[Exclusive] "Employment Stability Is Not the Responsibility of the Bank of Korea... Concerns Over Inflation and Independence" (Comprehensive)

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] An analysis in a Bank of Korea (BOK) commissioned report stated that "it is not advisable to decide the base interest rate by considering employment conditions in addition to price and financial stability."

Since the COVID-19 pandemic, "central banks actively injecting money" became a global trend, and with the U.S. Federal Reserve (Fed) prioritizing employment in its monetary policy, there was interest in whether the BOK would add 'employment stability' to its operational objectives. However, the commissioned research concluded that "there would be no effect and only side effects could increase." Notably, the report included content highlighting the rigidity of South Korea's employment, making it difficult to address through monetary policy.

According to the commissioned report titled "Comprehensive Review on Adding Employment Stability to the Purpose of Establishing the Bank of Korea," obtained by Asia Economy Newspaper from the National Assembly on the 30th, four economics professors concluded that "it is not advisable to include employment targets in the central bank's responsibilities" because "monetary policy has difficulty influencing employment." The study involved economics professors Jinil Kim and Kwanho Shin (both from Korea University), Yongseong Jang (Seoul National University), and Jung Kyung Ha (Hanyang University). Although it was clarified that this is not the official view of the BOK, as a commissioned study, it can be used as a basis whenever proposals to amend the Bank of Korea Act arise in the future.

The research team identified potential problems if employment responsibilities were imposed on the BOK, including ▲ Inflation and asset market surges causing financial system instability ▲ Minimal effect due to South Korea's rigid labor market ▲ Undermining central bank independence ▲ Lack of policy tools. An analysis of 37 countries excluding the BOK showed that only 10 countries had added employment stability to their mandates. In countries that included 'employment stability' as a goal in their central bank laws, the actual effect on lowering unemployment rates was minimal, but inflation rose and household debt tended to increase.

Phillips Curve with Position and Slope Changing Over Time

Possibility of Inflation and Asset Price Surges

Experts unanimously pointed out that adding employment stability to the BOK's responsibilities raises concerns about 'inflation.' If money continues to be injected considering the sluggish employment market, inflation could occur. For example, if unemployment is low but housing prices are high, focusing on employment and injecting money would inevitably push housing prices even higher.

Professor Yongseong Jang said, "It is difficult to assert that inflation will not occur in the future," adding, "The relationship between inflation and unemployment has weakened and even reversed (flattening of the Phillips curve), but this could change again, and if supply-side shocks occur, both inflation and unemployment could be missed."

At the beginning of last year, the base interest rate, which was 1.25% annually, dropped to 0.50%, while the consumer price inflation rate rose to 2.6% in May. The annual inflation rate is expected to hover around 2%. There is also a risk that efforts to revive the employment market could only create bubbles in real estate or stock prices. According to the report, household debt surged in countries like Australia, Canada, New Zealand, and Norway, which added employment stability as a goal. South Korea's household debt already exceeds 100% of its Gross Domestic Product (GDP).

South Korea’s Employment Flexibility Half That of the U.S... Doubts on Monetary Policy Effectiveness

South Korea's inflexible employment market was also cited as a problem. According to the study, the volatility of employment rate relative to GDP was 0.38 in South Korea, about half of the U.S.'s 0.73. This means that even with recessions of the same magnitude, changes in South Korea's labor market are only about half as much as in the U.S. Comparing employment flexibility indices among major countries, South Korea (46.2) was about half of the U.S. (92.4).

Professor Jang pointed out, "The synchronization between production and employment in the Korean economy is very low," adding, "Employment may not respond sensitively to aggregate demand policies." With the development of robots and online shopping changing industrial structures and weakening the link between employment and production, there is even less room for central bank intervention.

Undermining BOK Independence... Lack of Tools

The more goals added to the Bank of Korea Act, the greater the possibility of undermining the BOK's independence. There could be political pressure to continuously inject money. There were also calls to provide the BOK with at least minimal financial stability tools. For example, if unemployment is low but housing prices are high, focusing on employment and injecting money would inevitably push housing prices higher, so the BOK should be allowed to comprehensively consider this and regulate lending.

Professor Jung Kyung Ha of Hanyang University said, "The BOK's employment stability survey and forecasting functions should be strengthened, and ways to secure minimal financial stability tools should be considered." Macroprudential policies, especially the authority to set limits on Loan-to-Value (LTV) ratios, Debt-to-Income (DTI) ratios, Debt Service Ratio (DSR), Liquidity Coverage Ratio (LCR), as well as supervisory and inspection rights, should be granted to the BOK to operate monetary policy efficiently. Professor Ha added, "Countries like Norway and New Zealand operate policies by having the central bank and government sign Memorandums of Understanding (MOU), allowing the central bank to decide key ratios."

Employment Should Be Solved by 'Regulatory Innovation' in Private and Government Sectors

Experts agree that instead of burdening the central bank with employment responsibilities, a virtuous cycle where new jobs are created in the private sector should be established to solve employment issues. Professor Taeyoon Sung of Yonsei University's Department of Economics said, "Additional jobs should be created by rationally improving regulations to enable new industrial sectors," adding, "Adding employment goals without policy tools could politically undermine the central bank's independence."

There is also advice that regulations should be eased to allow the private sector to create jobs independently rather than the government creating jobs by injecting fiscal funds. This is because there are limits to creating jobs with limited resources. Although the government is working to expand fiscal jobs, the overall industrial employment inducement coefficient remains stagnant. According to the 2019 input-output table, the employment inducement coefficient (2019) was 10.1, the same as in 2018. The employment inducement coefficient refers to the number of jobs directly and indirectly induced across all industries when final demand such as consumption, investment, and exports for goods reaches 1 billion KRW. It has continuously declined from 11.4 in 2015 to 10.6 in 2017 and 10.1 in 2018. Professor Youngbeom Park of Hansung University's Department of Economics said, "Rather than directly injecting fiscal funds to create jobs, efforts such as deregulation and reducing labor costs should continue." The government plans to create 150,000 jobs through additional fiscal spending in the second half of the year.

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