceeded 65% for the first time according to Statistics Korea, yet there are lots of problems to solve in the labor market. The wage gap between major companies and small businesses, regular employees and non-regular employees, is not reducing, and irrational practices still exist. Furthermore, the youth employment rate was 40.7% in 2014, lower than the OECD average rate of 57.4%. The government announced the First Labor Market Reform plan in June to solve these problems, but arguments for and against this reform continue.



What is Labor Reform?

   The Korea Tripartite Commission, which is consisted of three representatives; labors, users, and the government, held the same view about the need to solve structural problems in the labor market. Then, they started to find specific solutions based on agreements about principles and direction for the Labor Reform plan on December, 2014. The Labor Reform plan aims to remove discrimination between workers, resolve uncertainty in the labor market, and provide jobs to unemployed people. It consisted of five major bills. Among these bills, the Peak Wage system, General Dismissal, Employment Stability for Period and Dispatching Workers issues are being contested. The Ministry of Government Administration and Home Affairs conducted presentations several times to the local governments and local public enterprises. As a result, more than 90% of the local public enterprises started to institute the Peak Wage system. After the first introduction from Daegu Metropolitan Transit Corporation, it was all applied to five public enterprises at Daegu. The city expects new 73 jobs until 2020 through the Peak Wage system.



Peak Wage System

   On April 30, 2015, the Korean National Assembly passed a bill extending the retirement age to 60 in order to prepare for the trend of an aging society. Public officials and companies with more than 300 employees are obligated to adopt this retirement law from next year, although it will increase the pressure of labor costs and delay labor flow recruitment. Therefore, the need for putting a new system in place has arisen ahead of the extension in the retirement age. One of the alternatives is the peak wage system, which guarantees job security until retirement age by reducing the wages of worker after a certain age. For instance, a 58-year old man would receive a 10% wage cut every year in return for extending his retirement age from 58 to 60. In some cases, gross salaries can be larger than before implementing the peak wage system, despite pay cuts.




   The rise of the peak wage system is inevitable, and consists of 2 factors: 1) to relieve employers of additional costs related with extended employment; and 2) to expand recruitment opportunities for young job-seekers with the money saved from wage cuts. Rather than competition between generations, it promotes coexistence for all. Senior workers can offer their abilities on the basis of abundant experience and know-how in workplaces. Corporations can acquire a trained workforce at low costs, avoiding conflicts between labor and management. Furthermore, consulting on wage structure reform and subsidies will be offered to companies which adopt this system.



   The government is pushing ahead with the peak wage system in the name of job creation for young people. However, there are still strong doubts on whether the reduction in labor costs will motivate companies to hire young job-seekers. One example is that five banks under the peak wage system have reduced their workforce up to 25% in terms of new employment, while the number of senior workers has increased from 430 to 858 over the past 10 years. This implies that the peak wage system has nothing to do with creating jobs. Moreover, acquiring a trained workforce at low cost can create an atmosphere in which companies want to hire young people at lower costs.


 

General Dismissal

   According to the analysis of the Korea Economic Research Institute (KERI), the real unemployment rate among young people is 2.9 times the official unemployment rate. For this reason, the need for labor reform is all the more crucial, along with regulation of the overprotection of regular workers. In principle, there are two ways to terminate contracts of employees in the Labor Standard Act. Companies can dismiss employees involved in corruption or embezzlement and layoff a certain number of workers when suffering from serious financial difficulties. Under the current Labor Standard Act, it is difficult to proceed with labor reform. Therefore, the government decided to add a general dismissal bill to the Labor Standard Act. General dismissal means firing those with poor performance at work for several years. It aims to make a breakthrough for youth unemployment and to acquire flexibility in the labor market. The concrete guidelines for general dismissal will be established based on precedents stipulated by the Supreme Court.



   There is a gap between regular workers and non-regular workers in the labor market. This gap is gradually widening due to overprotection for regular employees, which causes economic deprivation and income inequality. Furthermore, corporations are reluctant to hire regular workers overprotected by social laws, and the number of non-regular workers continues to increase. Regulation on overprotection of regular workers should be relaxed through introduction of general dismissal. General dismissal paves the way for expanding permanent jobs and narrowing the gap between regular and non-regular workers. 


   In fact, social problems are attributed not to overprotection of regular workers but rather insufficient protection of non-regular workers. The government has made no attempt to find practical solutions that improve conditions of non-regular workers. General dismissal just encourages conversion of regular positions into non-regular positions. In particular, the Standards of Personnel Appraisal System includes subjective judgments such as whether employees have responsibilities, use creativity, and communicate with co-workers. Employers can have full authority to dismiss employees due to lack of fair and objective assessment. Consequently, employees are likely to be under surveillance, and to become dismissal targets if they lose favor in the eyes of their employers. Thus, the management-union relationship will be out of balance because the guideline works to the advantages of the corporations.  


 

Employment Stability for Period and Dispatching Workers

   Nowadays, many companies use the ‘split-up labor contract’, used to avoid conversion from non-regular workers to regular workers with very short terms from two to six months. The companies can reduce costs by using non-regular workers, but these workers will feel anxiety about the future. The government suggested solutions through a ‘period law’ and a ‘dispatching law’. The Period law enables the contract term to be extended from two years to four years if the workers are aged 35 or over and agree. Furthermore, to restrict the split-up labor contract, renewal of a contract should be done up to three times for two years. The companies cannot abuse the workers at businesses related to life and safety, such as railroads, airlines, and shipping. The abuse of companies will be limited by the Dispatching law as well. It expands the range of dispatch to the elderly and high-income specialized jobs. In particular, dispatching can be possible for a type of so-called ‘root industry’ such as molding, casting, and welding.


