Hankyung Research Institute "Need to Reform Seniority-Based Wage System to Enhance Labor Market Flexibility and Stability"

[Asia Economy Reporter Ki-min Lee] An analysis of the flexibility-security models of major European countries has raised the argument that reforming the seniority-based wage system is necessary to enhance the flexibility and security of South Korea's labor market.

The Korea Economic Research Institute under the Federation of Korean Industries commissioned Professor Lee Sang-hee of Korea University of Technology and Education to analyze the report titled "International Comparison and Implications of Labor Market Flexibility and Security in Major Countries," which made this claim.

The report analyzed that South Korea could improve wage flexibility and secure labor market flexibility by reforming its seniority-based wage system into a job-based wage system. The job-based wage system evaluates the relative value of each job according to the importance and difficulty of the job and pays wages accordingly.

The report pointed out that Denmark, the Netherlands, and Sweden implemented flexibility-security policies to overcome economic crises and unemployment rates, noting that all three countries share the commonality of promoting social policies such as unemployment benefits guaranteeing 70-90% of previous income and cooperative labor-management partnerships.

The report criticized that South Korea's labor market is divided into large corporations, regular workers, and unionized sectors versus small and medium enterprises (SMEs), non-regular workers, and non-unionized sectors, highlighting the imbalance in dismissal protection and wage levels between the two sides.

As evidence, the report cited that the average tenure for large corporations, unionized, and regular workers is 13.7 years, whereas for SMEs, non-unionized, and non-regular workers, it is 2.3 years, with a significant wage gap of 4.24 million KRW and 1.52 million KRW per month, respectively.

Compared to major European Union (EU) countries, the report stated that South Korea has the highest level of wage seniority, with seniority weighted more heavily in large corporations. It added that while in Denmark, wages for workers with 1-5 years of tenure were 1.18 times those with less than one year, and 1.44 times for those with over 30 years, in South Korea, these figures were 1.58 and 4.39 times, respectively.

The Korea Economic Research Institute also pointed out the practice of seniority-based wage systems in large corporations, regular workers, and unionized sectors. The report explained that in its own survey on the operation of the step-based wage system, the operation rate was 15.8% in companies with fewer than 100 employees and 60.9% in large corporations with over 300 employees.

It argued that the seniority-based wage system practice is distinctly present in large corporations, regular workers, and unionized sectors. It further analyzed that the seniority-based wage system causes issues of wage fairness and leads to wage disparities, suggesting that reforming the seniority wage system to enhance wage flexibility is a means to improve the flexibility and security of the domestic labor market.

Professor Lee said, "So far, domestic labor reform has focused on labor law amendments such as easing dismissal, but this is practically impossible within South Korea's labor environment and labor-management relations, making it difficult to adopt as an appropriate means of flexibility-security policy." He added, "Now, even if it takes time, strong momentum is needed to reduce wage seniority in large corporations and public enterprises." He continued, "Specifically, the time has come for the government and both labor and management to deeply review the introduction of a job-based wage system based on social responsibility."

This content was produced with the assistance of AI translation services.