Assessment and Recommendations

Korea’s economic growth record over the past half century has been outstanding, reaching on average 7.7% in the 1970s and ‘80s, boosted by sound macroeconomic policy, heavy investments in human and physical capital and a rapid expansion of the working-age population. Nevertheless, economy growth slowed down to 2.7% in 2018 and is projected to remain around 2.4-2.5% in 2019-20. Weaknesses in domestic demand and international trade are the main causes for the slowdown, but also population ageing and inefficiencies in the product and labour markets play a role. Future growth prospects will depend on how well the country will master these challenges.

How do youth fare in the Korean labour market?

The employment rate of young Koreans aged 15 to 29 stands with 43% in 2018 well below the OECD average of 54%. The low youth employment rate is driven by the high share of young people studying and the low share of students who work during their studies. Indeed, fewer than one in eight Korean students are employed, compared with more than one in four students across the OECD. Young Koreans prefer to invest heavily in their education, both formally and informally, and tend to spend a long time preparing for entry exams of large companies or the public sector, rather than accumulating experience in the labour market.

The Korean labour market is known to be highly segmented, with large differences in employment conditions between regular and non-regular workers and between small and large companies. Yet, young workers perform relatively well. While Korea belongs to the top five of OECD countries in terms of temporary employment incidence, temporary contracts are less frequent among Korean youth than among youth in OECD countries on average, and transitions from non-regular to regular jobs are frequent. In addition, while many 15 to 24 year olds in Korea hold low-paid jobs, by the time they are in their late twenties, fewer of them are in low-paid jobs than in OECD countries on average. The temporary employment and low pay incidences for young people both declined between 2007 and 2017.

Despite the relatively promising and improving outcomes among young workers in Korea, weakening economic growth is translating into increasing youth unemployment and inactivity. The unemployment rate among 25 to 34 year olds rose from 5.0% in 2007 to 6.6% in 2018 and is now higher than the OECD average of 6.2%. For the age group 15-24 years, the unemployment rate is still lower in Korea than in the OECD on average (10.5% and 11.1% respectively in 2018), but it also displayed an increase over the past decade (up from 8.7% in 2007). The observed increases are in contrast with trends in unemployment for middle-age and older workers, as well as with OECD trends in youth unemployment.

In addition, a considerable share of young Koreans are neither employed, nor engaged in formal education or training (the so-called NEETs). In 2017, the NEET rate reached 18.4% for the age group 15 to 29 years, compared with the 13.4% cross-country OECD average, and a slight increase from the 17.9% NEET rate in 2014. The NEET rate is particularly high among college or university graduates (45% of NEETs in Korea have a tertiary degree), in contrast with most OECD countries, where low-educated youth are much more likely to be NEET than are their higher-educated peers. Both the participation in informal education and the long preparation time for company entry exams explain a significant part of the high NEET rate among highly educated youth in Korea.

While informal education may complement formal education, its widespread use suggests that there is a gap between skills supply and demand. Many students feel that the formal education system does not equip them with the skills they view as prerequisites for success, whereas employers seem to judge the formal education degrees as insufficient measures of someone’s skill, preferring their own employment exams to select their employees. Indicators of skill mismatch indeed suggest that there is significant scope for improvement in efficiently using the skills of young people.

The strong societal preference for higher education and eagerness to obtain a job in a large company or public sector generate tough competition among young Koreans to attend one of the top universities. More than eight out of ten Korean teenagers and nine out of ten Korean parents hope that they or their child will obtain a four-year university degree at a minimum. This preference pushes students to attend even sub-par tertiary institutions and puts much pressure on the shoulders of young Koreans. Not surprisingly, the OECD Child Well-Being indicator shows that less than one in five Korean adolescents report high life satisfaction, compared with one in three adolescents on average in the OECD.

