Chapter 4. Improving hiring and job retention for older workers in Korea
This chapter looks at how current policies and practices around hiring and firing affect older workers in Korea. The discussion focuses on potential rigidities introduced by Korea’s seniority-centred professional appraisal culture and the impact of its employment protection legislation for older workers. The discussion evaluates recent policy initiatives to address some of these issues and looks at how they might contribute to better outcomes. The conclusion outlines some concise recommendations for policy makers to consider.
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
A labour market dismissive of its oldest participants
Korea’s labour market will have to improve the opportunities for older people to continue working in good jobs. An important issue for more inclusive ageing and employment policies in Korea is to encourage employers to place older workers into better jobs, including by retaining them longer in their main job. Not only would older people benefit from more fulfilling work and age-friendly workplaces but employers would also benefit in terms of improved staff engagement, reduced staff turnover, institutional memory and opportunities for knowledge transfer (Marvell and Cox, 2017).
Job retention among older workers in Korea remains very low compared with most other OECD countries. In 2016, only 23% of all Korean workers aged 55-59 were working with the same employer they had five years before – less than half the equivalent figure of 50% for the OECD as a whole (Figure 4.1). Meanwhile, hiring rates of jobseekers aged 55-64 were high in Korea, almost four times higher in 2016 than the OECD average (34% compared with only 9%).
a. Employees aged 55-64 with job tenure of less than one year as a percentage of total employees.
b. All employees currently aged 60-64 with job tenure of five years or more as a percentage of all employees aged 55-59 5-years previously (4-years for the United States).
c. Data for the retention rate refers to 2015 and to 2012 for the hiring rate.
d. Data refer to 2015.
Source: OECD Older Worker Scoreboard, 2016, http://www.oecd.org/els/emp/ageingandemploymentpolicies.htm.
Employment practices towards older workers
It is common in Korea for employers to enforce a strict mandatory retirement policy. Some employers decide such rules unilaterally while others deliberate them through collective bargaining. Such self-imposed rules automatically terminate the employment relationship of any worker reaching a specified age-limit. Such rules also constrain hiring at or close to the given age-limit. Job termination of this kind is lawful in Korea unless the rules are stipulated in a discriminatory or arbitrary way. Beyond formal mandatory retirement, it is also common for employers in Korea to petition their older employees to voluntarily separate from their job before reaching the mandatory retirement age through certain incentives. This widespread practice is known as “honorary retirement” (Box 4.1).
According to Korea’s Additional Economically Active Population Survey for the Elderly, the average age of separation from the main job (i.e. the job a given worker has held for the longest duration) for workers aged 55-64 (including the self-employed) was as low as 51.6 among men and 47.0 among women in 2016 (Table 4.1). More than half of such separations occurred among workers aged 50-59. The average age of separation from the main job has remained consistently low since the indicator was first calculated in 2005.
For men, the most important reason for separation from the main job was the business situation such as business closure or bankruptcy (38%), followed by honorary retirement and layoffs (16%) and mandatory retirement (15%) (Figure 4.2). By contrast, for women, illness came first (28%), followed by business closure or bankruptcy (25%) and family care (21%). The high share of job separations accounted for by the business situation is probably related to the fact that many older workers are self-employed.
Note: Includes self-employed persons.
Source: Statistics Korea, Additional Economically Active Population Survey for the Elderly.
The term “honorary retirement” refers to voluntary retirement before the mandatory retirement age. Usually, an honorary retirement plan is initiated by employers by notifying employees about the plan and its eligibility criteria and conditions. In most cases, such a plan entails considerable compensation in return for retirement, although there is no rule governing the compensation level, which may be freely set.
Employers can unilaterally establish such a scheme which is not regarded as a dismissal and not subject to dismissal rules. However, in practice, employers try to reach an agreement with trade unions or limit the category of honorary retirement to non-trade union members such as white collars or high-level employees so as to avoid resistances from trade unions. Honorary retirement is thus a kind of voluntary termination of the employment contract under a mutual agreement between the employer and the employee, this practice being sometimes related to traditional Confucian values of honour and respect for older people.
Honorary retirement is often used by employers who need to reduce their workforce. These redundancies are not subject to dismissal rules in principle and, thus, employers may avoid legal uncertainty that could result from collective dismissals. Although Korea’s labour law stipulates dismissal rules for redundancy (dismissal for managerial reasons), honorary retirement is widely used for smooth implementation of adjustments of the workforce. It is also directly related to the procedure of a collective dismissal. Under the labour law, honorary retirement is accepted by the court as a measure to avoid or minimise lay-off (i.e. a collective dismissal).
Honorary retirement is also frequently implemented independently of a reduction of the workforce. Many (large) firms systematically implement this plan to reduce the share of older workers, without intending to reduce the overall workforce. This is done for two main reasons. First, it is used to reduce the number of older workers who are being paid above their productive value because of a seniority-based wage schedule. Second, in doing so, it can create more room for promotion of less costly and more productive younger workers, which could elicit more commitment from them.
Honorary retirement plans are prevalent mainly in large firms and in the public sector. In SMEs, individual agreements to terminate the employment relationship are more prevalent, with or without compensation for termination. Even if compensation is paid, the amount is usually small. Greater acquiescence by employees facing redundancies in SMEs partly reflects an acknowledgement of the difficult business situation that SMEs often experience and the greater opportunities they have to find similar jobs in other SMEs. Of course, the existence of stronger trade unions in large firms and in the public sector is also a key reason for this difference.
Employers argue that they have to adopt a costly honorary retirement plan to overcome Korea’s overly strict dismissal rules. According to them, even in the case of a lawful collective dismissal, it is difficult to take actions faced with severe resistance from trade unions. Trade unions argue that honorary retirement plans are, in many cases, actually involuntary in that targeted workers are pressured to apply for the plan by the threat of being disadvantaged if they refuse.
Source: Phang et al. (2012), “Practices of the Mandatory Retirement Ages and Retirement Management in Enterprises”, Korea Labour Institute, Sejong.
Despite relatively early retirement from the main job, most of Korea’s older workers remain within the labour market. Most of those exiting their main jobs around this age begin a so-called “second career”. This second career might be in an altogether different economic sector and typically entails a sharp reduction in earnings, job quality and job security. For many, a second career may entail self-employment and business-ownership – though without necessarily having the skills or networks necessary for success. This very unique and long-standing situation in Korea has contributed, in large part, to the high poverty rates observed among the elderly population. Some of the ways in which this pressing issue can be addressed are discussed throughout this chapter.
