Two-year limit distorts hiring, deepens dualism, discourages stable employment

A labor law designed to promote stability has instead taught firms to count months. In South Korea, the most consequential number in employment is not a wage or productivity metric, but 23 months.

That is when many fixed-term contracts end, just shy of the two-year threshold that triggers automatic conversion to permanent status. What was meant as a bridge to security has hardened into a ceiling.

President Lee Jae Myung has said as much, calling the Fixed-Term Act a system that, in practice, discourages employment beyond two years. His critique is less political flourish than an admission of policy failure. Nearly two decades after its legislation in 2006, a rule meant to curb abuse of nonregular labor has helped entrench it.

The mechanism is straightforward. Employers must convert fixed-term workers into indefinite contracts after two years. In a labor market where dismissals are difficult and costly, that obligation is seen less as an incentive than a risk. Contracts are terminated at one year and 11 months or split into shorter cycles. The law’s intention remains on paper, but in practice, it has created a predictable exit point.

Data reinforces the point. Fixed-term workers have risen to more than 5.3 million, or roughly 24 percent of all wage earners. Earlier figures show a similar trend from the mid-2000s, when both the share and number were significantly lower. A regulation meant to reduce temporary employment has coincided with its expansion.

This reflects structural rigidities. South Korea ranks poorly on measures of labor market flexibility, trailing the US, Japan and Denmark. Once hired, regular workers are hard to dismiss, and wages rise with tenure rather than productivity.

For Korean firms, the choice is simple: either commit early to a long-term obligation or avoid it altogether. Many opt for the latter.

The consequences are uneven. Nonregular workers earn about 2.08 million won ($1,400) a month, compared with 3.89 million won for regular employees. The gap shapes consumption, family formation and mobility. It also exposes an uncomfortable truth that protections designed for a minority of regular workers can come at the expense of a much larger group of nonregular workers.

President Lee has hinted at this imbalance, noting that policies meant to improve welfare may have weakened it in aggregate. His remarks on union influence and hiring practices point to a system in which insiders are well defended while entrants face narrowing paths.

The risk is intergenerational. If firms hesitate to create regular positions, younger workers inherit shorter contracts and thinner prospects.

One approach to address the issue is to extend the conversion threshold from two to four years, giving firms more time to assess workers and workers more time to develop skills.

Another is to shift from status to compensation. In several advanced economies, temporary workers receive higher pay to offset insecurity. Australia’s casual loading and France’s instability allowance show how risk can be priced rather than prohibited.

Labor reform has long been framed as a contest between protection and efficiency, unions and management. That framing is now part of the problem. A system that produces 23-month careers is neither protective nor efficient; it is evasive.

A more durable settlement would accept a trade-off. Firms would gain flexibility in hiring and separation, while workers receive stronger income support, fairer pay and clearer paths to mobility. Such a bargain requires concessions from both sides, including a willingness to reconsider entrenched privileges.

The irony of the current law is that it protects by exclusion. As the Fixed-Term Act nears its 20th year, the lesson is not that regulation is futile, but that it must anticipate behavior. Otherwise, the calendar will continue to dictate careers, and the promise of stability will remain just out of reach.


khnews@heraldcorp.com