A labor market grounded in economic principles benefits workers too

Trying to solve labor issues on the premise that labor is somehow special distorts the market and ultimately harms workers. Because a policy stance tilted toward being pro-union has persisted for so long, distortions in our labor market have reached a serious level. Laws and institutions have been shaped not by market logic but by collectivist political logic, and the result has been a string of side effects, including job shortages and low wages. To resolve this, we must first accept that the labor market performs best and delivers the greatest benefits to workers and the public when it operates according to market principles. Only then can the labor market function smoothly by removing the various regulations created through political logic.

Work is precious and valuable to everyone. Through work, people enrich their lives and gain a sense of accomplishment. Some create work for themselves, but many work through contracts with other people, companies, and other legal entities. In modern society, working under contract with others is the usual arrangement. Because people choose their work of their own free will, it is also highly satisfying. Workers have no reason to do work they do not want. If they find a contracted job unsatisfactory, they can look for another one.

If contracts are free, no one loses through labor or employment. Both employers and workers freely choose and enter into contracts for their own benefit, so both sides are satisfied. Problems arise when regulations, interference, physical force, or the power of others compel people to accept what they do not want. If a contract is made under coercion despite one’s unwillingness, it cannot be satisfying and it also harms an unspecified number of people in the related field.

Labor contracts mainly concern wages, hours, and duration. There are many regulations in law and institutions that interfere with free contracting in these areas. The proper role of law is to protect voluntarily concluded contracts and ensure that their terms are honored. This includes enforcing compensation for damages if either party breaches the agreement. If institutions stray from this basic function and try to replace the market’s function, the result is market distortion. Regulations aimed at interference and control damage the interests of the contracting parties and cause harm related to employment.

Wages should be determined by the free mutual consent of the parties. There is no reason for the government to intervene and control by setting upper or lower limits on wages. If there are households whose income falls below the minimum cost of living because of unemployment or low wages, that should be addressed through welfare policy, not by forcibly placing the burden on businesses. Working hours, too, should be determined by the free mutual consent of the parties. Working hours should be set in accordance with the nature of the business. The current regulatory method of imposing a weekly limit has serious harmful effects, so it should be eliminated, and the cap on the premium rate for overtime pay should be lowered to reduce the incentive for long working hours.

The duration of work should also be determined by workers and employers according to the nature of the job and by their free mutual consent. Contracts should be allowed on a one-year basis, or for 5 years, or 10 years. For example, in professional baseball, players are sometimes signed to 7-year contracts. But in most workplaces, regulations tied to the mandatory retirement system are being rigidly enforced so that if a contract exceeds 2 years, the contract period is effectively required to run until age 60. Universities may set the retirement age for professors at 65. This uniform imposition of contract duration harms everyone. It creates side effects of shrinking employment and lowering productivity, trapping the system in a mire of coercion, discrimination, and poor performance. By overprotecting regular workers, it blocks productivity gains and prevents people seeking jobs in that field from entering, thereby undermining the functioning of the labor market.

It is necessary to address the excessive burden that mandatory retirement regulations impose on businesses. Allowing a mandatory retirement system while blocking dismissals for managerial reasons excessively infringes on the employer’s right to manage and creates an excessive protection mechanism for regular workers. Institutional flexibility should be increased so that, as in the United States, temporary layoffs for managerial reasons are possible.

The reason regulations intended to protect regular workers end up harming workers is clear. The dual structure of the labor market has become entrenched, and the wage gap has widened. The more the market is distorted, the more economic efficiency declines and jobs are destroyed as productivity falls. Moreover, regulations designed for existing workers are fundamentally blocking new employment for people seeking jobs. Regulations that excessively protect regular workers are harmful because they grant privileges to incumbent workers, thereby discriminating against other workers and perpetuating a socially value-destroying condition.

For workers, jobs are essential for making a living. Opportunities to work are provided by businesses. That is why creating a legal environment in which businesses can operate actively is also a path that benefits workers. Workers are contracting parties who pursue economic gain, and they should be able to receive compensation for their labor according to contract. It is not economically rational to treat workers—economic actors who generate income—as objects of welfare. Welfare policy has meaning when it is directed toward citizens who have difficulty taking responsibility for their own lives.

Distortions in the labor market mainly arise when politicians accept unions’ demands and institutionalize them. Collusion between unions and the political sphere has continued since the late 1980s. In the 21st National Assembly, this phenomenon was especially severe. Starting with the Serious Accidents Punishment Act, countless anti-market laws poured out. Employment sites were devastated, and businesses lost their vitality. In the end, workers are losing jobs or suffering from low wages.

It is also in workers’ interest for the labor market to break away from political logic and once again adhere to economic logic. For the market to regain vitality, labor regulations must be removed as soon as possible. Fortunately, the Yoon Suk Yeol administration has the will to pursue labor reform. Much was achieved in its first year in office, and I hope that over the remaining 4 years it will succeed in labor reform and create good, high-wage jobs.

Sung-no Choi, President, Center for Free Enterprise (CFE)

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Original title: 노동시장도 경제원리에 충실해야 노동자에게도 이롭다

Author: Sung-no Choi

Date: 2023-05-08

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=10&idx=25621