Factors driving age-based employment practices
Seniority-based professional appraisal
Workers who stay longer with a firm typically have considerably higher wages than workers who joined more recently. This holds true for many OECD countries, and may arise for a number of different reasons. First, older workers may be more productive as they have longer work experience, which in turn may result in broader competencies and greater complexity of tasks and duties. Second, tenure effects may reflect positive assortative matching between firms and workers, whereby higher wages would be a result of employers’ selecting better workers to stay in their firm while, similarly, workers would be less prone to leave better-paying firms. Third, firms may incentivise workers to remain in the firm and exert effort in exchange for higher wages in the future. Unlike the two first explanations, this motivation effect may encourage firms to incite workers with longer tenure to take early retirement or lay them off, if possible, if these workers do not have correspondingly higher levels of productivity. Concerns have thus been raised about potential negative employment effects for older workers of pay scales that increase with tenure, regardless of job duties and/or work performance.
Comparing wages in the manufacturing industry, Kim et al. (2015) found that in Korea the average wage of employees with tenure of 20-30 years was 2.7 times the average wage of employees with tenure of less than one year – a ratio much higher than in other OECD countries, except Japan. While the importance of seniority in wage-setting has diminished over time in many OECD countries, seniority-based wage-setting practices are still dominant in Korea. According to the Additional Survey on Labour Force at Establishments, a seniority wage system was in place in 2017 in 60.3% of establishments with 100 or more employees. This is perhaps the single most important factor driving negative employment outcomes for older workers in Korea.
However, there are large differences in wage-setting practices between large firms and SMEs, and between regular and non-regular workers. Large firms still maintain a strong seniority-based wage system while in SMEs seniority wages have become less evident. Average job tenure tends to increase with firm size, ranging from 2.5 years in firms with less than five employees to 3.1 years in firms with 5-9 employees and 10.4 years in firms with 300 or more employees, according to the Economically Active Population Survey in 2012. Moreover, Hwang et al. (2005) found a very weak seniority effect on wages among non-regular workers using the Korea Labour Income Panel Survey data in 2002: the gap in wages between regular and non-regular workers is larger among prime-age workers and narrower among younger and older workers. This implies that a significant number of older workers move from seniority-based wage jobs in large firms to low-paid jobs without a seniority premium, mostly in SMEs.
Why does the seniority wage system persist in Korea?
Seniority-based wage-setting has a long history in Korea. It first came about during Korea’s early period of industrialisation as a means to recruiting (and retaining) higher skilled workers who were in very short supply at the time. Seniority-based wage-setting was enforced through strong support from incumbent workers – who have much to gain from its rewards – and employers satisfied by the simplicity of its approach. Arguably, seniority-based wage-setting mechanisms have also found fertile ground in Korea’s Confucian social norms that have long enforced strong age-based hierarchies within society. In theory, seniority is not the same as age but in many cases, the two elements go hand in hand in Korea. Seniority-based wage-setting saw average job tenure in Korea rise substantially over time: from 3.6 years to 6.2 years between 1985 and 2010 among establishments with five or more employees and from four years to nine years among those with 500 or more employees (Jeong et al., 2011).
Understandably, the seniority wage system is strongly supported by employees and trade unions because it works in favour of regular employment and strengthens solidarity among union members. The lifetime expenditure pattern of typical Korean households has also contributed to the persistence of the seniority wage system. This pattern can be characterised by the practice of providing continuous financial family support for older parents and children, especially for private education, tertiary education and marriage.1 This means that expenditures tend to peak for households as the breadwinners reach their late 40s and early 50s.
How does the seniority wage system affect employment of older workers?
The basic link between early retirement from the main job and the seniority-based wage system lies in the gap between the wage level and productivity. If wages rise steeply with seniority, employers will have a disincentive to retain older workers since it becomes too costly to hold onto these workers relative to their productivity. Many empirical studies find a negative effect of Korea’s seniority-based wage system on employment of older workers (Phang et al., 2012; Hwang, 2005; Hwang, 2012; Korea Development Institute, 2011; Kim et al., 2007). International comparisons also point out that this wage system could impair career prospects for older workers (Box 4.2). In Korea, wages are estimated to increase by 13.4% as tenure (with the same employer) increases from 10 to 20 years, even after controlling for observable skills, skill use at work, job complexity dimensions and the accumulation of skills associated with more experience (Figure 4.3).2 This is the highest expected wage growth among OECD countries for which data is available, more than double the cross-country average of 6.1%. These estimation results thus confirm that older workers are at greater risk of job separation in Korea than in other OECD countries.
Note: See Box 4.2.
Source: Authors’ own compilation based on data from OECD’s Survey of Adult Skills (PIAAC).
Another factor is linked to promotion. As higher positions are limited, older workers who had not been promoted are likely to retire. Basically, firms would prefer that such older workers retire voluntary to make more room for promoting younger workers. Together, under the workplace culture based on seniority and age, such older workers may want to retire because it is uncomfortable to work under the supervision of younger colleagues with shorter seniority. The practice of honorary retirement (see Box 4.1) could be seen as a compromise to reconcile the different interests between employers and older workers. In any case, the strong influence of seniority in Korea’s firms adversely affects job security of older workers and is a main cause for early retirement from the main job.
How to transition towards job-based professional appraisal?
The Korean government fully recognises the adverse effect of the seniority-based wage system on the employment of older workers. It has given impetus to transition towards a job-based system. While wage policy is primarily determined by the social partners, public authorities can help impulse positive changes in at least three ways:
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By working with social partners to develop new criteria, such as well-designed qualification frameworks, for anchoring wage-setting practices and ensuring fair pay for workers, in connection with their job requirements and skills;
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By raising awareness and understanding of these new criteria and the benefits from using them instead of seniority criteria, for both workers and employers.
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By ensuring a smooth transition period, including through the provision of transitory compensating measures to minimise the potential loss of lifetime earnings that the current cohort of workers may incur.
