Executive summary
At less than 4%, open unemployment is low in Korea, but joblessness is common nonetheless. Three out of ten working-age Koreans are labour-market inactive, and half of all workers stay in their job for less than 6 years. Accessible unemployment support can serve to reduce inflows into inactivity, helps to bring people back into the labour force, and improves their chances of finding suitable and good-quality employment. With the fastest-ageing society of any OECD country, mobilising people into productive employment is vital for Korea in particular.
Protecting people, rather than specific jobs, plays a key role in promoting inclusive, resilient and adaptive labour markets. This is especially true in Korea, where unstable or precarious jobs in very small enterprises co-exist with better-protected employment in large and highly productive firms.
In the context of government initiatives and ongoing consultations to make unemployment benefits more accessible and more supportive of re-employment in good-quality jobs, this report first traces key policy developments in Korea since the introduction of the Employment Insurance (EI) programme in the mid-1990s. The report then examines the design and performance of existing unemployment support measures relative to other OECD countries and discusses policy lessons and priorities.
International comparisons highlight the low effective reach of unemployment benefits in Korea, and the very limited income support that is available for longer-term jobseekers. Following the complete erosion of the EI programme’s original link between benefits and past earnings, current benefit provisions can nevertheless result in benefit entitlements that are close to – and sometimes above – the in-work incomes of low-wage workers. Weak work incentives resulting from EI provisions counteract Korea’s significant policy initiatives to make work pay, e.g. through successive expansions of the earned income tax credit. Financial disincentives also translate into challenges for activation policies, notably in the context of Korea’s efforts to expand income support to non-standard workers.
Initiatives to promote income security for non-standard workers are timely, and the scope and ambition of reforms in Korea compare favourably with initiatives in other OECD countries. Establishing reliable income protection for non-standard workers is indeed particularly urgent in Korea, given the high prevalence of non-standard work. At the same time, promoting an inclusive labour market and harnessing human resources and skills also calls for tackling long-standing challenges that have hindered access to support for standard workers, including weak compliance with EI mandates and the exclusion of “voluntary” jobseekers from the EI programme.
The report welcomes recent efforts to strengthen support provisions for jobseekers in Korea, calls for maintaining the recent reform momentum, and identifies a number of priorities for future policy changes in this area:
Continue with successive steps to extend coverage to non-standard workers, while strengthening the enforcement of existing EI mandates. The recent extension of EI entitlement to some groups of independent workers adds to the urgency of broadening effective coverage across the entire workforce in order to avert unintended loopholes.
Consider ways to soften the very steep income drop for those with longer unemployment spells. One option would be to continue boosting the generosity and reach of means-tested safety nets, notably of the existing unemployment assistance and associated employment-support measures.
Re-establish the earnings link in the EI programme. The earnings link has all but disappeared due to the evolution of key entitlement parameters, notably benefit floors and ceilings. Current entitlement rules simultaneously erode incentives to work for low-wage earners, and incentives to be part of the EI system for those higher up the earnings distribution.
Accessible employment support, allied to job-search requirements and other activation measures, should become a central part of reform programmes. With an expanding scope of income insurance and safety nets for jobseekers, it becomes all the more important to address existing structural challenges, and to ensure that support promotes good-quality employment. In the context of Korea’s heterogeneous labour market and jobseeker needs, aligning with good international practice requires strengthening the capacity and staffing of employment services.
The financial balance of the EI system has been tested following the pandemic, and because of additional spending commitments resulting from recent policy changes. In a challenging overall fiscal context, considering opportunities for curbing spending increases and raising revenues will remain a central part of necessary efforts to adapt and strengthen income protection in Korea. A number of options can help to improve the budgetary outlook of unemployment support programmes:
Continue to redesign, or abolish, the sizeable Social Insurance Subsidy Programme, which seeks to encourage participation of low-paid workers in small firms. Past evaluations have pointed to very high deadweight costs and underlined that premium subsidies do not solve the problem of low EI coverage. In spite of recent reforms, the subsidy remains generous. Other OECD countries also operate contribution subsidies, but the objective is typically to lower labour costs or boost work incentives, rather than “encourage” enrolment in a programme that is mandatory in any case.
Review whether the Early Re-employment Allowance provides good value for money. The allowance pays a large share of remaining unemployment benefit entitlements to individuals who find a steady job early on during their jobless spell. Earlier assessments have pointed to very high deadweight costs. Even after successive tightening of entitlement criteria, it is unlikely that the allowance makes a substantial difference for those with weaker employment prospects. If a form of re-employment allowance is maintained, it should be targeted more narrowly, with savings channelled towards more cost-effective employment-support measures.
Widening the tax and contributions base could boost revenues, e.g. by aligning the tax and contribution treatment of different forms of work, removing unintended fiscal incentives for short contract durations and self-employment, and by combating so-called “false” self-employment. An essential element of such a strategy is limiting opportunities for selective opt-outs that are present in all systems where membership remains, in part, voluntary. Key characteristics of non-standard workers in Korea suggest that the fiscal effects of opt-out opportunities may be sizeable.