Opinion on the Partial Amendment to the Framework Act on Employment Policy

- Bill No. 170262, introduced on August 9, 2004 by member of the National Assembly Dongyeon Yeom:

Partial Amendment to the Framework Act on Employment Policy -

1. Raising the Issue

On August 9, 2004, member of the National Assembly Dongyeon Yeom and 45 other members of the National Assembly introduced the “Partial Amendment to the Framework Act on Employment Policy.” The main points of this bill are: 1) in order to ensure equal employment opportunities, discrimination shall not be permitted on the grounds of sex, religion, age, social status, region of origin, school of origin, marriage, or pregnancy; 2) none of the above-mentioned prohibited grounds of discrimination that are not directly related to the job shall be stated in any documents related to recruitment and hiring (except that sex and age may be included if deemed relevant to the job); 3) employers with 50 or more employees shall be encouraged to make efforts to give priority in hiring so that at least 20 percent of new hires are graduates of local universities within the jurisdiction of the metropolitan city or province where the workplace is located (referring to local universities as defined in Article 12 of the Special Act on Balanced National Development); 4) the Minister of Labor shall be granted the authority to investigate and issue corrective orders in this regard; and 5) employers who violate these provisions shall be subject to an administrative fine of up to 20 million won, while employers who fail to cooperate with an investigation or disobey a corrective order shall be subject to an administrative fine of up to 3 million won.

In short, this bill would not even allow applicants’ schools of origin to be listed during recruitment and hiring, and violations would carry an administrative fine of up to 20 million won. It would also allow the Minister of Labor to conduct investigations and issue corrective orders in this regard, and noncompliance would result in an administrative fine of up to 3 million won.

The very fact that this bill has been proposed does reflect the employment difficulties faced by students at local universities. However, there can be considerable disagreement over whether such difficulties can be resolved through this kind of coercive legislation, whether it would be preferable to devise other incentives such as subsidies, or whether it would be better to increase employment opportunities by creating a “business-friendly environment” that encourages investment. Moreover, this type of legislation restricts hiring freedom, one of the core components of freedom in business management, and thus conflicts with the government’s policy goal of creating a “business-friendly country.” It may also discourage investment and, in the long run, actually reduce jobs.

This amendment bill also constrains the core of entrepreneurship. The essence of entrepreneurship may be said to consist in alertness to business opportunities and in bearing final responsibility for the results of actions taken on the basis of that alertness. Structurally speaking, entrepreneurship can also be understood as alertness about alertness—the ability to recognize people who possess such alertness. Therefore, legal restrictions on hiring inevitably constrain fundamental aspects of management in which entrepreneurship ought to be exercised.

2. Problems and Possible Alternatives

A. What Is “Unfair Discrimination”?

Article 19 of the current Framework Act on Employment Policy, which provides for equal employment opportunity, states: “In recruiting and hiring workers, employers shall not discriminate on the grounds of sex, religion, age, social status, region of origin, school of origin, etc., and shall ensure equal employment opportunities.” In addition to these grounds, the amendment would also prohibit discrimination on the grounds of marriage and pregnancy, and would allow sex and age to be stated in the recruitment or hiring process only when they are recognized as being related to the job. Accordingly, if this bill is passed, an employer who seeks to know or requires the applicant to state the applicant’s university, sex, age, and the like at the time of hiring would be subject to an administrative fine of up to 20 million won.

This bill—or more precisely, those who proposed it—either assumes that age and sex may in some cases be related to job performance, while one’s university and the like have absolutely no relationship to one’s ability to perform the job, or else acknowledges that one’s university does bear some relationship to job performance but nevertheless sympathizes with the need to protect the disadvantaged for the sake of fostering local universities and promoting balanced development.

But is it really correct to view one’s university of origin as irrelevant to job performance? In labor economics, school background is regarded as an excellent proxy variable for future job performance, and schooling in that sense is seen as functioning as a screening device that differentiates workers and provides information. It is impossible to know in advance how much a particular person will contribute to a company, and so securing excellent talent is a grave and difficult matter on which the company’s future depends, requiring significant cost and effort. Information about “school of origin” reduces these costs.

It is true that a person’s university of origin does not tell us with certainty how much that person will contribute to a company in the future. But if knowing a person’s university is in fact even slightly more helpful on average than not knowing it when making such judgments, then companies should not be prevented from using this information to find talent suited to their needs.