The internationally comparable data on individuals’ skills collected by PIAAC enables a new perspective on the relationship between wages, tenure and skills/productivity (OECD, 2016). As the survey contains information on many aspects of skills and job tasks, it allows for a better estimate of productivity at the individual level. To the extent that longer tenure coincides with higher levels of human capital and productivity, the association between tenure and wages should become relatively weak when controlling for various measures of skills and work tasks. Any remaining influence of tenure on wages of individuals with the same levels of observable skills and job complexity may indicate an increased risk of negative employment outcomes for older workers.
For each country, the expected wage growth – as tenure with the same employer increases – is derived from the estimation of a standard Mincer wage equation:
Ln Wi = β0 + β1Si + β2Xi + β3Xi2 + β4Ti + β5Ti2 + β6Gi + εi (1).
The dependent variable is logged hourly wages (trimmed of the highest and lowest percentiles to control for outliers, and reported in 2012 USD); S is defined as years of education; X as potential labour market experience (equal to age minus years of schooling minus age when school typically starts); and T as tenure with current employer. G is a vector of controls, which includes in particular: three indices of skill proficiency (literacy, numeracy, and ability to use computer), four indices of skills use at work (ICT, reading, writing, and numeracy); four indices of task complexity (autonomy, influence, supervision and planning); and training participation in the past 12 months. Each regression includes controls for gender, immigrant status, parental educational attainment, marital status, number of children, and controls for missing values. Results are weighted by the complex sampling weight in PIAAC.
Since the estimation framework allows for the effect of an additional year of continuous tenure on wages to vary (quadratic specification of tenure in the wage equation), the estimated coefficients on tenure (β4 and β5) are not easy to interpret directly. Therefore, a summary indicator of the slope of earnings profiles is calculated, which corresponds to the expected wage growth when tenure with the same employer increases from 10 to 20 years: Δ = lnWT=20- lnWT=10 = 10β4 + 300β5.
OECD (2016), Skills Matter: Further Results from the Survey of Adult Skills, https://doi.org/10.1787/9789264258051-en.
The new National Competency Standards (NCS) and the progressive implementation of Qualification Frameworks based on the NCS constitute an important step in the right direction. For each industry, the NCS provide a classification of jobs into various categories, and for each category, they set out specific competencies – in terms of skills, knowledge and attitude – workers should possess to achieve their job duties successfully (OECD, 2015a). NCS-based criteria are progressively being used for hiring individuals in the private and public sectors. The right foundations for a job-based system of industrial relations are in place, and the transition is underway.3 As a matter of fact, there has been a decreasing trend in the prevalence of seniority-based systems for setting wages in recent years: while seniority-based wages were applied in 71.9% of firms with 100 or more employees in 2013, this proportion had fallen to 60.3% by 2017.
In addition, public authorities aim to foster the transition towards a job- and skills-based system by providing information, guidelines and other relevant services. In this respect, the Korea Labour Foundation provides briefing sessions, consulting services and free counselling to help companies engage in a dialogue with employees and/or their representatives. The government releases information on best practices, based on a selection of firms that have successfully reformed their practices through improvements to the wage-setting system. But there is still a lack of knowledge among key stakeholders concerning the market wage for a given job that requires specific skills. Government efforts to reduce this knowledge gap should be pursued and strengthened.
To speed up the transition process and overcome resistance from workers and their representatives, some compensation measures may be necessary for the current cohort of workers who have been hired before the transition and have been paid according to a seniority-based system for a number of years. To the extent such pay systems encompass a lifecycle dimension whereby younger workers tend to receive wages lower than their productivity levels in exchange of higher pay – above productivity levels – at older ages, the current cohort of workers may suffer a loss in lifetime earnings.
As sketched out in Figure 4.4, this potential loss would reach a maximum level for middle-age workers: by switching from a seniority-based to a job-based wage system, they will lose their deferred wages almost entirely (Figure 4.4, Panel A). A simple way for firms to redistribute the accrued amount of deferred wages is to postpone the age of mandatory early retirement. Symmetrically, postponing that age without a corresponding change in the wage-setting system would impose large costs on employers (Figure 4.4, Panel B). Therefore, there is scope for social partners to agree on changes in both wage and early retirement practices, for the benefit of workers and employers alike. To strengthen incentives for social partners to engage in such a dialogue, public subsidies can be provided on a temporary basis. In this respect, efforts have been made to introduce a wage peak system, whereby the employer commits to maintain older workers in their job in exchange for a wage cut that is partly compensated by government subsidies granted to employees (see further below).
The experience of Japan indicates that seniority-based systems for setting wages are not set in stone and that the transition towards a job-based system may not occur without some kind of initial impulses (OECD, 2018). In Japan, the main driver was a decade of economic stagnation following the collapse of the Japanese asset price bubble in the early 1990s. Back then, many Japanese companies replaced a large part of their workforce with temporary workers with little job security and much poorer benefits. In turn, fears of job loss led regular workers to accept lower wages in order to maintain their jobs. Job-based systems for setting wages have gained momentum in this context of difficult labour market conditions. In 2016, about three in four Japanese companies applied a job-based system for managerial positions, as compared with one in five in 1999. And even for non-managerial positions, this proportion was 56.4% in 2016 compared with 17.7% in 1999. Symmetrically, the percentage of firms that reflect age and tenure in their pay scales has declined in Japan from 32.2% to 24.8% for managerial positions, and more steeply, from 78.2% to 49.6% for non-managerial positions.
Source: OECD Secretariat.
Employment protection laws
Employment protection laws can play an important role in increasing the stability and quality of employment. Overly rigid employment protection laws, however, can diminish employment opportunities especially for vulnerable social groups, thus compounding existing labour market disadvantages and dualities between younger and older workers; women and men; low- and high-skilled workers; and regular and non-regular employees (OECD, 2013b). Employment protection laws can thereby have an important influence over employers’ decisions around hiring and retaining of older workers.
Stricter regulation on individual dismissals of permanent workers
Protection of permanent workers against individual dismissal is stronger in Korea than on average across OECD countries based on OECD’s employment protection index, mainly due to procedural inconveniences and protection against unfair dismissal (Figure 4.5).4
Note: The figure presents the contribution of different subcomponents to the indicator for difficulty of dismissal. The height of the bar represents the value of the indicator for difficulty of dismissal. For the sole purpose of calculating the indicator of difficulty of dismissal, missing values of specific subcomponents are set equal to the average of other non-missing subcomponents for the same country, excluding the maximum time for claim.
