The Key to Labor Reform Is Restoring Labor Productivity

The Yoon Suk Yeol administration kicked off labor reform by requiring large labor unions and their umbrella organizations to submit accounting data, but 63% of those unions refused to comply. The Trade Union and Labor Relations Adjustment Act states that when requested by the administrative authorities, unions must report their financial settlement results and operating conditions, yet no previous administration has ever demanded such reports from unions that carried out illegal strikes. In the United States, the government uses this mandatory reporting provision to supervise unions and block illegal practices.

Union reform should curb the dysfunctions of unions

The starting point of labor reform will be for the government to demonstrate its will to uphold the law. Labor reform means restoring fairness so that workers’ wages are determined by productivity, and what stands in the way of this is the union. In general, unions can demand higher wages by monopolistically supplying labor, and employers can respond by adjusting employment.

In Korea, however, ordinary dismissal is nearly impossible, so wages far above productivity are being maintained, and this is causing inefficiency throughout the economy.

Unions also have positive functions: they can contribute to productivity growth through collective communication, such as preventing workplace bullying and making suggestions. Labor reform can be described as restoring unions to their proper place by restraining their negative functions while maximizing their positive ones. It was therefore very appropriate for President Yoon to define labor reform as union reform.

The current administration is pushing working-hour制度 and the wage system as the top priorities of labor reform. But working hours and wages are not independent variables; they are dependent variables determined by agreement between workers and employers participating in the labor market. When there is an abundance of work, it is natural to increase working hours, and when there is little work, it is natural to reduce them.

Whether a wage system is based on seniority, job duties, or performance also varies depending on a company’s human resource management strategy. Accordingly, the U.S. Fair Labor Standards Act contains no provisions concerning working-hour and wage systems. The idea that the government should step in and determine dependent variables that change according to labor-market conditions is proof that it does not understand the labor market at all.

In a market economy, all transactions are carried out through voluntary contracts that benefit both parties, but in Korea the Labor Standards Act takes precedence over voluntary contracts. The Labor Standards Act should be revised so that only minimum standards remain and the rest is converted into provisions related to labor contracts. Only when the provision of labor and employment are governed by the principle of freedom of contract can the labor sector actively contribute to production. In the United States, the basic law governing the rights and obligations of workers and employers is common law.

Accordingly, labor contracts may be terminated freely by either workers or employers at any time. Just as a worker may freely resign unless there is a clause in the labor contract to the contrary, an employer may also freely dismiss a worker at any time. This is called the principle of employment at will for workers and employers.

The two major factors of production are capital and labor. Because funds are needed to purchase or use capital, financial markets develop and capital is procured through their supply and demand. In an open economy, financial markets inevitably become integrated with international financial markets and operate relatively efficiently according to international standards. But the labor sector has remained insulated from globalization and is strewn with rent-seeking reefs, making it unfair and inefficient. If the labor sector is left in this state, the Korean economy will not merely fail to grow; it will regress. In financial markets, institutions such as banks and securities firms have developed to intermediate between suppliers and demanders of capital.

But in labor, information asymmetry is even more severe than in capital, and yet there are very few labor intermediary institutions linking firms and workers. Just as the collective term for suppliers and demanders of capital centered on financial institutions is the financial market, the collective term for suppliers and demanders of labor centered on labor intermediary institutions—such as placement, dispatch, and service agencies—may be called the labor-finance market.

In the United States, there are about 700 professional employer organizations (PEOs) that handle HR functions on behalf of firms, along with many dispatch companies and similar entities. For the development of a labor-finance market, comprehensive private staffing firms are needed to intermediate between labor demand and labor supply as financial institutions do in capital markets, but Article 9 of the Labor Standards Act (Exclusion of Intermediary Exploitation) fundamentally prohibits this.

These two tasks are the essence of labor reform, but the current administration lacks the political capacity to push them through. Therefore, if labor reform is not to remain mere saber-rattling, the following three measures must be pursued without fail. In Korea, employers may not hire or substitute persons unrelated to the business in question to perform work suspended by a union strike, nor may they subcontract that suspended work.

The provision banning replacement work during strikes has existed since the enactment of the Trade Union Act in 1953. It did not even exist in Japanese labor law at the time, and among OECD member countries Korea is the only one with such a rule. During periods when unions were suppressed, this provision was largely meaningless, but after unions became active in 1987, it came to wield enormous power.

Institutions that intermediate in the labor market must be introduced

If replacement work during strikes is to be allowed, strikes must be carried out outside the workplace. In other countries, a strike is called a walkout because the principle is that workers leave the workplace when they strike. Korean unions, however, obstruct operations through occupation strikes, while in reality public authorities are reluctant to intervene even when employers request it. In this situation, the only countermeasure available to employers is a lockout. Only by carrying out a lockout can striking workers be removed from the workplace.

In advanced countries such as the United States, workplace occupation strikes are illegal, so a lockout effectively begins together with the strike. In Korea, however, employers may impose a lockout only when certain conditions are met, and if the union files suit, a judge determines whether the lockout was lawful. If the lockout is ruled illegal, the employer faces imprisonment or a fine. Therefore, it is extremely difficult for an employer to decide to carry out a lockout, and particularly when the head of the institution is a public official or a teacher, carrying out a lockout is a major gamble that puts the rest of one’s life on the line.

The Dispatch Workers Act allows dispatched labor only for 32 types of work, but these are mostly simple jobs such as gas station attendants and parking lot managers, and do not include manufacturing work. The use of dispatched workers and in-house subcontracting in manufacturing is a common production method in advanced countries such as Germany and Japan. In light of the cases of Germany and Japan, if the Dispatch Workers Act is revised to allow dispatch work for almost all tasks, including manufacturing, while prohibiting it only for a limited number of jobs, hundreds of thousands of jobs would be created in Korea.

The Labor Standards Act has dealt essentially only with production workers since it was enacted in 1953. A representative example is overtime pay for working hours exceeding 40 hours per week, which must be paid with at least a 50% premium over ordinary wages. While output for production workers increases in proportion to hours worked, managerial and office workers can regulate their own work intensity and may be compensated according to performance; yet for them as well, overtime hours are calculated and wages with a 50% premium are paid.

In the United States, workers are divided into those who are eligible for overtime pay and those who are not. If Korea were to classify workers in the same way, average working hours would naturally decline and a life with evenings free would become a reality.

Recently, the so-called MZ unions have been drawing media attention. But unless the reforms above are carried out, expecting MZ unions to become proper unions would be like seeking fish by climbing a tree.

Kiseong Park, Professor, Department of Economics, Sungshin Women’s University; former President of the Korea Labor Institute

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Original title: 노동개혁의 핵심은 노동생산성 회복

Author: Gi-seong Park

Date: 2023-04-17

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=25537