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Labor market duality is a complex and critical issue for many countries that can lower productivity, contribute to inequality and result in negative externalities. In this paper, I study duality in the Korean labor market and analyze its sources and potential policy options. I find that employment protection legislations and large productivity differentials are the key drivers of Korea’s duality. In addition, applying a general equilibrium search-and-matching model and calibrating it to the Korean economy, I show that well-calibrated flexicurity policies can significantly reduce duality and inequality and raise welfare and productivity. Notably, the introduction of all three pillars—flexiblity, a strong safety net and active labor market policies—is critical for its success. If only one pillar is introduced it can result in negative side-effects and might not reduce duality.
Labor market duality is a complex and critical issue for many countries that can lower productivity, contribute to inequality and result in negative externalities. In this paper, I study duality in the Korean labor market and analyze its sources and potential policy options. I find that employment protection legislations and large productivity differentials are the key drivers of Korea’s duality. In addition, applying a general equilibrium search-and-matching model and calibrating it to the Korean economy, I show that well-calibrated flexicurity policies can significantly reduce duality and inequality and raise welfare and productivity. Notably, the introduction of all three pillars—flexiblity, a strong safety net and active labor market policies—is critical for its success. If only one pillar is introduced it can result in negative side-effects and might not reduce duality.
While the Korean unemployment rates are currently among the lowest in OECD countries, the labor market duality and the underemployment in some segments of the population are important labor market challenges, and factors contributing to lower potential growth. The paper shows the benefits of comprehensive policy reforms aimed at increasing labor force participation and youth employment and reducing duality are likely to be considerable in the medium term.
Korea is facing mounting economic challenges. Productivity growth has been on a trend decline amid demographic headwinds, while the societal demand for inclusive growth has been on a steep rise. Furthermore, the government-led unbalanced growth model—which served Korea well in the past—has become less effective and politically palatable in recent years. As such, Korea needs a major paradigm shift to embark on a new sustainable and inclusive growth path. But policy response has been modest at best with no major reforms being implemented over the past two decades. We propose a paradigm shift in Korea’s economic framework, involving a simultaneous big push for greater economic freedom and stronger social protection within the parameters set by long-run fiscal sustainability. We also provide a detailed account of structural reforms to boost economic freedom and sustainable funding plans for stronger social protection.
This paper examines structural challenges facing the Korean labor market and analyzes the macroeconomic effects of potential labor market reforms. Our cross-country empirical analysis finds that easing of employment protection legislation tends to have positive macroeconmic effects during periods of strong growth but could turn contractionary in periods of slack. By contrast, increased spending on active labor market policies and reductions to the labor tax wedge tend to be more effective in periods of slack. Our analysis thus highlights the importance of considering economic and policy conditions when designing labor market reforms. Under the current disinflationary policy stance, the government’s focus on the working hour reform seems appriorate. With growth recovering, deregulation to reduce employment protection for regular workers can also be considered, combined with targeted support to vulnerable groups.
Reviews the evolution of economic growth and trends in social development during the period between 1948 and 2009.
Both Japan and Korea are trying to boost female labor force participation (FLFP) as they face the challenges of a rapidly aging population. Though FLFP has generally been on a rising trend, the female labor force in both countries is skewed towards non-regular employment despite women’s high education levels. This paper empirically examines what helps Japan and Korea to increase FLFP by type (i.e., regular vs. non-regular employment), using the SVAR model. In so doing, we compare these two Asian countries with two Nordic countries Norway and Finland. The main findings are: (i) child cash allowances tend to reduce the proportion of regular female employment in Japan and Korea, (ii) the persistent gender wage gap encourages more non-regular employment, (iii) a greater proportion of regular female employment is associated with higher fertility, and (iv) there is a need for more public spending on childcare for age 6-11 in Japan and Korea to help women continue to work.
The Republic of Korea today is a highly industrialized, global leader in innovation and technology. It is the 10th largest economy in the world and has a per capita income approaching the average of OECD countries. In the 1950s, however, it was one of the world’s poorest countries, with decidedly bleak prospects. Its transformation has made Korea a well-known case study of successful development. Innovative Korea: Leveraging Innovation and Technology for Development summarizes the sources of Korea’s remarkable growth and the policies and institutional reforms that made it possible. The report focuses on Korea’s successful transition from a middle-income to a high-income economy. Korea escaped from the “middle-income trap†? by fundamentally transforming its growth paradigm to a more private-sector-led model emphasizing market competition, innovation, and technology. Compared to the previous emphasis on large fi rms and industries, the government became more focused on promoting small and medium enterprises and technology entrepreneurs. Exports expanded significantly through greater integration in global value chains. Already-high levels of human capital development were complemented by an expanded social safety net and a more integrated approach to education and training. Korea succeeded by focusing on the foundations of long-run growth, building global capabilities in innovation and technology, and adapting and evolving its growth paradigm to promote new sources of growth. Innovative Korea, jointly prepared by the World Bank and the Korea Development Institute, provides useful insights on Korea’s development story and practical lessons for public policy making.
This Selected Issues chapter outlines a strategy to facilitate this and navigate the more challenging monetary environment, involving enhanced communication of policy interest rate intentions and inflation-forecast targeting. The reduction in the inflation target by a percentage point to 2 percent in January 2016 weakened the nominal anchor. Monetary policy can play a role rebuilding the credibility of the anchor more rapidly through the adoption of inflation-forecast targeting. This strengthening of the monetary policy framework involves enhancing communications. An effective, credible monetary policy cannot address all macroeconomic challenges facing Korea. Rather, it can foster robust growth with low inflation, providing a stable and predictable environment that allows other policies to work more effectively. These other policies play a complementary role. Fiscal policy can reinforce the effectiveness of monetary policy, as illustrated by model scenarios. Structural policies can also support monetary policy by, for example, boosting potential growth.