🚨 Korea's Low Labor Productivity, Need to Increase Productivity with Merit-Based Personnel Management and Create Flexible Employment Environment
Today Korean Economic News | 2025.03.20
📌 Need to Increase Productivity with Merit-Based Personnel Management and Create Flexible Employment Environment
💬 At a press conference on the 19th, Bank of Korea Monetary Policy Board member Jang Yong-sung pointed to seniority-based workforce allocation as a cause of Korea's low labor productivity, emphasizing the need for personnel system reforms centered on talent and ability, and employment flexibility.
1️⃣ Easy to Understand
Bank of Korea Monetary Policy Board member Jang Yong-sung has pointed out the problem of 'low labor productivity,' one of the biggest weaknesses of the Korean economy, connecting it to the seniority-based personnel system. I'll explain why this issue is important and what changes are needed.
Labor productivity is an indicator that shows how efficiently workers create value during a certain period of time. Simply put, it measures how much valuable output is produced in one hour of work. Higher productivity means creating more economic value with the same effort, which is very important for national economic development and improving individual quality of life.
Korea has relatively low labor productivity among OECD countries. The bigger problem is that working hours are long but productivity is low. Why does this problem occur?
Member Jang identified the seniority-based personnel system as one of the main causes. The seniority-based system is a system where promotion and salary are determined by how long one has worked at a company rather than individual ability or performance. Under this system, ranks and salaries automatically increase the longer one stays at a company, which can lead to mismatches between actual work abilities and job positions.
For example, a young employee with excellent programming skills might only be assigned simple tasks because of short career experience. On the other hand, an employee with long years of service but lacking programming skills might be put in charge of important projects. In such situations, the overall productivity of the organization inevitably declines.
Member Jang said two directions of change are needed to solve this problem. The first is reforming the personnel system to focus on talent and ability. That is, how well one works should be the basis for evaluation and compensation, rather than how long one has worked. The second is employment flexibility. This means creating an environment where companies can more easily adjust their workforce according to needs, and workers can move more freely between different types of jobs.
These changes may cause conflicts due to employment insecurity or changes in wage structures in the short term. However, in the long term, they can enhance the productivity and competitiveness of the Korean economy, ultimately contributing to improving the quality of life for all workers. What's important is that these changes should benefit everyone rather than being at the expense of specific groups. For this, complementary policies such as strengthening social safety nets and expanding re-education opportunities are needed along with labor market reforms.
2️⃣ Economic Terms
📕 Labor Productivity
Labor productivity is output relative to labor input, a key indicator of economic growth and national competitiveness.
- It is generally measured by value added produced per worker or per work hour.
- It is influenced by various factors such as technology level, capital investment, human capital, and institutional efficiency.
📕 Seniority-Based System
The seniority-based system is a traditional personnel system where promotion and wages are determined by the length of service.
- It has advantages in increasing organizational stability and member loyalty, but has limitations in reflecting individual abilities and performance.
- It is a characteristic traditionally strong in East Asian countries such as Korea and Japan.
📕 Employment Flexibility
Employment flexibility refers to the institutional environment that allows companies to adjust employment forms and workforce levels according to market conditions.
- There are various forms such as functional flexibility (job reassignment), numerical flexibility (workforce size adjustment), and wage flexibility.
- It enhances the adaptability and competitiveness of companies but can affect employment stability for workers.
📕 Human Capital
Human capital refers to intangible assets such as knowledge, skills, and abilities that individuals possess and contribute to productivity.
- It is accumulated through education, training, experience, etc., and has an important impact on the economic performance of individuals and nations.
- Efficient allocation and utilization of human capital is essential for improving the productivity of the entire economy.
3️⃣ Principles and Economic Outlook
💡 Korea's Labor Productivity Status and Structural Problems
Korea's labor productivity is relatively low compared to major OECD countries, stemming from various structural factors.
First, Korea's labor productivity remains at a low level compared to the OECD average. According to recent statistics, Korea's hourly labor productivity is about 75% of the OECD average. The gap is even more pronounced when considering working hours. Korea records one of the longest annual working hours among OECD countries, but its productivity relative to working hours is in the lower ranks. This shows that long working hours do not necessarily lead to high productivity, suggesting fundamental problems in work methods and organizational structures.
Second, the seniority-based personnel system hinders efficient allocation of human capital. In many Korean companies, especially large corporations and the public sector, personnel systems based on years of service are still strongly established. In these systems, organizational rank becomes the main criterion for job allocation and promotion rather than individual abilities or job suitability. This impedes the rapid growth of talented young talent and causes mismatches between jobs and abilities (job-skill mismatch). For example, employees with longer years of service are often assigned to positions requiring specific skills or knowledge rather than those with expertise in the field, which can lower overall productivity.