A university degree certainly increases the chances of earning a high income and working for a large enterprise. However, when tuition fees and foregone earnings during the years of study are taken into account, the financial pay-off from higher education is negative for a substantial share of university and college graduates: three out of ten college graduates and two out of ten university undergraduates earn less than the average of high school graduates.

Poverty among young Koreans is low, especially compared with elderly, mainly because they continue living with their parents until they find a stable job. However, uncertainties about their future are having profound implications for marriage and family formation, as well as for the country’s development as a whole.

Supporting young people in a weakening labour market

To support young adults, the Korean government announced in March 2018 an ambitious plan with a wide range of youth support measures. Many measures are an extension of existing ones, but there are also important new initiatives. In particular, the plan represents an important shift from indirect measures, such as subsidies for firms that hire young people, towards a stronger focus on measures that directly benefit youth, such as tax exemptions and in-work benefits. According to government estimates, the different support measures should bring the real earnings of young people employed by SMEs closer to those working for large enterprises, hereby lowering the implications of labour market duality.

While ambitious and promising, the youth action plan does not address the underlying structural barriers faced by young people to enter the Korean labour market. As put forward in the OECD Action Plan for Youth, a comprehensive range of measures to tackle youth unemployment and promote better outcomes for youth in the longer run are needed to equip them with relevant skills and remove barriers to their employment. In particular, action is required in different fields, including the connection between the education system and the world of work, the role and effectiveness of vocational education and training, the quality of career guidance services, effective labour market policy and institutions that facilitate access to rewarding employment, and social programmes to prevent social exclusion.

Reducing the gap between skill supply and demand

Korea has the most educated youth population in the OECD, with virtually all young people completing high school and more than two thirds obtaining a college or university degree. However, while education is highly valued in Korean society, young people’s skills do not always match labour market needs. Graduates spend nearly one year, on average, searching for a job, while 40% of small and medium enterprises struggle to fill positions. At the same time, the financial costs of education for the government and parents are high (reaching 6.5% of GDP in 2016 when expenditure on private after-school teaching academies is included), as is the personal investment of young people in terms of time and energy devoted to studying.

Over-qualification has risen hand in hand with rising education levels. In 2015, 45% of university graduates and 79% of university postgraduates reported that they were over-qualified for their job. At the same time, graduating from upper secondary schools with a vocational focus or tertiary institutions in a field with clearly defined professional pathways, such as pharmacology or engineering, reduces the likelihood of being over-qualified.

Career guidance is a first way to address such mismatches, as it helps students to select programmes that offer good career prospects and correspond to their interests and aptitudes. As a second step, education and training programmes need to equip youth with the skill set they actually need to be successful in the labour market in the short and long-term, that is, to facilitate both the entry and future performance. This recommendation applies equally to vocational and general education programmes and to secondary and tertiary institutions. Furthermore, there is a need to alter companies’ recruitment practices to place more weight on competencies instead of education credentials.

Guiding students to improve educational choices

In recent years, the Korean government has invested heavily in career guidance. Its strategy is to create career awareness in primary school, offer career exploration in lower secondary school and stimulate career planning in upper secondary school. The reforms are a good start and follow international best practices that encourages children and teenagers to start thinking about possible careers at an early age. Nevertheless, further changes that ensure the quality of career counselling, engage disadvantaged youth and strengthen community links could boost the payoffs.

• Increase the effectiveness of career guidance and counselling. Better training for counsellors and the provision of didactic material to incorporate career-relevant material in all subjects can improve the impact and relevance of guidance in Korean secondary schools. Higher budget allocations for more career services staff would allow schools to provide more individualised guidance. Self-assessment exercises based on benchmark performance measures can serve as a tool for the regular improvement of career counselling.

• Adapt career counselling to the needs of disadvantaged youth. Students from disadvantaged backgrounds typically receive less career counselling and are less able to benefit from it. To address these gaps, schools could consider either programmes that are targeted to this group’s needs or individual counselling sessions for all students in advance of important education transitions.

