Efficiency of the Labor Market Allocation of Human Resources

Strong employment protection for regular employment is believed to be a major contributing factor to the gradual decrease in the effectiveness of the human resources allocation mechanism in the Korean labor market. An increase in productivity does not lead to job creation but increases the wage levels. Higher adjustment costs arising from strong employment protection contribute to concentrating labor allocations on temporary contracts; and it is evident that this phenomenon leads to the greater use of capital input instead of increasing the labor stock. Such labor market rigidity hinders the efficient use of human resources in our society, thus it is likely that labor market rigidity can be a growth inhibitor while also exacerbating dichotomization. The smooth shift of workers from a relatively low-productivity industry to a high-productivity industry will ensure the efficient use of limited labor resources, but it is also likely to ease social issues such as wage inequality. Therefore, both a reduction of employment protection for regular workers and the implementation of policies to minimize any discrimination against non-regular workers are required to ensure more efficient allocation of labor resources and reduce labor market dualism. The key element for labor market flexibility lies in reducing employment protection for regular positions. ╺ Considering the current dichotomy between regular and non-regular workers resulting from strong employment protection for regular workers, policies aimed at enhancing labor flexibility solely through the deregulation of the use of non-regular workers will likely to provoke serious social conflict. Under the premise that employment protection for regular workers is relaxed, minimizing discrimination against non-regular workers while implementing policies to extend the labor supply will serve as a more sustainable solution for higher efficiency of resource allocation in the labor market and greater social integration. ╺ If employment protection for regular workers is not reduced, policies aimed at controlling the expansion of non-regular workers such as limiting the length of non-regular job contracts will likely make refusals to renew non-regular workers’ contracts more common.