Strikes early this year, protesting changes in the labor law, cost Korea $3.15 billion in lost production
and $482 million in lost exports (MOTIE). But many think the legal reform is not the real
catalyst for change in today's labor environment....

For decades, Korea's economy had been rolling along at double-digit growth, its opulence literally growing before our eyes. Those absent from Seoul for only a couple of years had trouble recognizing it upon their return. Industry grew quickly, workers demanded their piece of the pie and, for the most part, they got it. Wages grew fast-faster than productivity-and as the economy matured and slowed, the country had to finally take an introspective look at what was happening.

There was little doubt that labor reform was necessary. In the "don't fix it if it ain't broke" mentality, the nation's labor law had stood virtually unchanged for over forty years. So in 1996, the President and the ruling majority New Korea Party initiated the action in the name of greater competitiveness and conformation to international norms.

Their ideas, including one that would make it easier for companies to lay off employees in times of crisis, thereby doing away with the deeply ingrained idea of lifetime employment, were controversial, but necessary in the eyes of many. Seven months of negotiation led by the Reform Committee for Labor-Management Relations failed to result in a bill that was acceptable to all parties concerned and opposition lawmakers blocked a final decision on the bill until the ruling party met in a predawn session on the day after Christmas-forgetting to invite the opposition-to push their version through the National Assembly.

That's when everything unraveled for the proponents of the change. Opposition parties immediately voiced their strong disapproval of the bill and the way in which it was passed. Trade unions, led by the Korean Confederation of Trade Unions (KCTU), called for a nationwide general strike which commenced on January 3rd in the private sector, affecting first the automobile, shipbuilding, steel, and electronics industries. The public sector soon followed, led by transportation workers. The Korean Federation of Trade Unions, the only legally recognized trade federation, joined the melee and by mid-January, hundreds of thousands of workers were involved in the walkout.

The striking workers displayed determination greater than the NKP expected, it seems, and with elections scheduled for late this year, some of the lawmakers began breaking ranks in search of a more moderate approach to the reform.

President Kim Young Sam finally agreed to accept a revised set of bills that would be drafted jointly by the ruling and opposition parties. The compromise bill was promulgated in a plenary session of the National Assembly on March 10, 1997, and formally implemented three days later.

The President and the ruling camp had at first attempted to press ahead with the original revision despite the strong repercussions, explaining again and again that the reform was necessary because the nation's economy was in such dire straits. And in fact, an increasing number of opinion leaders had expressed concern over a potential economic crisis after Korea joined the OECD. There was a fear that a replay of Mexico's 1994 foreign exchange crisis was possible. Some economic experts cited the fact that Korea's foreign debt had increased to $111 billion last year while its foreign currency reserve dwindled to $29.8 billion as of the end of February this year, so there was a need for the nation to take appropriate measures to avoid the similar conditions that led up to the Mexican financial trauma.

The Korean government believes the situation is not as serious as the doomsayers profess, although there is no argument that the nation's economy faces serious hardships due to a swelling trade imbalance and slower-than-usual economic growth. The Asia Development Bank also came out with a report predicting that the Korean economy would begin a recovery in the latter part of this year, although a continued lagging performance could be expected due to lack of investment and lower export growth. The report predicted that Korea, which in 1996 recorded 7 percent growth in gross domestic production, will mark 6.3 and 6.9 percent GDP growth in 1997 and 1998, respectively.

The ADB report explained that Korea's relative low growth will be ascribed to low investment and sluggish overseas sales, coupled with the presidential election slated for late this year. But it also says that the economy will make a dramatic comeback in the coming two years, boosted by increasing demand from developed nations.

Even so, the notion began to spread rapidly that the nation's competitiveness had been continuously weakening, mainly caused by the high-cost, low-efficiency structure that had evolved. And it was pointed out that the fundamental problem lies in a high cost labor force whose productivity didn't measure up to what it was being paid. A consensus was formed, then, that called for measures to be taken to cope with the overall structure of the labor market, hence the legal approach.