Source: OECD Employment Protection Database, https://doi.org/10.1787/lfs-epl-data-en.
In particular, Korean rules are stronger in regard to the possibility of reinstatement following unfair dismissal. In Korea, Austria and the Czech Republic, if dismissal is recognised as unfair, reinstatement is almost always granted or offered to the worker. This is likely to create strong disincentives and uncertainties not only to firing, but also to hiring (OECD, 2013b). By contrast, except in the case of dismissal based on explicitly prohibited grounds such as discrimination, reinstatement is for example never offered to workers (or employers can choose compensation instead of reinstatement) in countries like Belgium, Estonia, France, Luxembourg, Spain, Switzerland and Turkey.
A clear tendency towards reducing the strictness of employment protection for permanent workers is observable over the past decade in OECD countries. One of the main policy interventions since 2008 has been a limitation of the possibility of reinstatement in the case of unfair dismissal (OECD, 2013b). Korea needs to take into account the possibility of limiting reinstatement in the case of unfair dismissal in order to reduce uncertainties on dismissal and enhance job mobility of vulnerable groups, including older workers. Such change should go hand-in-hand with a significant reinforcement of social protection for non-regular workers (OECD, 2013b; OECD, 2015a).
Uncertainty in collective dismissals
Another peculiarity in employment protection in Korea is uncertainty in the case of mass workforce adjustments or collective dismissals. With regard to the dismissal rule for redundancy, one of the most critical issues has been the interpretation of the requirement of “urgent managerial reasons”. For example, the Ssangyong Automobile case was finally decided in the Supreme Court after five years of contention with different rulings and interpretations at different litigation levels. In the past, dismissals for managerial reasons were possible only if a firm was faced with a high and imminent risk of bankruptcy, but later the court began to allow dismissals also when a reasonable cause for improvement of the business situation or the competitiveness exists, even in the absence of imminent possibility of bankruptcy.
However, the judicial review on this requirement is still a key issue and hotly disputed, and determinations are not sufficiently consistent to give a clear guidance for employers. The bottom line should be to minimise uncertainty arising out of interpretation of legal requirements, notably of “urgent managerial reasons”. Clarification on this issue must give sufficiently accurate guidance to employers, which could be done through legislation or a tripartite agreement, or both, as appropriate.
Impact on labour market duality
Korea’s labour market duality is very marked with a high share of all workers found in non-regular employment. Strict regulation on individual dismissals of permanent workers combined with lenient regulation on fixed-term contracts has led employers to use more widely non-regular workers for flexibility reasons. In addition, there is also comparatively strict regulation for Temporary Work Agency (TWA) employment in Korea (Figure 4.6). TWA is not allowed for some industries such as construction and is permitted for only 32 occupations for a maximum period of two years. For the rest, TWA is allowed only in the case of a temporary and intermittent need not exceeding the maximum of six months. Furthermore, a person who intends to carry out a TWA business has to obtain permission from the Ministry for Employment and Labour (MOEL), and must report regularly to the ministry. Regulations according to the Act on the Protection of Dispatched Workers also determine that a sending employer and a using employer shall not treat a TWA worker in any discriminatory way in comparison with a worker who performs the same work in the business of the using employer.
Note: Data refer to 2013 for OECD countries and Latvia, 2012 for other countries. The figure presents the contribution of the indicator of regulation for standard fixed-term contracts (EPFTC) and the indicator of regulation for TWA employment (EPTWA) to the indicator of regulation on temporary contracts (EPT). The height of the bar represents the value of the EPT indicator.
Source: OECD (2013), Employment Outlook, Figure 2.9, https://doi.org/10.1787/888932852675.
Stringent TWA regulation, in particular the narrow scope of permitted occupations, encourages employers to prefer fixed-term contracts over TWA employment. The share of fixed-term workers in total employment was 15% in 2014 while the share of TWA workers was only 1%. However, fixed-term contracts and TWA employment are not the only forms of precarious, non-regular employment in Korea. Employment by in-house subcontractors who work for a single firm in the firm’s own premises is also widespread, particularly in the manufacturing industry because jobs for direct production are not included in the list of permitted TWA occupations. This form of employment is largely unregulated (Box 4.3).
Future change will need to regulate such unlawful in-house subcontracting practices. The scope of lawful in-house subcontracting needs to be more strictly interpreted, as appears to be happening in court decisions recently, and supplementary measures should be taken to improve TWA regulation. Experience from the Netherlands suggests that TWA employment can open opportunities to improve the quality of non-standard forms of work, provided legal provisions are carefully designed and backed up with collective agreements (Bovenberg et al., 2008). Since the adoption of the so-called Flexibility and Security Act in 1998, TWA workers in the Netherlands have, depending on tenure, a right to a fixed-term or permanent contract with the agency, training facilities (individual budget) and pension entitlements. After 26 weeks of working for the same company, they are entitled to the same wage as employees of that company. The user company saves on hiring and firing costs, but pays more for a temporary worker than for their own employees as the costs for the agency are added to the wage costs of the agency worker. On the other hand, Dutch legislation facilitates recourse to TWA workers for firms, while abolishing a permit system for TWAs with respect to their placement activities.
In Korea, many prominent large firms use in-house subcontracts to reduce labour costs. In-house subcontracts refer to a work pattern in which subcontractors work for principal firms (usually large firms) in the premises of the principal firm. Usually, the subcontractors hire their own employees who work in the principal firms’ premises. Although Korea has very strong regulations on TWA, there is no regulation under labour law on such subcontract work, except for some restrictions in relation to occupational health and safety; thus, civil or commercial laws govern the relationship of in-house subcontracts.
This work pattern has been controversial in Korea for many years because the working conditions of employees of subcontractors are much lower, compared with employees of principal firms, even in the case of similar and comparable jobs. The more disputed issue is that the border between TWA and in-house subcontracting is unclear. In some cases, the court decided that the in-house subcontract in dispute is actually a TWA contract. Notably, the Supreme Court has decided in this way in the Hyundai Automobile case; Hyundai Automobile (the principal user) was thus obliged to directly hire most of the employees of its in-house subcontractors.