 

   If the companies violate the renewal restriction rule, they will have a fine imposed on them.  Furthermore, when they do not want to convert non-regular to regular workers, they will have to pay some money to unemployed workers. Therefore, the ruling party (Saenuri Party) has said the period law will prevent unreasonable dismissals of non-regular workers. They also said relaxing the dispatching regulations will be helpful to both companies and workers. Companies can respond to a changing external environment by dispatching the workers to influential nations, and workers can have more working opportunities.


   However, these two laws were the most objected by the Korea tripartite commission and the opposition party. The opposition party insists that the laws will bring out side effects like making low-grade work environments rather than job creation. The commission disagreed strongly because these two items were not agreed between the government and the Korea tripartite commission, but the government included them nevertheless. Thus, the commission conducted a survey targeting the non-regular workers. About 70% of them were opposed to the period law, and 53% of them said that its purpose was not to convert non-regular to regular workers. About 61.7% of the non-regular workers disagreed about the dispatching law for the reason that it intensifies the dual structure of the non-regular and labor market.


 

Hartz Reform from Germany

   Hartz Reform, implemented by Germany, is considered as a representative example of labor reform. Last August, the president of Korea, Park, Guen-hye, first mentioned about Hartz Reform, saying Korea should follow the example of its reform methods. Furthermore, to support Labor Reform, the Bank of Korea paid attention to the Hartz Reform after an analyzing labor reform cases in leading countries. Many people in the political, economic, and scholarly fields are choosing Hartz Reform as the best example for Labor Reform.



   In the 1990s, Germany’s economy was shocked by the sudden reunification and the introduction of the Euro single currency. As a result, Germany was called the patient of Europe, suffering from a high unemployment rate (10.1% in 2002) and low growth. The German Chancellor, Gerhard Schröder, decided to progress for labor market reform. ‘Hartz Reform’ was named after the chairman Peter Hartz. It was conducted stage by stage from 2003 to 2005. The goal of this reform was to improve the flexibility of labor market, to reduce the unemployment rate, and to strengthen the competitiveness of German companies. The core contents of Hartz reform would be four bills. The first of these focused on enhancing the employment rate through creating various jobs such as mini-jobs, short-term jobs, and personal jobs. Second was the idea of the solitary company. This was a bill that made it easier for individuals to start-up and this resulted in four thousand new companies. The third was the making of a Federal Employment Agency to service providing agencies with high flexibility and quick work practices. Lastly, unemployment payment was reduced from 32 months to 12~18 months.



Consequently, the Hartz Reform successfully made Germany rich and powerful among the EU. The employment rate rose up to 74.1%, and the unemployment rate was 5% this year. However, Hartz Reform is also known as an ‘unpopular success’ because the life of Germans has become difficult. Before the reform, unemployed people could receive 60% of their wages for one year after unemployment and 54% after two years. This enabled the workers to look for the job they wanted continuously. As the unemployment payment was reduced, they received the same pay in the first year, but received 391 euro (about 492,000 won) a month after two years. In order to survive in a society with high prices, unemployed people had to accept jobs with bad environments quickly. However, if people are willing to work for cheaper wages there is a fear that all wages will decrease. Hartz Reform was a success in terms of cutting down the unemployment rate and the personnel expenses of companies, but it has also caused a severe gap between the rich and the poor. Because of this, the German government has now imposed the minimum wage system.


   To accept Hartz Reform as a role model is difficult because Korea and Germany have different economic situations. Non-regular workers account for 45% of the labor market of Korea. This means the labor market is already flexible, and the financial safety net for the unemployed is weak. Thus, the goal to make the labor market more flexible through following the methods of Hartz Reform is meaningless. The most effective thing that can be learned from Hartz Reform is improving the employment service.


 


 Interview about Labor Reform


Park, So-yeon

Dept. Energy Engineering, Junior

   The labor reform is unfamiliar to most students including me despite the ongoing media coverage of it. Students are usually pressed for time with getting credits and participating in language programs and internships. Furthermore, students have scanty opportunities to experience labor laws, and finding jobs is considered more urgent to them. That is why students cannot pay attention to the labor reform.

   Some experts point out the problem in labor market where small businesses, the large proportion of all businesses, are struggling with labor shortage while young people have difficulties in getting jobs. The experts indicate that it is attributed to a large gap of annual salaries, work intensities and welfare policies between small businesses and big corporations. It is reasonable point of view, but I think that small businesses are good in their own way. Unfortunately, compared with the big corporations, these small companies are not promoted well through media, which leads to low preference of young job-seekers for small businesses. There needs to be support for small businesses in providing connections to job-seekers and helping growth steadily.


Lee, Geon-hee 

Secretary General of Daegu Youth Union

   I think that there are some prerequisites to pushing ahead with labor reform. First, guidelines should suggest how many jobs will be created within a certain period and how long it will take to achieve the goal. Without concrete action, guidelines just worsen the condition of workers and aggravate problems in the labor market. Appropriate measures should be drawn, tailored for situations and practicalities. Second, an ideal social atmosphere is where laborers can claim rights to know their working conditions and workplaces. In fact, one of my unionists, a part-time worker, requested to show the labor rule. However, his request was rejected just because he was a part-timer, and then he was fired without being informed of any reason. This example indicates the unfair situations young people work in. The government should not only promote job creation but also confirm whether these working conditions basically are protected through a survey on black enterprises.

  


  On September, 14th, the Korean government announced that labor reform would be undertaken in the legislative process. However, it is still being disputed by concerned parties over whether it causes loss of good jobs, rather than creating jobs. At this time, there is a great deal of attention being given to how labor reform can make situations that are win-win for Korea.





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