The current economic slowdown is, of course not solely attributable to high wages. In fact the sharp drop in semiconductor prices and lackluster overseas sales of automobiles and other major export items has been a primary contributor to the current economic woes. Overdependence on certain export items, a dependence on imported capital goods and technology, and policies which have neglected the importance of small and medium sized companies have all been cited as major problems for the Korean economy, and many of the predictions that forecast the economy's recovery later this year are actually based on higher semiconductor prices and the like.

Japan's renowned Nomura Institute projected in a report issued on April 15th that Korea will maintain a low annual growth rate of about 5 percent through 2005, though, and its current account deficit will reach $20 billion. It also said that Korea's economic problems lie in its high cost and low efficiency environment, in addition to a heavy dependence on developed nations for technology, which has hampered its efforts to focus on high value-added products.

Suzanne McDonald, corporate personnel director at Unilever Korea, agrees that the catalyst for change in the nation's labor structure is not necessarily the law itself, but the unstable economy. "The law reform will impact the change in the labor scene only by about 10 percent," she says. "Ninety percent of the change is how the reforms are used. Legal reform will give us the framework for making the changes, but it's up to the employers to manage it well.

So, the government set out to correct the structure of the labor market with the belief that the weakened competitiveness of the nation's enterprises in overseas markets had come about mainly as a result of the escalating labor costs. The revised labor bill was aimed at establishing a balance between labor and management, adding flexibility to the labor market, and easing the burdens on businesses arising from high wages. By addressing the competitiveness of industry, the administration hoped to reach a breakthrough in the economic hardship.

The trade unions saw it a different way, however, believing that the bill generally favored employers and they voiced three basic concerns over some specific amendments of the proposed law. First and foremost was the issue of job security. The proposed amendment that, under certain circumstances, would allow companies to lay off workers more easily led to rumors of companies planning to initiate mass layoffs, no matter how many times the companies denied such rumors and promised to work responsibly within the law. Second was the issue of flexible working hours, which would limit workers' ability to collect overtime, and third, the unionists were concerned over employers being able to replace strikers with third-party contractors.

The government's plan was certainly not meant to harm employees, but rather to create a better balance with some amendments that would provide companies a chance to raise their competitive advantage by allowing them to save on labor costs and to more flexibly deal with manpower issues. It is too early to tell whether the law as it now stands will add momentum to the Korean economy, but it is certain that it is a positive step toward making the legal structure fit the modern realities.

In the foreign community, the final version of the law was greeted with mixed emotions. Unilever's McDonald says, "I was encouraged and excited by the nature of the reforms that were put through on the 26th of December. I believe Korea, as a country, needed all of those changes, and possibly more. Having said that, at least we do have some reforms now, and they are going to help us a lot-perhaps not as much as I as an employer would have liked, but now the task is to use what we're got. It's a positive thing and I think it's expected to make significant changes.

On some of the specifics of the law, Ms. McDonald continues, "I think flexible working hours can be a very positive opportunity, as long as management is able to win the workers' support of that. I don't think flexible working hours should be imposed. The issue of employees being able to request severance pay early requires some careful management, because in the long term, millions of Koreans might face retirement without any pension. The issue of halting pay to union leaders will be positive, but I think allowing multiple unions is a potential bomb.

Ms. McDonald, who worked for Unilever in Australia for ten years, says that she had to negotiate with 14 different unions there. "Boilermakers had a union, electricians had a union, security had a union, unskilled workers had a union, and so on. Perhaps the most beneficial thing to come out of Australia's labor reforms in the mid '80s was to reduce the number of unions.

McDonald feels that the key issue of the law that was modified between December and the final version in March is that of job security. She argues that there are few democratic countries in the world where lifetime employment is still guaranteed to the extent it is in Korea and that it restricts productivity by obstructing companies from restructuring their business. While the law was amended, the new layoff criteria state that from 1999, layoffs may only be executed in cases where critical managerial necessity exists (simply a reiteration of past Supreme Court rulings).