There are no official statistics on the size of in-house subcontracts in Korea. According to a MOEL survey in 2010 on establishments with 300 or more employees, 41% of the surveyed establishments used in-house subcontracts, with the number of employees of in-house subcontractors (326 000) being much higher than the total number of TWA workers (211 000). Lee (2012) also finds, using the Workplace Panel Survey data in 2007 and 2009 that the most important reason for using in-house subcontracts is to reduce labour costs and that large firms tend to use more in-house subcontracts than SMEs. He also finds a substitution effect between in-house subcontracts and regular jobs and a negative effect of use of in-house subcontracts on total job creation, although they could contribute to firms’ profitability.
Source: Lee, B.H. (2012), “Reason for Using In-house Subcontract and its Impacts on Employment”, Korea Labour Institute, Sejong.
The social partners also played a key role in the Dutch reform process. Employer organisations and trade unions reached an agreement on regulating the legal position of TWA workers, in complement to legal provisions under the Flexibility and Security Act. The Collective Labour Agreement (CLA) for temporary agency workers provides for matters such as conditions for hiring and separation, but also wages, training and education, holidays and leaves, as well as pensions. In particular, it sets minimum standards that apply to all temporary agency workers. The main employer representative in the TWA sector, ABU, and trade unions renegotiate the CLA every five years, in line with labour market developments (ABU, 2012). Social partners, in particular the ABU, also play an important role with respect to compliance issues. For instance, to become and remain an ABU member, a private TWA must satisfy a number of membership criteria and rules of conduct. ABU membership is seen as quality mark for user companies, but also for temporary workers. ABU members are expected to meet quality standards regarding employment conditions, payment of social security levies, and safety in the workplace. To ensure the quality of ABU membership, the ABU has a comprehensive system of quality checks, including audits which are carried out by special auditing institutions.
The Dutch reform is an example how a balanced reform of TWA regulations, providing additional rights to TWA workers while opening up new business opportunities for TWAs, can constitute a win-win strategy. But achieving this requires collective and well-coordinated efforts, by public authorities, employer representatives and trade unions. In the Netherlands, this was made possible not only thanks to the conducive industrial relations landscape, but also because the TWA sector was large enough to be well structured and organised, led by large firms that were unionised. Korea is far away from such a situation because it has significantly poorer working conditions for temporary agency workers, mirrored in shorter employment duration (35 months compared to almost 90 months for regular workers) and lower wages (KRW 11 500 vs. KRW 18 000).
Special employment protection rules for older workers
An appropriate balance needs to be found between protecting jobs of older workers and enhancing their labour mobility in terms of improved hiring rates and job-to-job moves. Special employment protection rules for older workers can be counterproductive. Policies that penalise firms for laying-off older workers can have a negative impact on reducing their hiring or may lead to substitution between workers of different ages. Firms may also seek to avoid these penalties through various early retirement arrangements and schemes. For example, in Poland, older workers are protected against dismissal during the last four years before reaching the retirement age, but in practice they are likely to lose their job just before reaching the protected age period, facing a high risk of becoming long-term unemployed as employers are reluctant to hire highly protected workers (OECD, 2015b).
In Korea, there is no special employment protection rule targeted at older workers. The court sometimes rules that it is not unfair or unreasonable to better consider older workers with longer tenure in the selection criteria for a dismissal for managerial reasons. But this is not an absolute norm and the court tends to interpret this requirement in a more flexible way, giving more focus on faithful consultation with trade unions. However, to dismiss older workers first could be unlawful because it violates the age-discrimination legislation unless there is a reasonable cause.
By contrast, regulation on temporary contracts permits exceptions for older workers. Employers may use workers aged 55 or more as temporary workers beyond two years, with no time limitation. Similarly, user firms may use a TWA assignment beyond two years with no limitation if TWA workers are aged 55 or more. These special rules for older workers in regulations on non-regular employment are supposed to provide more employment opportunities to older workers who otherwise may be less employable than their younger counterparts. This could help older workers find employment in relatively low-quality jobs, but also potentially with a substitution effect against younger workers in regular jobs. Such substitution effects need to be monitored carefully.
More employment protection needed in SMEs
Many non-regular workers, including older workers, are deprived of basic social protection and employment rights, as regulations and legal requirements are often not respected or well enforced. This is most notably the case among SMEs, which record the most violations of labour regulations. By contrast, employees in larger firms may enjoy higher employment protection than basic social protection through collective labour agreements. It is also difficult for large firms to carry out dismissals for managerial reasons, which could cause severe resistance from employees and social partners.
These considerations suggest that the rules governing the use of fixed-term contracts, TWA employment and in-house subcontracting in Korea need to be reformed while also strengthening their implementation and enforcement. In particular, further effort is needed to shift towards a more equal treatment of employment protection regulation for regular and non-regular workers. The enforcement of employment protection regulations for workers in SMEs should also be a priority.
The progress of recent reforms
Korea has recently taken a number of significant policy steps towards securing better employment outcomes for older workers. While these initiatives largely go in the right direction, some could achieve more if they were strengthened further.
Minimum mandatory retirement at 60
Regulations on employers’ mandatory retirement rules gradually came into force in 2016 and 2017 under a new law enacted in Korea in 2013. Under the new rules, age limits for mandatory retirement must not be lower than 60 years. The new law encourages collective dialogue on shaping mandatory retirement and wage-setting rules. The new law also introduces a comprehensive incentive scheme for enterprises that restructure their wage-setting mechanisms to better accommodate older workers.
Prior to 2013, the Korean government already had incentives in place for employers to rehire workers they previously terminated under mandatory early retirement schemes. As from 2008, subsidies were provided for firms to rehire their early retirees, provided the age of mandatory early retirement set by the firm was at least 56 years old. Eligibility criteria were gradually strengthened over time: the minimum age of mandatory early retirement was raised to 58 years in 2013 and 60 years in 2016, for firms to be eligible for the rehiring subsidy. The aim was to encourage firms to rise their mandatory retirement age on a voluntary basis. The reforms had a significant effect as the average age of mandatory early retirement increased by three years, from 57.1 in 2008 to 60.2 in 2016.
At the same time, the new regulation triggered concerns among employers around the need to negotiate new wage-setting mechanisms in view of the prospect of having to retain low-performing workers up to the age of 60. Government concerns were also raised that the legislation might create obstacles for youth to enter the labour market in case wage-setting mechanisms fail to properly adjust away from a seniority-based model. Concerns were also raised about a knock-on effect in some economic sectors regarding higher incidences of honorary retirement and (potentially) non-regular employment.