• Involve employers in career counselling. Students tend to be more interested and engaged in career counselling when enterprises and their employees are directly involved. Schools should better cooperate with employers to offer a mix of different activities, such as information events, workplace visits and job shadowing.

Promoting upper secondary vocational education

Vocational upper secondary schools traditionally educated a large share of Korea’s workforce, but their importance declined when higher education expanded rapidly during the 1990s. To counter-act this development, the Korean government has diversified vocational education options in the hopes of attracting more young people and train the type of workers that employers require.

The two most important measures to boost vocational education were the introduction of Meister schools in 2010 and apprenticeships programmes in 2013. Meister schools follow the German/Austrian model of upper secondary schools that focus on practical vocational training in close collaboration with employers, while apprenticeships programmes combine theoretical education at an upper secondary level with practical training in the company that hires the apprentices. Although these two programmes are relatively successful at securing employment for their graduates, very few students currently participate in such programmes. With barely 3% of upper secondary students attending a Meister school or participating in an apprenticeship programme, Korea remains at the bottom of the OECD ranking.

• Use the success of Meister schools as a template for quality improvements in secondary vocational education. The government could consider increasing the number of Meister schools, on the one hand, and requiring all vocational schools to create more and deeper connections to industry, on the other hand. Curricula should also be reviewed to reflect National Competency Standards while ensuring sufficiently broad theoretical training.

• Expand apprenticeship programmes. More enterprises and youth could benefit from apprenticeships if they were expanded across a number of dimensions. For instance, longer programmes could prepare apprentices for more complex occupations, while introducing apprenticeship programmes in the service sector could provide employers with a skilled workforce. Enlisting large employers as apprenticeship providers could also boost the prestige of apprenticeships. In turn, this approach could improve the benefits that apprentices and employers of all sizes derive from the apprenticeships.

• Reduce the cost of apprenticeships for employers. In some sectors, the costs of offering apprenticeships exceed their benefits, despite the subsidies offered to SMEs to offset part of the training costs. The negative balance could be redressed if employer and employee representatives agree on how training requirements can be redesigned. Employers can also reduce their costs by arranging joint training. Sectoral councils could play a central role in both solutions.

Ensuring quality tertiary education

The quality of Korea’s tertiary education is not as high as its primary and secondary education and it varies strongly across institutions. In recent years, the Korean government and individual institutions have undertaken efforts to base their admission decisions on other factors than just academic records and standardised test scores and ensure the quality and relevance of college and university teaching. Very low-quality institutions have been shut down and funding directed towards more successful institutions. However, as most tertiary institutions are private and primarily fund themselves through tuition fees, the potential of the funding mechanism is limited.

• Incentivise students to select better institutions. In line with the gainful employment regulation in the United States, Korea could refuse federal loans and public grants for students who want to attend institutions where the ratio between students’ debt and their later earning is larger than in other institutions offering similar programmes. With nearly one-third of higher education students receiving a need-based grant and more than one-sixth taking out a direct loan, this approach could be quite influential in improving the quality of universities.

• Strengthen quality through reporting. The government could require institutions to collect and publish more indicators on the labour market progress of their graduates. In addition to alumni employment rates, the reporting requirements could be expanded to average earnings, time to graduation and five-year earning gains by degree. Although it would take time before changes in a university’s quality would be reflected in better outcomes, this strategy could become a powerful way to steer students to institutions with better labour market outcomes.

• Foster collaborations with employers. Employer involvement with tertiary institutions can ensure that curricula are better adapted to labour market needs and that students are better prepared for the labour market. Evidence from European countries suggests that collaborations are more durable when employers are engaged through multiple channels. These can include internship programmes, employer advisory boards, research co-operation and others.

• Integrate entrepreneurship education. To equip students with the skills they need to realise their entrepreneurial ambitions, tertiary institutions should offer more entrepreneurship-related courses and programmes. These courses should be open to students from different disciplines and combine theoretical teaching with experiential learning. Continuous evaluations can allow universities to improve entrepreneurship education over time.

