Lessons from Korea’s unemployment insurance program

Sung Teak Kim of Korea Labor Institute has this insightful paper on the topic. Interestingly Korea has a pretty good unemployment insurance program. They expanded the program after the 1997-98 South East Asian crisis which helped in 2008 crisis. 

The coverage of Korean EIS has expanded step by step and now includes all businesses with one or more employees since the EIS was introduced on 1 July 1995. In practice, the coverage rate of employment insurance for wage workers is 56.8% and about 80% for regular workers as of August 2008. 

The EIS of the Republic of Korea (hereafter Korea) is categorized in three main programs—the Employment Stabilization Program, the Vocational Competency Development Program, and the Unemployment Benefit Program. In the process of overcoming the 1998 Asian financial crisis, the Government of Korea promoted many active labor market policies (ALMPs), because the EIS coverage was too small compared to the huge number of the unemployed, and the subprograms were not adequate to solve the problems of the Korean labor market. Eventually many ALMPs were converted into EIS subprograms. The three main programs had about 20 specific programs altogether at the time of introduction of the EIS, and now there are about 80–90 subprograms targeting specific goals. 

The percentage of enrollment figure in the EIS program is impressive. 

Though impact on GDP was much higher in 1997-98 crisis compared to 2008 crisis, but because of this insurance program unemployment was much lower. 

the impact from the 2008 crisis is relatively smaller compared to the impact of the 1998 crisis. The unemployment rate in the first half of 2009 was 3.8% despite the negative gross domestic product growth rate (–2.2 to –4.2%), while the unemployment rate  in 1998 was 7% with the negative gross domestic product growth rate (–6.9%).  

The ALMP programs in the EIS form a larger proportion of the whole labor policies than in 1998–2000, and most of those policies are expansions of the existing programs in the EIS. This implies that the Korean labor market is acquiring the systematic tools to resolve the problems of the economic crisis, but needs to adjust the budget and the order among the policies according to the economic and labor market situation. 

Before the 1998 financial crisis, the Korean labor market was near full employment status, with the unemployment rate at less than 3%. However, the Korean labor market faced record-high unemployment rates of 7% in 1998 and 6.3% in 1999 for the first time since 1960, and the number of unemployed skyrocketed from 568,000 in 1997 to 1,490,000 in 1998 and 1,374,000 in 1999. While the government introduced EIS in 1995, the social safety net of Korea was not well developed during this period. The government tried to remedy the situation by setting out temporary welfare programs and active labor market policies, including public works, for the unemployed. In 1999, 46.5% of wage-workers were covered by the EIS and only 15.5% of unemployed wage-workers were getting unemployment benefits. The ALMPs were more effective than the Unemployment Benefit Program in terms of coverage. Eventually, some of the programs were included in the EIS after the crisis. 

But again, it is not just good labor policies which helped in this crisis. Overall, economic framework improved after 1997-98 crisis. 

There are many reasons behind the differences in the impact of the two financial crises on the Korean labor market. First, the macroeconomic situation between the two crises is completely different. In 1998, the Government of Korea lost control over macroeconomic policies such as interest and foreign exchange rates because the financial crisis drove the country into the edge of national bankruptcy.

In the current crisis, businesses avoided laying off workers unless absolutely needed. Instead, companies resorted to various means such as implementing flexible working hours, employing mandatory additional leave without pay, reducing overtime work, reducing regular working hours, implementing partial wages, lowering starting salaries, introducing peak-wage rate, adjusting wages, and so on.

The 1998 Asian financial crisis precipitated the deterioration of income distribution significantly as the Gini coefficient in 1998 rose to 0.303 from 0.268 in 1997 and the relative poverty rate increased to 13.1% in 1999 from 9.3% in 1997. The Gini coefficient ranged from 0.256 to 0.272 and the relative poverty rate was about 7.6–9.3% steadily before 1998. This implies that the 1998 Asian financial crisis significantly widened the gap of income distribution in Korea. The Gini coefficient and the relative poverty rate slightly increased in 2008 compared to those in 2006 and 2007. However, it is difficult to conclude that the major cause of these increases is the current financial crisis because there has been an increasing trend of those indicators during 2001–2007.

What are the lessons?

First, financial stability at the national level is important for employment stabilization

Second, countries need to develop a social welfare system to cope with uncertain economic situations autonomously

Third, layoffs should be the last resort to lowering labor costs even during recession. Flexible working hours and wages, and inside-labor-market could be used to overcome short-term labor cost problems.

Finally, cooperation and coordination across government departments are important. Policies involving the macroeconomy, labor market, social welfare system, and industry, including industrial relations, should be coordinated.

I have just summarised the main ideas. There are many more interesting things in the paper.

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