Third, productivity gaps between industries and company sizes are serious. The Korean economy has one of the largest productivity gaps between manufacturing and services, and between large and small companies among OECD countries. In particular, the productivity of the service industry is significantly lower than that of manufacturing, and the productivity of small and medium-sized enterprises remains at about 1/3 the level of large companies. This dual structure becomes a factor dragging down the productivity of the entire economy. The seniority-based personnel system can be a factor increasing the inefficiency of talent utilization especially in the service industry and small and medium-sized enterprises.
Fourth, labor market rigidity is also an important issue. Korea's labor market is quite rigid due to a clear dual structure between regular and non-regular workers, difficulty in moving between occupations, and high costs and constraints on dismissals and hiring. This rigidity makes it difficult for companies to respond flexibly to market changes and hinders efficient reallocation of human resources. Additionally, labor market rigidity becomes a factor delaying productivity improvement across the economy by limiting natural job mobility according to technological development and industrial structure changes.
These structural problems are interconnected, and a comprehensive approach is needed for sustainable growth of the Korean economy. In particular, reforming the seniority-based personnel system and labor market flexibility are emerging as key tasks for improving labor productivity.
💡 Effects and Implementation Methods of Merit-Based Personnel Systems
How can a merit-based personnel system actually contribute to improving labor productivity, and what are effective implementation methods?
First, a merit-based personnel system promotes optimal allocation of human capital. Overall organizational productivity can be increased by placing individuals in positions where their talents, knowledge, and skills can be best utilized. For example, when an employee with expertise in a particular technical field is assigned to tasks in that field, they can shorten the learning curve and create innovative results faster. Empirical research shows that the higher the match between job and ability, the higher the individual's job satisfaction and productivity. Additionally, ability-based compensation and promotion strengthen employees' motivation for self-development and performance improvement, having the effect of enhancing the human capital level of the entire organization.
Second, building objective evaluation systems is important for effective implementation of merit-based personnel systems. Transparent and objective evaluation criteria and procedures are needed to fairly measure ability and performance. This requires preliminary work such as creating clear job descriptions through job analysis, multi-faceted evaluation, and building competency assessment systems. It is also important to increase the reliability and acceptability of evaluations through providing feedback on evaluation results, offering improvement opportunities, and training evaluators. If the evaluation system is perceived as unfair, it could rather cause distrust and conflict within the organization.
Third, a transition to job-based personnel and compensation systems is needed. A gradual transition to a job-based pay system is needed where compensation is determined by the value, difficulty, and scope of responsibility of the job rather than years of service or rank. This can increase fairness by realizing the principle of 'equal pay for equal work' and enhance flexibility in career development through job mobility. However, a phased approach is desirable rather than abrupt changes in transitioning from the existing seniority-based pay system to a job-based one. For example, a hybrid model can be introduced as a transitional measure that maintains seniority elements in the base salary while reflecting ability and job value through performance bonuses or job allowances.
Fourth, change management for organizational culture and member perception changes is important. The seniority-based personnel system is not simply a system but part of organizational culture and values formed over a long period. Therefore, it is difficult to achieve substantial effects with just system changes, and comprehensive change management is needed to lead changes in member perceptions and behaviors. This requires clear vision and will expression from top management, education and coaching for middle managers, sharing and rewarding success cases, and establishing continuous communication and feedback channels. In particular, it is necessary to manage resistance from middle-aged and older employees who benefited from the existing system and to prepare support measures to help them adapt to the new system.
Fifth, support systems for ability development and career management should be established in parallel. For effective operation of a merit-based personnel system, a support system is needed for employees to develop necessary competencies and manage their careers. This includes systematic education and training programs, mentoring and coaching, job rotation opportunities, and support for self-directed learning. Also important is a career management system that designs and supports career paths matching individual abilities and career goals. Such support can help employees' continuous growth and adaptation, and contribute to increasing acceptability of the merit-based personnel system.
Introducing a merit-based personnel system requires fundamental changes in organizational culture and operation methods beyond simple system changes. This is a long-term task difficult to complete in a short period and requires a customized approach suitable for the characteristics and situation of the organization. However, if successfully introduced, it can make important contributions to realizing individual potential, improving organizational productivity, and further strengthening national economic competitiveness.
💡 Balance Between Employment Flexibility and Strengthening Social Safety Nets
Employment flexibility can contribute to improving labor productivity, but it requires balance with appropriate social safety net construction.
First, employment flexibility can increase productivity through efficient reallocation of human resources. If companies can flexibly adjust their workforce composition and size according to market environment and technology changes, and workers can more easily move to jobs matching their abilities and preferences, the resource allocation efficiency of the entire economy can be increased. Especially in the modern economy where industrial structure changes are rapid, labor market flexibility becomes an important condition for innovation and growth. For example, labor force mobility can be facilitated from declining industries to growing ones, or from low-productivity companies to high-productivity ones. Such flexibility is becoming increasingly important in the era of digital transformation where technological development and global competition are intensifying.