Supporting companies in altering their recruitment practices

Competence-based hiring is still rare in Korea. Like in Japan, most large employers and public institutions use general recruitment exams to recruit groups of hires. As a result, recent graduates often invest months, and sometimes even years, preparing for those company exams. Yet evidence suggests that job descriptions that clearly define the required competencies are a better predictor for job performance and reduce job turnover.

• Provide training in competency-based hiring to companies. The Korean public sector is experimenting with recruiting more of its candidates based on clearly defined job descriptions, eschewing the need to include certificates and qualifications attesting to skills unrelated to the jobs’ requirements. To encourage private companies to follow its example, the government can identify sectors where the need is largest and provide necessary training on competency-based hiring to employers.

• Consider introducing intermediary matching services for small and medium-sized firms. Smaller firms often have high hiring costs. Under certain circumstances, information sharing between enterprises and intermediary matching services can help reduce these costs.

Improving support for young people

Korea has been continuously expanding public social spending over the last decades, more than doubling the share of GDP it devotes to social spending since 2000. Even so, gross public social spending remains third lowest in the OECD ranking, leaving only Chile and Mexico behind. With only 11% of GDP devoted to pensions, health, social services and active labour market policies, Korean social expenditure remains well below the OECD average of 20% of GDP in 2018.

Expanding the social safety net

Overall, the Korean social protection system provides rather limited support to young people without a job. While the Employment Insurance scheme includes most salaried workers on a mandatory basis, more than one out of three 15-29-year-old workers did not have access to an unemployment safety net in 2017, mainly because their employer did not enrol them into the system even though they are legally bound to do so. In addition, the strict income requirements and family support obligations of the Basic Livelihood Security Programme keep most young people excluded from the system (barely 1% of the age group 20-39 benefits from the programme).

• Better enforce social security legislation. Access to Employment Insurance for young workers could be improved by expanding the resources of the relevant monitoring authorities to observe and sanction offending employers, raising penalties to increase their deterrent effect, and promoting and rigorously applying the arbitration procedure through which non-insured workers can claim Employment Insurance entitlements.

• Expand eligibility for Employment Insurance to voluntary job leavers. The full exclusion of voluntary job leavers is rather strict compared with many other OECD countries. Korea could consider a suspension or sanction period for voluntary job leavers to support young workers who are stuck in low-quality jobs and who need time and assistance to find a better job.

• Incorporate non-standard forms of employment in the Employment Insurance scheme. Extending social protection to non-regular contracts that are currently uncovered, like in Austria or Italy, could narrow the scope for companies to opt for contractual arrangements that evade social contributions.

• Ease access to the Basic Livelihood Security Programme. While the government exempts certain types of households from the family support obligation for living and health benefits since the beginning of 2019, it could go further and phase out the family support obligation completely. Abolishing this rule would bring Korea more in line with other OECD countries in terms of social assistance coverage.

Offering adequate employment support for young unemployed

In 2009, the government introduced the Employment Success Package Programme to provide customised job-search support for jobseekers as well as training to improve employability. The programme’s activation strategy is in line with best practices in OECD countries with a good balance of incentives and requirements for participants. While public Employment Centres serve low-income and disadvantaged groups, services for most youth are subcontracted to private providers.

• Maximise the impact of the Employment Success Package Programme. In-depth evaluations suggest that the programme is quite effective in bringing participants into employment. However, the number of youth benefiting from the programme remains low. Better and more proactive outreach is needed to promote the programme among young people, possibly by increasing the provided income support to make the programme more attractive. Korea can also build on successful outreach strategies in other OECD countries. Possibly, proactive outreach could become an element in the performance evaluation of private employment services.

