Korea – Extending working lives

WEB EXCLUSIVES | April 29, 2010     

Extending the number of years that workers remain employed is a policy objective of governments in many Western developed nations. Delaying the age of retirement is necessary to cope with ageing populations, longer life spans and lower fertility rates, as well as limited state funds for income security and health programs for those no longer in the labour force.

While most Western nations seek to delay retirement, South Korean policy-makers face a situation in which workers already have long working lives, but, paradoxically, also face early retirement. As such, the Korean government must undertake a more fundamental restructuring of its labour market policies.

Respect and reverence for the elderly is widespread in Asian nations, especially those influenced by Confucianism. However, the veneration of the old, or even those who are middle-aged, excludes the workplace. In many parts of Asia, especially Korea, reaching age 50 means that being laid-off is just a few years away.

Dismissal is couched in terms of contractual mandatory retirement and as a means of making room for younger workers. Nevertheless, the result is the same: involuntarily unemployment for workers in their 50s followed by a second career in low-paying and insecure jobs. The typical career path for many in Korea is a job with a large organization obtained immediately after graduation, retirement after 25 or 30 years, and then a decade or two of menial work – often in the information economy.

The Asian economic miracle is partially built on this policy: hiring young males who work horrendously long hours, and then replaced once reaching middle age. For economies heavily dependent on manufacturing, this can result in high productivity and also relatively low wage costs. In addition, the exclusion of women from workplaces ensures a small welfare state (and government expenditures), as home-related tasks are assumed by females.

For Korea, with the world’s most rapidly ageing population and lowest fertility rate, reversing contractual mandatory retirement at an early age is essential. If not, then in two decades there will be more people ‘retired’ from the formal economy than are working. However, overturning a cornerstone of national economic policy requires both political leadership and the acceptance by business and labour of new arrangements. In other words, it will not be easy.

The hiring of young workers and their early retirement has been a cornerstone of the Korean economic rise, lifting the country from a basket case economy in the 1960s to the world’s 11th largest economy today. Large employers – that is the industrial powerhouses like Samsung, LG, Hyundai and others – recruit only young workers. Until reforms in 2007, permanent employees hired by government could not be older than 34 for lower level positions, or 32 for more senior positions.

Once in their 50s these workers, when beginning to earn substantial wages due to seniority provisions, are shed by their employers. This means companies limit their wage and pension costs, as well as the need to upgrade the skills of workers.

Older workers – that is those in their mid 50s – have few options once laid off. Many drift to the informal economy, earning a fraction of their previous income. Middle-aged taxi drivers with a perfect command of English gained as middle managers stationed overseas are common in throughout Korea. Some of those laid-off will run convenience stores or other similar service establishments for long hours and little pay.

The result is overall lower productivity and a considerable waste of human resources. Although this is recognized by the state, there are barriers to reform.

Seniority-based wages have served as a means to justify retirement at a young age as employers argue that older workers earn wages that exceed their contribution to the firm. As such, uniform retirement is seen by both management and labour as an acceptable means of removing a cohort of less productive – vis-à-vis their wages – workers. In other words, mandatory retirement is a trade-off for seniority-based wages.

Labour unions are unwilling to agree to revisions to seniority-based wages, fearing that it will result in overall wage reductions for all workers. Rather unions would prefer that the government mandate a retirement of 60 for all workers, thus leaving the seniority system intact. The state however is loath to act when faced with opposition from business.

However, the hands of the state, as well as the labour market partners, are being forced by unprecedented demographic shifts. With fertility at a world’s low of 1.4 children per woman for nearly two decades, Korea will soon experience labour shortages. There will be fewer and fewer young workers and more older ones. This demographic trend  is not restricted to Korea, which is why lengthening working lives is on the agenda of nearly every developed nation. However, the reforms in Korea will be unique in that working lives in the ‘first career’ need to be lengthened, while time spent in the ‘second career’ needs to limited, if not eliminated altogether.

Companies will need to recognize that middle aged workers are still valuable and, in some cases, require upgrading and opportunities to learn new skills. Organized labour will need to retreat from seniority linked wages and accept that workers will not necessarily earn more each year. In addition, a discourse of human rights will need to provide a rationale for government to ban hiring, and firing, workers based solely on the arbitrary criterion of chronological age.

Policy-makers began to act in 2007 when the government unveiled a proposal to raise the retirement age by five years. However, the global financial crisis and recession delayed legislation to implement the proposal. With an economic recovery underway, pressure will mount for the government to lead by example and make 60 the normal retirement age for all state workers, and mandating large employers, such as financial institution, to follow.

Although there will be some negative reaction for employers, such an initiative will not be widely opposed, and indeed will be welcome by many particularly the large group of workers now in their 30s and 40s. That some of the more physically demanding and lower-added value manufacturing jobs are being shifted to other nations, also means that the argument that workers are ‘worn-out’ and less productive by the time they reach their early 50s carries less weight. Increasingly, unions and workers will recognize that remaining employed in the formal sector, even if wages are capped, is a better option than the current early exit to precarious employment.

For Korea, the aging of the population provides an opportunity to reform its atypical labour market arrangements. Such reforms often involve winner and losers. With any luck, Korea will be an example were the outcome is of advantage to both workers and employers.

biolineThomas R. Klassen is an associate professor in the Department of Political Science, and the School of Public Policy and Administration at York University (Toronto). He is co-editor of Retirement, work and pensions in ageing Korea.

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