Alongside other issues, such worries led to the launch of a social dialogue in September 2014 led by Korea’s Tripartite Commission composed of employers’ and workers’ representatives as well as spokespersons for the public interest. The Commission’s vast agenda confronted various issues around reforming wage-setting mechanisms. One key recommendation focused on the need to make so-called “wage peak systems” a common practice in enterprises.
Wage peak system
The short-term reform of Korea’s seniority-wage practices mainly concerns the use of the wage peak system. According to this system, the employer commits to maintain older workers in their job in exchange for a wage cut that is partly compensated by government subsidies granted to the employee. However, to change the wage system, including the introduction of the wage peak system, the consent from trade unions is necessary if such change may adversely affect employees, whole or in part, even in the case of conflicts of interest among employees. The only exception is the case where such change is reasonable and inevitable in light of established social norms and all relevant circumstances. After much discussion and upheavals, the Tripartite Commission reached an agreement on the labour market reform on 15 September 2015.
The agreement includes a broad range of labour market reforms to alleviate the dual structure of the labour market, extend the social safety net and eliminate uncertainties in work organisation and pay by addressing a number of key issues such as the definition of ordinary wage, the reduction of working hours and improvements in the wage system. It contains the introduction of the wage peak system without the consent of trade unions or majority of workers in a firm. It also encourages companies to adopt a wage-setting mechanism based on job duties or skills, and reduces the uncertainty of employment protection rules in respect of under-performing workers. However, the trade union (KFTU) declared the breakdown of the agreement and its withdrawal from the Tripartite Commission after the government announced the guidelines on the procedure of the introduction of the wage peak system and the dismissal of under-performing workers on 22 January 2016.
Without a wage peak system, the extension of the mandatory retirement age in Korea may not accomplish its goal of encouraging employers to retain older workers longer because their wages could not be aligned with their productivity. The additional burden for firms could be substantial in terms of their competitiveness (see Figure 4.4 above). It would prompt them to continue to push older workers out of the workplace before the mandatory retirement age through more frequent use of honorary retirement. The social partners need to co-operate in the introduction of the wage peak system in order to prolong the current retirement age from the main job.
However, in the long run reliance on the wage peak system is not desirable. It should be seen as a transitory measure to compensate for strong seniority in wage-setting practices which should ultimately be replaced by a job-based mechanism for setting wages. In addition, it may have a negative impact on older workers’ motivation to improve their skills or productivity due to a lower wage. At the same time, good practice in retaining older workers and in wage setting should be better rewarded while non-compliance with the minimum mandatory retirement age should be monitored closely and penalised.
Removing mandatory retirement
The difficult move away from a low mandatory retirement age in Korea should be seen in the context of an international trend to eliminate mandatory retirement altogether. Organisations representing older people are generally favourable to eliminating any reference to age when it comes to retirement. For instance, the American Association of Retired Persons, a non-profit, non-partisan social welfare organization based in Washington with a membership of nearly 38 million people supports the elimination of maximum hiring and mandatory retirement ages for all workers (AARP, 2016). Qualification for employment should be based on competency and fitness rather than age. AGE Platform Europe, a European network of around 150 organisations of and for persons aged 50 years and over, representing more than 28 million older people in the European Union, has also defended this position since its creation in 2001. With the removal of the Default Retirement Age in 2011, the United Kingdom has prohibited the setting of a mandatory retirement age. This is also the case in four other OECD countries (Australia, Canada, New Zealand, and the United States).
Getting rid of mandatory retirement altogether is not without controversy. In particular, employers often argue that their businesses could not be run as efficiently without mandatory retirement practices. As it is difficult to objectively measure the performance of older workers, mandatory retirement provides an easy mechanism to get rid of unproductive workers. But ultimately it comes down to a point of fairness. Why should someone still performing well be forcibly retired just because of age? The United States eventually got rid of mandatory retirement progressively by raising the minimum age of mandatory retirement. This would seem a sensible approach for other countries, including Korea. Difficulties for employers will be greater in countries with rigid employment protection rules but this should be another reason for reforming these rules and allowing greater flexibility for employers in dismissing workers for poor performance.
Laws against age discrimination
Following a recommendation by the OECD in 2004 (OECD, 2004), in 2009 Korea has passed the Act on Prohibition of Age Discrimination in Employment and Aged Employment Promotion, prohibiting various forms of unfair treatment for older workers in terms of hiring, firing, remuneration, training, promotion and other aspects of professional life. Legal provisions discount all those cases of discrimination where: bona fide occupational qualifications play a role5; seniority-based wage-setting or promotion practices are in place; a mandatory retirement policy is operated; and in cases of positive discrimination in favour of older workers. Adjudication falls under the responsibility of Korea’s National Human Rights Commission and enforcement is carried out under the MOEL.
In general in OECD countries, individual victims of discrimination face strong barriers to bringing a case to the courts, as legal action remains a costly, complex, time-consuming and adversarial process. This is also the situation in Korea, where very few cases are brought before the relevant body. Records from the National Human Rights Commission (National Human Rights Commission, 2014) reveal that 1 498 cases of age discrimination were brought forward between 2001 and 2014. Of these, 76% were employment-related – most of them related to recruitment and hiring (Figure 4.7). This implies that only around 100-150 cases are brought forward every year. Of the completed caseload between 2001 and 2016, only 11.2% were accepted; 59.2% were rejected and 29.1% were dismissed.
Source: National Human Rights Commission.