On the government side, Lim Mu-song, director of the labor relations policy division of the Labor Ministry, says, "We expect that labor-management relations will remain stable and excessive regulation in the labor market will be eased with the re-revision of the related laws. Labor-management relations will return to normalcy and labor practices will be matched to international norms. In addition, the efficiency of the labor market will be heightened and national competitiveness will be raised. The laborers, for their part, will be able to enjoy stable working conditions and a higher living standard in the long run.

He went on to say that the former labor law, established in 1953, contained many points which contradict the situation as we see it today and has undermined both flexibility in the labor market and productivity. As a result, voices have gained strength expressing the possible "hollowing" of domestic industry with the exodus of local enterprises to overseas markets in search of cheaper labor and more favorable business conditions while avoiding further investment in domestic projects.

Regarding the final revision the labor law, Lim says that the effects will be better determined after wage negotiations take place this year from April to July. But both labor and management appear to be moving toward raising labor efficiency, as seen in a series of moves to settle the labor talks without negotiation and declarations for wage freezes. Lim asserts that the phenomenon is partly a concerted effort to address the current economic difficulties and partly an effect of the new labor law.

While most think it's a step in the right direction, the new law is not the answer to all the problems. There are still lingering labor issues which have to be ironed out in the future, and there is certainly no easy way to balance the interests of the nation's laborers and address the needs of business and industry in their quest for competitiveness and profitability.

"The re-revision of the labor law was aimed at modifying 40-year-old clothes to match the body," said Dr. Kim Soh-young, researcher at the Korea Labor Institute. "The labor law has remained virtually intact all these years except for occasional minor changes and has yielded lots of problems as it was set up in the era of low development and low wages," she added. Dr. Kim also said that under the new labor law, cooperative labor-management relations will be enhanced, thus helping inject fresh air into industry and heightening national competitiveness.

She noted that the revision of these laws came about rather late in comparison with cases in advanced nations which have already pressed ahead with such legal measures in order to establish cooperative labor-management relations at the state level. "Under the new labor law, a win-win situation will be possible," she added.

Kim Dong-seok, director of the Central Employment Information Management Office, also noted that the new law prepared a basis for fair play, by offering rights and duty to both labor and management sides. Under the new law, much-disputed issues pertinent to the prohibition of multiple unions, political participation by the unions and intervention by third parties were revised to meet the standards of related international organizations like the International Labor Organization (ILO) and the Organization of Economic Cooperation and Development (OECD).

While the government was seeking to revise the labor-related law, enterprises attempted to cope with the persisting business slowdown themselves by finding ways to lay off employees, creating a tremendous shock wave in the labor community. The companies were offering "honorable" early retirement to employees as an easy way of dismissing the workers rather than seeking to improve the business climate through technology renovation or management reform which would take a longer time and much more energy. To the Korean employees accustomed to the notion of a virtual lifetime employment system, the move was indeed a shock.

The "honorable retirement system" consists of offering employees allowances in addition to their severance pay for leaving the company early. Despite the financial incentives offered by the retirement system, there have been strong repercussions from labor circles. Critics note that it is these employees, mostly in their 40s and 50s, who helped build the country's economic achievements, and it is improper to force them from their work. In addition, they say, the retirees are young and healthy enough to continue working and need so much money for living expenses, the education of the children, and so on.

In such a social atmosphere, and in a culture where work defines respect and dignity, especially for men, the phrase "fathers with dropped heads" gained popularity, describing the disgrace of being an out-of-work man younger than the normal retiree, and a novel about the phenomenon entitled "Father" became a bestseller.

Indeed one of the unions' primary concerns was that if broader authority was given to employers, indiscriminate layoffs would do more harm to the economy than good. They argued that Korea does not have a sufficient safety net in place, in the form of a comprehensive social security system, to deal with the displaced workers. That should be set up before the nation allows companies to dismiss employees so easily.

Recently, the enterprises, wary of the side effects that any kind of a layoff system might produce, such as lower morale, have turned instead to reducing costs by freezing wages and conducting management renovation. According to a survey conducted by the Korea Employers' Federation of 233 companies, 22.1 percent replied they have redundant manpower but 81.9 percent said they have no plan for layoffs, reflecting that most of the firms are in fact reluctant to adopt a layoff system. The idea of a relaxed layoff system has led the employees to emphasize job security over wage hikes, forcing the government and management to rethink their manpower management and the restructuring of the labor market.

