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Labor market reform tasks for restoring the dynamism of the Korean economy

Labor market reform tasks for restoring the dynamism of the Korean economy

Ⅰ. Declining Economic Dynamism and the Changing Labor Market

□ The economy is constantly evolving, and the phenomenon of creative destruction that emerges amid such change is the core of sustainable economic growth.
ㅇ In an economy characterized by continuous innovation, outdated products disappear while new products and services are constantly introduced, leading to dynamic transformation.
ㅇ Recently, rapid changes in demographic structure, technology, and other aspects of the economic environment have made maintaining continuous growth and economic dynamism even more critical.

□ However, the Korean economy has recently been experiencing a steady decline in dynamism and is now facing a range of challenges that may further hinder its vitality in the future.
ㅇ Entry through start-ups has declined, and the productivity of young firms has slowed (Lee, Kim, and Ji, 2019).
— Unlike in major countries such as the United States, where even if the total entry rate has decreased, the net entry rate at the firm level has not declined, Korea has experienced a fall in both. This reduction in dynamism has had a stronger negative impact on productivity (Aum, 2024).

ㅇ The sharp decline in birth rates has accelerated population aging, which is expected to lead to a decrease in the working-age population in the coming years.
— Because the age structure of workers varies by industry, the progress of aging is likely to exacerbate labor supply–demand imbalances across sectors (Lee, Um, and Lee, 2023).

ㅇ The rapid advancement of digital technologies is also changing the direction of technological progress and the nature of production environments.
— Especially in terms of the labor market, digital technologies such as AI may have qualitatively different impacts from those observed in the past several decades of technological change (Felten et al., 2018).

ㅇ In addition, global uncertainties are expanding, including the contraction of global value chains, the rise of protectionism, and persistent global inflation.

□ A decline in dynamism reduces the scope for creative destruction, hinders adaptation to change, and undermines long-term growth momentum.
ㅇ It is therefore necessary to diagnose the causes of weakened dynamism and propose effective solutions.

Ⅱ. Labor Market Reform Agenda

1. Flexible Working-Hours Systems Reflecting the Diversification of Work Styles

□ Korea is known as a country with long working hours, and the government has pursued policies to legally regulate working hours above a certain level.
ㅇ The Labor Standards Act limits weekly working hours (five-day workweek, 52-hour system), rest breaks, and additional pay for extended or holiday work.

□ However, work patterns vary greatly by industry and occupation, making uniform legal and regulatory frameworks impractical.
ㅇ Regulations such as the 52-hour workweek that disregard individual companies’ operational contexts and workers’ preferences may reduce not only firm-level productivity but also overall economic efficiency.
ㅇ Moreover, excessive regulation of working hours may paradoxically encourage long working hours by limiting the natural downward trend in work time associated with rising productivity.

□ In particular, rapid technological change is transforming how people work, potentially rendering the current working-hours system obsolete.
ㅇ New forms of work such as platform labor, remote work, and telecommuting are expanding.
ㅇ Diverse forms of labor supply are emerging beyond the traditional model of one person, one job.

□ Policy recommendations must be based on empirical evidence, not ideology. Instead of compromise proposals constrained by labor–management conflict, bold reforms are required.
ㅇ Korea’s social conflict index ranks third highest among OECD countries.
ㅇ Using data, empirical analyses should examine how heterogeneous working-hour patterns are across industries and occupations, and how they fluctuate with business cycles.
ㅇ The study should assess both the necessity and feasibility of exempting R&D and white-collar positions from current working-hours limits.

2. Remodeling Employment Protection to Overcome Regular–Nonregular Dualism

□ In Korea, the level of employment protection is polarized between regular and nonregular workers.
ㅇ Regular workers are protected by laws that make general dismissal difficult and prohibit unfavorable changes to employment rules.
ㅇ Nonregular workers, meanwhile, are prohibited from being employed for ongoing and continuous work (lasting over two years), and the likelihood of conversion to regular employment is low, especially in large corporations and the public sector.
— The more difficult it is for firms to change employment rules for regular workers, the less willing they are to convert nonregular workers to regular status.

□ Economic growth occurs through the movement or relocation of labor and capital from low-productivity to high-productivity sectors, making the free mobility of labor an essential condition for growth.
ㅇ However, mobility between the two groups—regular workers (about 60% of wage earners) and nonregular workers (about 40%)—is limited, resulting in deep labor-market dualism.