The 2009 Act has yet to fulfil its potential impact. While age restrictions are seldom stated explicitly on job advertisements, subtler obstacles remain in place for many older workers throughout the recruitment process. It will take more effort on behalf of policy makers to overturn the business culture and mentalities that continue to endorse such obstacles. In 2016, MOEL monitored 6 836 cases of suspected age discrimination, which resulted in 244 official warnings or remedial orders being issued. As the enforcement of legal rules is based on the willingness of victims to claim their rights, public awareness and incentives for victims to lodge discrimination complaints are crucial elements of an effective anti-discrimination policy. MOEL thus complements its monitoring activities through awareness raising campaigns aimed at transforming current attitudes towards older workers and promoting positive business practices. Since 2006, every third week in September has been designated Elderly Employment Week in Korea, with workplace and media campaigns promoting the message that workers’ abilities are more important than their age and prizes going out to companies and workers demonstrating best practices in promoting employment of the elderly. Korea’s Job Centres organise a complementary activity about twice a year in the form of an Employer-Employee Meeting Day for the Aged, where best practices are shared and positive examples of re-employment are highlighted, including rewards for companies with innovative solutions.6
Moving from age discrimination to age diversity
Stereotypical views about older workers could give rise to discrimination by age in the hiring, firing, compensation, training and promotion of older workers (OECD, 2006). Most OECD countries have launched a number of ad hoc initiatives for the prevention of age discrimination to change attitudes of employers towards older workers. Initiatives include legislation, awareness campaigns, development of “tool kits”, promotion of best practices, and consultation and co-operation with the social partners (Sonnet et al., 2014). In Norway, for example, the social partners participate actively in the activities of the Centre for Senior Policy to raise awareness of the value of older workers’ resources, identify what is needed to motivate workers to remain at work longer, and stimulate age diversity at work (OECD, 2013a).
Age discrimination alone tends to be insufficient to change deeply-rooted workplace cultures linked to age. According to Davey (2014), for example, legislation against age discrimination in the workplace in New Zealand has had limited success “because much of it is not overt, and discriminatory practices are deep seated in business culture”. It is thus crucial that legal rules are complemented by initiatives to promote age diversity. In an overview of good age-management practices among OECD countries, Duell (2015) finds that in general implementation remains poor, particularly in SMEs. Guidance for SMEs, as well as coaching, mentoring and guidance for older workers and jobseekers, should be provided on a wider scale. Social partners should introduce age-management issues in collective bargaining. Training the social partners at local level can help with the implementation of good age-management practices but the “knowing-doing gap” is wide. Guidelines and consultancy need to take into account the different management styles and conditions, and available resources of companies of different size.
Reducing age discrimination in Korea can only come about through changing labour market cultures. This will require a shift away from businesses’ current hierarchical structures towards more horizontal ways of working. It will also require movement away from the current tenure-oriented, age-based human resources management practices towards more job-oriented, performance-based ones. Such changes will require time to take hold although a range of different measures and approaches could probably do much to speed things up.
Access to flexible work
More flexible work arrangements could be helpful to employers and workers, improving business efficiency and labour market performance. Under a rapidly changing business environment, more flexibility in working-time arrangements may be a better strategy than numerical work force adjustment in that firms could retain skilled workers and avoid the costs for hiring, firing and skills formation. It could also enhance the employability of some groups of workers, particularly those with family responsibility or limited ability to work long hours because of health problems.
Part-time work could be such a type of rewarding flexible work, in particular for older workers opting for phased retirement. However, in Korea, the incidence of part-time work among workers aged 55-64 in total employment was only 11.7% in 2015, well below the OECD average of 17.7% and with little change since 2000. Under Korea’s labour law, part-time workers are protected from discrimination, working conditions should be the same and wages proportional to the hours worked, relative to full-time work. Recently, Korea has decided to take a range of measures to encourage part-time work as a way of raising the female employment rate. As specified in the “Roadmap to achieve a 70% employment rate” launched in June 2013, these measures include: subsidies for the creation of quality part-time jobs7; counselling services for the introduction of part-time jobs; and the establishment of the right to shorter working hours according to life stages (e.g. participation in apprenticeships for youth, child care for women, and preparation of retirement for older workers). According to Ministry of Employment and Labour (2016), subsidies were provided to 13 074 employees for an amount of KRW 51 billion (e.g. 1.04% of the total expenditure on unemployment benefits). Around three-fourths of subsidised part-time employees are women and only 11% of subsidised part-time employees of both genders are older than 50. According to the Additional Economically Population Survey, 43.6% of all part-time workers in 2014 were aged 50 or older, but there is no information available on the quality of their jobs in terms of pay and benefits, job security and working condition. More should be done to monitor the job quality of part-time workers as well as the impact of the part-time job subsidy programme on different age groups.
If the government intends to use quality part-time jobs as a tool to prevent career interruption, a right to demand shorter working hours needs to be introduced as indicated in the roadmap. For older workers, part-time work may be helpful to facilitate phased retirement and prepare for retirement, including possibly embarking on a second career after retirement. Some barriers hinder older workers from voluntarily working on a part-time basis. Along with reduced wages, in many cases jobs attached to part-time work are different from the full-time jobs that older workers previously held. Thus, if older workers opt for a part-time job, they are likely to be transferred to a lower position. This may not be acceptable to older workers under Korea’s workplace culture, which is affected by hierarchical order based on age and seniority. As mentioned in Chapter 5 the retirement pension system (defined-benefit retirement pension and retirement allowance) is another barrier as reduced wages following a transfer to a part-time job lower the value of an old-age pension. To overcome such barriers, part-time work in the main job needs to be encouraged and benefit entitlement rules adjusted accordingly, e.g. by allowing continued contributions on the basis of a full-time job.
Health reasons also drive early retirement. According to labour force survey data, in 2014 respondents retired from their main jobs at an average age of 51; for 19% of them, this was because of health problems. This large share is likely to be related to the fact that the Labour Standards Act has no provisions on sick leave which would provide workers with the right to request sick leave for having a health-related treatment. While workers in big firms or public organizations can use paid sick leave thanks to employment rules or collective labour agreements, many workers in SMEs have no sick leave. Many workers in SMEs have no choice but to leave their company when facing health problems. If sick leave could be guaranteed by law, many workers, especially older workers who are more vulnerable to illness, would be able to return to their main job after a necessary treatment.
Korea’s labour code stipulates various flexible working-hour rules. They include:
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A flexible working-hour system that may adjust regular working hours upwards or downwards in every three-month period while leaving regular hours unchanged.
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A selective working-hour system that allows employees to select when to start and finish their work day under the same regular working hours.
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A discretionary working-hour system that assumes employees work regular hours although their actual hours vary from day to day; this is applicable to employees who work outside the workplace such as press reporters, for example.
Flexible work arrangements require an agreement between the employer and the trade union or an employees’ representative. However, flexible work arrangements are not broadly used in practice: in 2013, among employees in firms with at least 10 permanent employees, only 4.8%, 3.5%, and 6.9% were covered by, respectively, the flexible, the selective and the discretionary working-hour system. Telework or home-work is also negotiable – the government has encouraged both work arrangements under the name of “smart work” to help promote a better work-life balance – but coverage is even lower, reaching only 0.6% and 0.9% of employees, respectively, in 2013.
