The Korea Herald


[Yoo Choon-sik] Labor market and domestic demand

By Korea Herald

Published : June 17, 2024 - 05:20

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Among numerous indicators used to measure a certain aspect or aspects of economic activities, labor market statistics are widely known for reflecting economic conditions belatedly compared to some other leading indicators such as sentiment indices. Moreover, labor data is one of the least dynamic indicators in South Korea due to the country’s rigid labor market structure.

In contrast to countries with more flexible labor market structures, such as the United States, the unemployment rate in South Korea changes relatively slowly, making it all the more important to examine various subindices to better assess what is happening inside the labor market as well as in the economy as a whole.

In that sense, the labor market data for May, announced late last week, provides a good opportunity to assess the challenges facing South Korea’s economy as well as a useful lesson to consider when making decisions on key economic policies. Headline figures show the country’s labor market conditions worsened in May but were still holding up quite well.

Indeed, the unemployment rate rose to 3 percent in May from 2.7 percent during the same month of last year, and the number of unemployed people increased to 884,000 from 787,000. Still, the number of employed people also grew by 80,000 in May from a year earlier as the country managed to keep creating jobs, according to the data released by Statistics Korea.

But the situation is far more serious when it comes to the quality of employment, as the increased number of jobs owed much to the growth in jobs for a few hours per week. In May, those employed for less than 15 hours per week accounted for 9.4 percent of the total, up sharply from 7.4 percent in May last year and the highest on record for that month.

Regarding the January-May period, the average ratio of those employed for less than 15 hours per week stood at a record high of 8.8 percent this year, rising from 7.8 percent in 2023 and 7.9 percent in 2022, according to the Statistics Korea data. As a result, the average length of employment per week fell to a record low of 37.1 hours for the five-month period this year, compared with 39.1 hours in both 2022 and 2023.

Some may say this is a welcome trend for South Korea, which had long been notorious for an extremely long work week when compared with other major countries, because that could mean more workers can now enjoy a better work-life balance. However, an improving work-life balance is not necessarily good if it leads to a significant decline in labor income.

Other recent economic statistics, such as household balance sheet data and consumer sentiment indices, suggest that the decreasing average work week in fact reflects a worsening in household income that could result in a widening gap between recovering exports and sluggish domestic demand.

Underscoring the weakening signs of domestic demand, the number of self-employed people has been decreasing fast in recent months. South Korea’s economic growth could face a sudden and severe hurdle when exports, for some reason, fail to post sharp growth for a long time because the country’s ratio of self-employed people stands high.

This means policymakers need to pay more attention to these subindices better reflecting what is really happening in the labor market and in the domestic demand. The government and the central bank have repeatedly said they would manage fiscal and monetary policy independently from the US Federal Reserve, but their recent remarks provide little indication that they are ready to move ahead of the US.

By the way, the trend of increasing employment for less than 15 hours per week also provides a lesson on making decisions in key economic policies, because that may be influenced by the steep increases in legal minimum wages in recent years and by the rigid regulations accompanying the minimum wage system.

For instance, employers are required to provide a paid leave day -- or allowances for that -- each week to the employee working for 15 hours or longer per week. Many employers, such as those running small shops with poor profitability, decide to hire multiple workers each for 14 hours or shorter per week simply to avoid that paid leave requirement and other costs, according to media reports.

This provides a useful lesson for policymakers and labor union leaders alike: good intentions do not always bring the outcomes we hope for. When it comes to economic policy, there have been many research reports pointing to the importance of targeting incentives as a means to affect economic players, instead of imposing rigid, direct changes in the way they undertake business.

There is no denying that steep increases in the minimum wage and the imposition of strict and rigid requirements for employers have been introduced for the purpose of helping workers earn more money and have better protection, among others. But higher minimum wage and strict rules alone cannot solve the problem unless the economy grows.

Yoo Choon-sik

Yoo Choon-sik worked as the chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. The views expressed here are the writer’s own. -- Ed.