Second, however, employment flexibility entails risks of employment instability and deepening income inequality. As it becomes easier for companies to adjust their workforce, workers may experience relatively high employment insecurity. Especially low-skilled workers, older workers, and vulnerable groups may be exposed to greater risks. Additionally, if the dual structure of the labor market (gap between regular and non-regular workers) deepens, income inequality may expand. This can increase social conflict and anxiety, and negatively impact economic growth by leading to domestic demand contraction. Therefore, employment flexibility should be pursued together with strengthening social safety nets.
Third, a comprehensive unemployment insurance system is a key element of building effective social safety nets. Currently, Korea's employment insurance has limitations in covering a significant portion of workers (special type workers, self-employed, etc.). Through a more comprehensive unemployment insurance system such as national employment insurance, a system needs to be strengthened to guarantee appropriate income levels during unemployment and support reemployment activities. Also, a balance is important to strengthen safety net functions while preventing moral hazard by appropriately designing unemployment benefit levels, duration, and eligibility requirements. Especially protection systems for new types of jobs such as platform labor and freelancers should also be considered together.
Fourth, strengthening active labor market policies (ALMP) is also important. Beyond simple income security, policies are needed to actively support reemployment and capability development of the unemployed and vulnerable groups. This includes various programs such as vocational training, job placement, employment subsidies, and startup support. Especially important is transition training to help workers in industries where jobs are disappearing or changing due to industrial structure changes acquire new skills and move to growth industries. Such policies can contribute to enhancing workers' human capital and reducing labor market mismatches.
Fifth, efforts to eliminate the dual structure of the labor market must be pursued in parallel. Institutional improvements are needed to reduce gaps between regular and non-regular workers, large and small companies, and male and female workers. Especially the realization of the 'equal pay for equal work' principle, prohibition of discrimination against non-regular workers, and elimination of social insurance blind spots are needed to increase labor market fairness and mitigate gaps between workers. Additionally, a system should be established where all workers can receive fair opportunities and appropriate protection regardless of company size or employment type.
Employment flexibility and strengthening social safety nets are complementary, and an approach biased to one side is not effective. This balanced approach, known as the 'flexicurity' model, has been successfully implemented in Nordic countries and needs to be applied to fit Korea's situation and institutional context. What's important is balanced development between labor market competitiveness and inclusiveness, efficiency and fairness.
4️⃣ In Conclusion
The correlation between the seniority-based personnel system and low labor productivity pointed out by Bank of Korea Monetary Policy Board member Jang Yong-sung clearly shows the structural challenges facing the Korean economy. Reforming to a merit-based personnel system and employment flexibility are important tasks for improving Korea's productivity and sustainable growth. However, these changes should be pursued in a balanced way along with strengthening social safety nets.
Korea's labor productivity is at a low level compared to the OECD average, and its seriousness is evident in that it is one of the countries with the longest working hours. The seniority-based personnel system causes mismatches between individual abilities and jobs, hinders efficient talent placement, and weakens innovation motivation. Additionally, productivity gaps between industries and company sizes and the dual structure of the labor market act as structural factors dragging down the productivity of the entire economy.
Transitioning to a merit-based personnel system can contribute to promoting optimal allocation of human capital, strengthening individual growth motivation, and improving overall organizational productivity. This requires building objective and fair evaluation systems, transitioning to job-based personnel and compensation systems, change management for organizational culture and member perception changes, and building support systems for ability development and career management. These changes are long-term tasks difficult to complete in a short period and require customized approaches suitable for organizational characteristics and situations.
Employment flexibility can increase productivity through efficient reallocation of human resources but entails risks of employment instability and deepening income inequality. Therefore, strengthening social safety nets such as a comprehensive unemployment insurance system, active labor market policies, and eliminating the dual structure of the labor market must be pursued in parallel. The 'flexicurity' model of Nordic countries shows successful cases of this balanced approach and needs to be applied to fit Korea's situation.
These changes should be pursued through participation and social consensus of various stakeholders. It is important to derive consensus on the direction, speed, and burden-sharing methods of reform through social dialogue involving government, businesses, labor unions, and civil society. Especially an inclusive approach is needed to ensure vulnerable groups are not marginalized during the change process.
In conclusion, reforming to a merit-based personnel system and employment flexibility are important tasks for improving Korea's labor productivity. These changes may involve difficulties and conflicts in the short term but can contribute to individual potential realization, corporate competitiveness enhancement, and sustainable growth of the national economy in the long term. What's important is finding a balance between economic efficiency and social equity, flexibility and stability. Through this, we should seek a path of inclusive growth where productivity increases and all members share its benefits.