In fact, the question of whether one’s university of origin affects job capability is not itself a matter to be determined by law; it is for the person seeking to hire to decide. If the essence of entrepreneurship lies in the alertness to supply, at lower cost than others, goods or services that consumers are likely to purchase, then judging who will contribute more to one’s company is likewise a core managerial decision. A free-market economy is, fundamentally, a place where individuals test their ideas, including business ideas, under their own responsibility. If a company hires someone who cannot contribute to it, that works to its disadvantage, and therefore the incentive to find suitable talent is internalized. In other words, if an employer engages in “unfair” discrimination contrary to its own interest and thereby hires less productive people, it suffers that much loss. Of course, mistakes may be made in hindsight, but given that wage conditions and suitable talent differ from company to company depending on their circumstances, there is in fact no economic actor more motivated than each company’s own management to select good talent, while also possessing the necessary information.

B. Is the Intent to Protect the “Economically Disadvantaged”?

If “unfair discrimination” means discrimination on grounds unrelated to productivity, then firms that persist in such unfair discrimination due to strange prejudices will, in the long run, be pushed out of the market. The market punishes prejudice. Freedom in the market means the freedom to engage in competitive experimentation and to make decisions about one’s own property according to one’s own judgment—even if hindsight later reveals those judgments to have been wrong. How to hire and what information to seek are matters for managers, acting as agents of shareholders, to decide. Who is to judge whether school of origin has no value whatsoever as information about who is likely to be more productive? And who can be expected to judge better—the manager acting as the shareholders’ agent, or the law, or the people who proposed the law?

In light of this, this amendment may be understood as having been introduced less to correct “unfair discrimination” than to protect the so-called “economically disadvantaged.” Even so, it is problematic that, as a means of realizing that purpose in practice, it chooses punitive methods such as mandatory rules, investigations, corrective orders, and administrative fines.

Even if the purpose of the amendment is to provide employment opportunities to the “economically disadvantaged,” a more effective approach than coercive and punitive provisions would be to create incentives for employers to do so, such as by offering subsidies. Research on regulation consistently concludes that laws and institutions achieve their intended effects when the parties concerned have incentives to comply voluntarily, whereas compulsion leads regulated parties to seek ways around the rules, raises monitoring costs, and produces serious side effects.

Of course, even in that case, whether it is desirable to generalize subsidy payments through legislation is a separate issue. Not only would central government finances have to be used, but the problem of reverse discrimination—or unfair discrimination—could reemerge. Someone who is not a graduate of a local university could be excluded from the 20 percent quota, suffer “unfair” discrimination, and fail to be hired. Paradoxically, the taxes paid by that unsuccessful applicant’s parents could then be used as subsidies to support the hiring of local university graduates.

If a particular local government seeks to revitalize its regional economy and promote employment for graduates from local schools by attracting a specific company, and in that process offers certain benefits in exchange for a contractual agreement to hire local university graduates above a certain ratio, that would pose fewer problems than drafting a bill that mandates subsidy payments. Even then, however, the problem of allocating human resources remains: because of the 20 percent rule, someone who would otherwise have been hired, and who in the employer’s judgment had a greater likelihood of contributing to the company, may not be selected.

3. Summary and Conclusion

As noted above, this bill mixes two different perspectives—correcting “unfair” discrimination and protecting the disadvantaged in the name of “balanced development”—and for that reason appears unable even to maintain internal consistency. The goal of “balanced development” may itself produce “unfair” discrimination.

Whom to hire, and what information to consider and rely upon in the hiring process, are fundamentally not matters in which third parties can intervene. These are core components of business activity within a process of free entrepreneurial competition. Whether information about “school of origin” is important in assessing an applicant’s potential future contribution to the company is, in the final analysis, also a matter for managers, as agents of shareholders, to decide.

To impose certain restrictions on this is to restrict the decision-making authority of managers acting as agents of shareholders, thereby infringing on private property rights. Even so, the idea of conducting investigations, issuing corrective orders, and imposing administrative fines for noncompliance is unnatural.

Even if one concludes that policies are needed at the social-policy level to protect the economically disadvantaged, it is more likely to be effective to compensate for restrictions on employers’ decision-making authority than to treat employers as though they were committing some kind of minor offense and punish them accordingly. Of course, even in that case, careful consideration must be given to whether such measures should be prescribed by law for all companies to follow.

Taken together, this bill is highly likely only to increase confusion in the hiring process and create an “environment unfavorable to doing business,” thereby reducing jobs. Therefore, broad revision or repeal would be desirable.

Iseok Kim (Korea Cyber University, Economics)

Wiki:

https://www.cfe.org/w/bbsDetail.php?idx=81

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Original title: 고용정책기본법중개정법률안에 대한 의견

Author: Yi-seok Kim

Date: 2004-11-19

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=bill&pn=3&idx=25838