No information is available on the degree to which older workers benefit from flexible work arrangements. It is likely that older workers have less access to such arrangements or to quality part-time work. In particular, as older workers in Korea have poorer ICT skills than in many other OECD countries (see Chapter 5) they are not likely to opt for telework and home-work. To promote longer and better working lives for older workers it will be important to tailor flexi-time arrangements to their needs. The government should provide technical services and disseminate good practices to stimulate flexibility.
Subsidising older workers’ wages
Another way of making it more attractive to employers to retain older workers longer is to subsidise their wages. Effective subsidies need to be well targeted. Age alone is not likely to be a useful target given the diversity of older workers in terms of employment prospects and capacities. Subsidies should be targeted at disadvantaged older workers, such as low-wage earners and jobseekers who have been unemployed for a long time, e.g. more than six months for the least skilled and more than a year for the others. In addition, the question remains as to whether it is more appropriate to give wage subsidies to employers or to older workers themselves in the form of an earnings top-up.
In Korea, three types of wage subsidies are available: the subsidy for the wage peak system, a working-hour reduction subsidy and a subsidy for extended employment of older workers (Table 4.2). The subsidy for the wage peak system was introduced in 2006 to tackle early retirement practices. It assumes that the seniority-based wage system drives early retirement practices and that a wage cut for older workers provides incentives for firms to retain older workers also after the mandatory retirement age. However, in the longer term the subsidy is likely to deter firms from reforming the seniority-wage system towards a performance-wage system. In 2016, the subsidy provided KRW 30.8 billion to 6 683 employees (e.g. 0.63% of the total expenditure on unemployment benefits).
The working-hour reduction subsidy is a new allowance for workers aged 50 or more beginning in 2016. It could be a significant channel not only to promote the reduction of working hours, but also to retain older workers longer in their main job. This subsidy should be combined with a skill development programme to enhance older worker’s productivity and a worker’s right to request the reduction of working hours.
To promote and retain employment of older people, the government has also provided subsidies to employers who i) hire workers who have retired because of the mandatory retirement age, ii) raise the retirement age above age 60, or iii) abolish the mandatory retirement age. In 2016, 2 496 companies received KRW 23.1 billion as subsidies.
Finally, all subsidies could be increased for low-wage earners. The redistributive effect of the wage peak systems needs to be assessed, and fine-tuning measures are necessary to ensure that vulnerable workers benefit most. A well designed system of in-work benefits is likely to be more effective in this respect while also being sustainable in the long term, unlike a wage peak system that should remain transitory in nature.
Conclusion
The large majority of workers in Korea retain their main job only up to their early-50s. Upon retiring early, or on an “honorary” basis, many either become self-employed or enter low-quality, precarious and low-paid jobs in sectors ill-suited to the skills and expertise they have built up over their working lives. Many maintain a so-called second career for a decade or two, if not longer, before effectively stopping to work and retiring in their early 70s.
These retirement dynamics among older workers are somewhat unique to Korea among the OECD countries. They are driven, in large part, by the prevalence of seniority-based professional appraisal systems that act to reward job tenure and age over any other variable. As discrepancies between workers’ pay and their productivity grow and become more obvious, many face severance from their main job and limited opportunities for suitable re-employment. Reforming Korea’s deeply-entrenched seniority-based wage-setting mechanisms will be an important first step towards enabling longer retention that could benefit workers and employers alike.
In the short term, reform could be achieved through promotion of the wage-peak system alongside potential additional subsidies for low-wage earners. In the longer term, Korea’s entire human resources culture will need to move towards more performance-based or job-specific professional appraisal techniques, away from the current focus on seniority. Important first steps are being taken in this regard.
To this effect, more could be done to build a strong consensus around the positive impacts job-specific appraisal and wage setting could have for all stakeholders. From a legislative point of view, more could also be done to i) reduce employers’ uncertainty around dismissal costs and what might constitute an unfair dismissal; ii) reform in-house subcontracting alongside the development of a more mature TWA sector; and iii) properly implement existing laws against age discrimination.
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Notes
← 1. A survey implemented by a Korean newspaper (JoonAng Daily) for 1 000 adults aged 40-59 well illustrates this fact. The main reason why saving for retirement is difficult is the cost of education for 49% of respondents and the cost of children’s wedding for another 30% (released on January 21, 2015).
← 2. Despite conditioning on observable differences across individuals, it nevertheless may be the case that individuals with higher tenure have other (unobservable) characteristics that make them particularly attractive to firms.
← 3. www.businesskorea.co.kr/news/articleView.html?idxno=9768 (accessed 10 December 2017).
← 4. The OECD index on protection of permanent workers against individual dismissal includes the following components: notice periods and severance pay for no-fault individual dismissal, procedural inconvenience, and difficulty of dismissal.
← 5. The Article 4-5 on Exception to Prohibition of Discrimination of the Act stipulates that any of the following cases shall not be considered as age discrimination: a) where a certain age limit is inevitably required in consideration of the characteristic of the duties; b) where wage, and other money and valuables, and welfare benefits are reasonably differentiated to length of services; and c) where a retirement age is set under labour contracts, work rules, collective agreements, etc. pursuant to this Act or other Acts.
← 6. For example, one such winner was a construction company that continued to hire career workers, leading to a substantial increase in the proportion of older workers. The company conducted job analysis with the help of a consulting institute and selected three areas where the skills and experience of older workers are important: project management, expert committees, and technical committees. In addition, it introduced a mentoring system whereby older workers provide on-the-job training to new recruits during three months. This has contributed to enhancing labour productivity and team work between younger and older workers (Ministry of Employment and Labour, 2016).
← 7. The quality part-time job in the roadmap is defined as a job which meets voluntary personal needs (study, child care, phased retirement), is free of discrimination, and guarantees basic working conditions such as minimum wage, the basic social insurances, etc. The subsidy programme stipulates five requirements for eligibility: open-ended contract, 130% of the minimum wage or more (120% for SMEs), 15 to 30 weekly working hours, guarantee basic working conditions including four basic social insurances, and no discrimination.