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Invest in technology, not income

The fundamental cause of the wage gap between big and small companies will not be solved by subsidies.
Mar 30,2018
The most pressing issue in the Korean economy is reducing youth unemployment. The rate has reached a whopping 9.9 percent, three times the overall unemployment rate, and there is no sign of it going down.

Recognizing the gravity of the situation, policymakers have come up with a plan to boost youth employment. When young people get a job at qualified small and medium-sized companies, they are to receive an annual subsidy of 10 million won ($9,400) for three years.

Ninety percent of jobs in Korea come from small and medium-sized enterprises (SMEs). Employment at these companies needs to grow to lower the youth unemployment rate, but young people have been reluctant to work for small companies. SMEs pay only 60 percent of what large conglomerates offer, and job security is another concern.

The policy is a temporary measure that does not address fundamental problems. SMEs pay less because they generate lower productivity and lower-level technology. The fundamental cause of the wage gap will not be solved by a three-year subsidy. Policymakers are simply using it as an emergency measure for our serious youth unemployment problem.

The government measure is expected to raise youth employment by temporarily increasing their income, but there could be adverse effects from the government’s direct intervention in the market.

For one, it is doubtful whether young people will choose SMEs for the three-year subsidy. Lower wages are certainly a major factor in young people’s avoidance of SMEs, but surveys show that job security is also a factor. We cannot expect the government’s makeshift measure to lower youth unemployment.

Conflicts with existing employees could also arise. Those who are already employed might be bitter about new hires receiving government subsidies. When new employees are paid more than their seniors, discord could escalate in the workplace. When that discord continues, it could exacerbate already low productivity.

The government needs to be careful when directly intervening with the wage structure of private companies. The Lee Myung-bak administration encountered failure when it tried to restrict starting salaries of new hires to 35 million won a year at state-owned companies.

To create jobs for young people, the government should introduce policies that indirectly subsidize wages through incentives for SMEs that hire young people rather than direct intervention.

For example, construction companies that win government contracts can be given additional points, or manufacturing and service industries could receive more funding to increase their wages.

Deregulation and policies that encourage investment are also needed. Jobs need to be created by private companies because they are the economic entities that offer jobs through investment. When uncertainty about the future rises, companies do not invest or create jobs.

Japan and the United States have adopted business-friendly policies to boost employment, and jobs for young people are growing. Just as policy makers protect the rights of workers, the government must ease regulations and encourage investment to lower youth unemployment.

Furthermore, efforts should be made to improve the technology level and productivity at SMEs. They are the fundamental reasons for their lower wages and job security. SMEs in Japan are competitive and stable because of their outstanding technological capacity. Policy makers must focus on financial support for technological development. Without enhanced technology and productivity, it is hard to close the wage gap with large corporations and increase employment.

Youth unemployment is likely to grow in the future. As industries become more tech-dependent and less labor-intensive, domestic production is weakening as seen in the relocation of our core industries such as shipbuilding. The management environment at SMEs is also deteriorating because of reduced work hours and low profitability.

To boost employment at SMEs and reduce youth unemployment, it is important to reduce unfair business practices between large and small companies, just as the administration is doing right now.

At the same time, the government should pursue policies to enhance the technological level at small companies. That way, even if large conglomerates continue to persist with unfair business practices, at least SMEs can generate profit from exports with competitive technology, just as in Japan.


Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, March 28, Page 33

The author is a professor of economics at Yonsei University.

Kim Jung-sik