[Exclusive] Bank of Korea Service Report "Employment Stability Is Not the Bank's Responsibility"

Bank of Korea, Report by Four Economics Professors
'Comprehensive Review on Adding Employment Stability to the Bank of Korea's Establishment Purpose'

"Adding Employment Conditions to the Bank of Korea’s Mandate Is Undesirable"

Ineffective and May Cause Significant Side Effects

Triggers Inflation and Asset Price Surges Including Real Estate, Debt Also a Concern

South Korea’s Employment Rigidity Minimizes Monetary Policy Impact

Concerns Over Bank of Korea’s Independence

"If Employment Stability Is Added, LTV and DTI Authority Should Also Be Granted to the Bank of Korea"

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] A service report from the Bank of Korea (BOK) analyzed that "it is undesirable to decide the base interest rate by considering employment conditions in addition to price and financial stability."

Since the COVID-19 pandemic, globally, "central banks actively injecting liquidity" became a trend, and with the U.S. Federal Reserve (Fed) prioritizing employment in its monetary policy, there has been interest in whether the BOK would add "employment stability" to its operational objectives. However, the research service stated that "there is no effect, and only side effects may increase." Notably, the report highlighted that due to South Korea’s high employment rigidity, it is difficult to address employment through monetary policy, drawing attention.

According to the "Comprehensive Review on Adding Employment Stability to the Bank of Korea’s Establishment Purpose" service report obtained by Asia Economy from the National Assembly on the 30th, four economics professors stated, "Monetary policy has difficulty influencing employment," and "it is undesirable to include employment targets in the central bank’s responsibilities." The study involved economics professors Jinil Kim and Kwanho Shin (both from Korea University), Yongseong Jang (Seoul National University), and Jungyong Ha (Hanyang University).

Concerns Over Inflation Stimulation and Independence Erosion

Experts unanimously pointed out that adding employment stability to the BOK’s mandate raises concerns about inflation. Continuously injecting liquidity to support a sluggish employment market could lead to inflation. For example, if unemployment is low but housing prices are high, focusing on employment and injecting liquidity would inevitably push housing prices even higher.

Professor Jang said, "It is difficult to assert that inflation will not occur in the future," adding, "If shocks occur on the supply side, both prices and unemployment rates could be missed." With the base interest rate having fallen to 0.50%, the consumer price index rose to 2.6% last month. There is also the risk that efforts to revive the employment market could only create bubbles in real estate or stock prices. According to the report, countries like Australia, Canada, New Zealand, and Norway, which added employment stability as a goal, experienced rapid increases in household debt. In South Korea, which has not included employment as a target, the household debt-to-GDP ratio has already exceeded 100%.

If the mandate is expanded, the independence of the central bank could be compromised. There could be political pressure to continuously inject liquidity into the economy.

Employment Rigidity Reduces Monetary Policy Effectiveness

Experts also raised the issue that South Korea’s labor market regulations are inflexible. According to the study, the volatility of employment relative to GDP in South Korea (0.38) is about half that of the United States (0.73). This means that even with recessions of similar magnitude, changes in South Korea’s labor market are only about half as large as in the U.S., indicating a structure that is difficult to respond to downturns. Professor Jang pointed out, "The co-movement between production and employment in the Korean economy is very low."

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

Professor Youngbeom Park of Hansung University’s Department of Economics stated, "Rather than directly creating jobs through fiscal spending, 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.