• Strengthen private employment service provision. Private employment services tend to be very small and low-performing ones can relatively easily remain in the market. Although Korea has an elaborated rating system, there seems to be considerable room for a stricter quality assessment and contract termination for poorly performing service providers. The performance of private providers could be published online on a regular basis to guide jobseekers to the best-performing providers.

• Reconsider the short duration of private providers’ contracts. One-year contracts are likely to hinder longer-term investment by private providers. To encourage them to expand their services and develop more specialised competencies, Korea could follow the example of Australia and the United Kingdom, who have gradually extended the duration of services contracts to six years.

Monitoring support for in-work poverty

The Earned Income Tax Credit provides in-work support for both salaried and non-salaried low-income workers and their families. The credit was introduced in 2008 and was expanded to single youth households aged under 30 in January 2019. A recent tax reform also increased the maximum tax credit, making the Korean system one of the more generous ones in the OECD.

• Carefully monitor the impact of the Earned Income Tax Credit. Given the rapid expansion of the system, it is important to evaluate the effectiveness of the system, in particular with respect to the impact on labour supply as well as the take-up among eligible (young) people.

Facilitating access to affordable housing

Korea has relatively good housing outcomes in an international context. Final housing expenditure in Korea is amongst the lowest in the OECD area and Seoul is not among the most expensive metropolitan cities in the world. Nevertheless, to support young adults in an economic climate with increasing employment insecurity, the Korean government recently expanded the target groups for its housing policies to include young people. The reasoning behind this policy shift is that the housing cost burden in urban areas makes it difficult for young people to get married and start a family, hereby aggravating the country’s social challenges of low fertility and ageing population. The most important policies directed at the young generation include subsidised public housing and rental support for the private market.

• Move away from support for jeonsei deposits towards housing allowances and rental market regulation. The government offers low-interest loans for housing deposits under the jeonsei system to young people at a time when landlords consider the jeonsei system no longer viable. It might be more realistic to allow the rental market to move away from the jeonsei system towards a system of monthly rentals as in most other OECD countries. The government could then support young people through other means, such as (temporary) housing allowances and rental market regulation. Korea may also wish to adopt safe and sustainable mortgage options for young people.

Addressing labour and product market duality

Large differences in employment conditions across Korean workers are related to a number of factors, including the growing dispersion in the performance of firms and the employment conditions they are able to offer, insider-outsider dynamics related to strong labour unions in large companies as well as global trends of globalisation and technological progress. The latter trends are not unique to Korea, but have a polarising effect on the labour markets in many OECD countries.

Korea’s large business groups have played a key role in the country’s rapid economic development over the past half century. They remain leading players, with the top 30 groups accounting for about two-thirds of exports in Korea’s manufacturing and mining sector and a quarter of sales in services. Despite their significant contributions to Korea’s economic development, the powerful role of the large business groups and their presence in a wide range of business lines stifle the establishment and growth of smaller firms and polarise the country economically and socially. Productivity in smaller firms in manufacturing has fallen to less than one-third of that in large firms, resulting in wide wage dispersion between small and large firms. Low productivity and wage levels discourage young people from accepting jobs at smaller companies, leading to fierce competition for jobs in large business groups and over-investment in tertiary education.

• Reform large business groups and enhance dynamism in smaller firms. Breaking down the country’s product market polarisation would broaden the opportunities of young people in the labour market and would spread human capital more equally across economic sectors. Without addressing the labour market duality created by the industrial polarisation, it will be difficult to improve the labour market performance of youth in a sustainable way.

In contrast, the employment protection legislation in Korea seems relatively balanced across permanent and temporary workers. The OECD employment protection legislation index shows that regulations for regular workers are less strict in Korea than in the average OECD country, whereas regulations for temporary employment are stronger than the OECD average. Following a range of reforms to improve employment protection for the different types of non-regular workers, the incidence of temporary employment in total dependent employment radically declined for young and prime-aged workers; only among workers aged 55 and over has the incidence of temporary employment risen between 2007 and 2017.

Assessment and Recommendations