Abundant human resources have been the very locomotive of growth in the course of the nation's rapid economic development. As a matter of fact, human resources are an essential factor for any nation deficient in basic industrial facilities and capital in its early industrialization stage. But with the population increase rate declining recently, a labor shortage has cropped up and a distribution imbalance at the inter-industry level has widened further due to the increase in the ratio of highly-educated, female and senior workers.

The demand for higher wages continued and climaxed during the Fifth Republic amid fervent demand for more democracy. Increasing income has led the people to shun 3-D work (dangerous, difficult and dirty) and opt for more leisure activities. The result has been a serious shortage of manpower for the manufacturing sector in particular, while in contrast the supply of workers with relatively high education has been in surplus, causing a higher unemployment rate than the nation is used to.

For example, only 100 job seekers took part in a job fair conducted by the Seoul Human Resources Bank on April 17, mainly for small and medium sized manufacturing companies (SMCs), although 42 SMCs participated, and most of the job seekers who showed up had little or no experience or education. In contrast, more than 1,000 people took part in a similar job fair organized by the Central Employment Information Office of the Ministry of Labor, mainly for those who quit their jobs under the new lay-off system.

Director-General Kim Dong-seok, who was in charge of the fair, said, "Highly educated people opt for office and specialized jobs. So white collar workers are in surplus while we have a shortage of engineers. In particular, the 3-D jobs have serious manpower need as most of the engineers want easy and convenient jobs. The SMCs are still suffering from a labor shortfall as they have never been able to receive enough foreign industrial trainees to meet their needs," he said.

For foreign companies doing business in Korea, the labor issues appear much like anywhere else, with slight differences in labor's evolutionary time line or cultural impact. The British/Dutch conglomerate Unilever has 1,400 employees in Korea and operates a wholly owned factory making home and personal care items, a joint venture foods plant, as well as facitilies for other chemical and prestige market products.

The company has gained considerable success in the Korean market, but not without dealing with the same labor issues that any local manufacturer faces. Ms. McDonald says of the labor situation, "I think Korea is unique in some ways, but people are really the same all over the world. Therefore there are many more similarities than differences."

"The positives aspects of Korea's labor market include collectivism, if you can harness collectivism, loyalty, if you can earn the loyalty, and the Korean people's overall willingness to work hard," she says. "I'd sum those three things up under the umbrella of management's ability to manage those positives. If you can understand the nature of labor in Korea and can earn the respect of labor, then there is no reason you cannot achieve a highly productive and harmonious workforce. Underscoring that is management's ability to manage the strengths of Korean labor.

"On the negative side," McDonald continues, "is an overall unawareness of differentiation of skills. Payment based on relative skills and even a infrastructure to train and develop the differentiation of skills are weaknesses in the Korean labor system. I think those weaknesses come from a historical and traditional system called 'hobong,' a promotion and pay system based mainly on seniority."

Korean companies are now beginning to tackle the same "pay for performance" issues, which should reward employees willing to work hard and get ahead, but there is resistance from a business culture where it has always been considered bad form to make more money than your colleagues or be promoted over an elder. So the changes will take adjustment to the local culture and time.

Korea's fast changing environment naturally makes it tricky to deal with a labor force spanning different generations. Ms.McDonald notices even a generation gap between those coming out of universities today and those that graduated just five years ago. "So you can imagine the generation gap between new employees and their 45-55 year old directors," she notes. "Management needs to understand several different sets of values" everal different sets of aspirations.

The new labor law, it seems, may be simply an update to meet modern reality. The real change is occurring within the companies themselves and in line with the rapid industrial and cultural dynamism. As the environment continues to change, the laws will inevitably have to go through another round of adaptation just to keep up. "In other countries, I think we have recognized now that the only truly competitive edge that can be achieved these days is through the quality of the people," says McDonald. "How you increase the quality of people is what human resources management is all about. I think a lot of Korean companies are realizing that now, but progress is slow.