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That ’70s show

Our performance-based pay system was chucked out in the 1970s and 1980s.
Sept 01,2017
Last year, some 81 percent of Korea’s economic growth came from trade. The Korean economy runs on commerce. The contribution from domestic demand is downright feeble. We are not blessed with a large population like China, the United States or Japan. We must pay heed to the external environment for further growth. That is why we must have a mid-scale open economy.

Germany is among the few advanced economies that are led by exports. Its reliance on trade tops 70 percent. But its unemployment rate hovered around 10 percent when the global economy was booming in the 2000s. The Economist’s June 1999 edition called Germany the “sick man” of Europe. A series of labor reforms dubbed the Hartz reforms or Agenda 2010 — proposed in 2003 by Chancellor Gerhard Schröder — helped restructure the job market and increase competitiveness, which became a turning point.

The agenda included action plans to facilitate layoffs, reduce employment allowances, increase temporary work and reform pensions. Unions went along with a highly unpopular agenda that cut or froze wages. From 1999 to 2008, real wages on average contracted 0.5 percent a year. Companies started building factories in Germany instead of moving out. The magic behind its transformation from sick man to Europe’s top economic player in just a decade was keeping jobs growing while subduing increases in labor costs.

Spain chose the opposite direction. It paid little heed to advice from the Organization for Economic Cooperation and Development about labor reform. It was too intoxicated with the fruits of the boom years. Spain crumbled when the global financial meltdown arrived at its shores. It carried out labor reforms in 2012. It eased regulations on layoffs to make work hours flexible. Employers were able to lay off staff if sales dropped for three consecutive quarters. From the second quarter of 2014 to the first quarter of 2015, Spain created the most jobs in the eurozone after Germany. Layoffs plunged 70.4 percent.

France belatedly followed the successful programs of its neighbors. On Dec. 1, 2015, the government announced reforms dubbed Loi El Khomri to allow companies to lay off workers more easily. A workplace of 10 or fewer employees was able to shed workers if sales fell for one quarter, two consecutive quarters for a workplace of 50 or fewer, and four quarters for a workplace employing 300 or more.

Japan lifted a regulation limiting the hiring of temporary workers in certain industries. Jobs for temporary workers had to be secure for five years. Unions resisted the Shinzo Abe government’s call for wage hikes by insisting pay systems should be up to the employer and employees. As a result, real wages in Japan rose 0.7 percent last year and fell 0.3 percent in the first quarter of this year.

Labor reform is hardly heard of in Korea anymore. The country is going in the opposite direction of developed economies. Governments vie to entice multinational enterprises to their countries through cuts in taxes and favorable rents and other terms for factory sites. Korea is out to raise the corporate tax rate. Our performance-based pay system was chucked out in the 1970s and 1980s to allow annual increases in wages. The legal wage floor was raised. The base salary definition is also being challenged in courts. Companies employing workers on a non-permanent terms are criticized as being somehow immoral. There is little consideration for businesses.

President Moon Jae-in vows to create a society that appreciates the value of labor. It is a noble concept. While he promises to increase incomes for households, he does not say how productivity can improve. Celebrating his 100th day in office, Moon also pledged to seek ways to increase the number of union members. The employer-employee relationship somehow fell into the government realm.

Few want to talk about “pain-sharing.” Labor legislation in advanced economies is based on the pain-sharing principle. In Korea, laws serve unions. Pain is entirely dumped on the employers. Some say they should pay for years of disregarding their workers and their value. But the economy cannot run on one wheel — of workers.

Foreign companies are moving out, not into Korea. GM Korea is said to be considering pulling out. Domestic textile makers Kyungbang and Chonbang are preparing to take their manufacturing elsewhere. One day, Korean companies could start moving their very headquarters.

The government claims the economy is doing well. But for a few exceptions like semiconductors and petrochemicals, Korean industry is struggling.

Korea won’t be able to keep a mid-scale open economy at this rate. The age of the fourth industrial revolution has arrived, and yet our labor laws are from the 1970s and 1980s. If we backtrack, the economy’s fundamentals could be shaken. To succeed in the global market, our regulations must be up to its standards.

JoongAng Ilbo, Aug. 30, Page 31

*The author is an editorial writer of the JoongAng Ilbo.

Kim Ki-chan