South Korea: Key labour reforms set to face intense union opposition

19 Jan 2016

South Korea: Key labour reforms set to face intens...

The past 12 months have seen repeated episodes of industrial action and protests in opposition to proposed government reforms intended to overhaul the labour market and create greater flexibility for employers.

The reforms are seen as vital to delivering stronger economic growth and boosting productivity, but unions fear they will undermine job security and disempower workers, threatening further labour disputes in the next year.

Despite the opposition, the backing of President Park Geun-hye, her party and major businesses means there is a strong likelihood the reforms will be passed shortly after, if not before, the April 2016 general election.



Stringent laws


The proposed labour reforms have won wide support from employers, who see them as vital for delivering stronger economic growth and business competitiveness. Under existing legislation, businesses are constrained by rigid regulations that protect workers from redundancies and ensure higher wages for more senior workers. This has deterred many companies from hiring permanent staff in favour of short-term contracts, which carry less rigid requirements. A 2015 report by the Organisation for Economic Co-operation and Development found that some 32.4 percent of South Korea’s population is employed on temporary contracts, which the report claimed contributes to poor productivity, income inequality and increased incidence of industrial action, as contractors are denied welfare benefits and job security. Protections for senior workers have also been blamed for fuelling youth unemployment, which hit a 16-year high of 10.2 percent in June 2015, as companies struggle to offer opportunities for younger workers due to the enlarged payroll of ageing staff.


To address these shortcomings, the government has proposed an overhaul of labour laws that will amend dismissal procedures for permanent staff and offer greater protections to temporary contract workers. Under the new regulations, employers would be allowed to dismiss workers deemed to be underperforming or negligent. Reforms to the wage structure will also introduce wage-peak systems, meaning workers aged 56 and over would see their wages decrease each year to encourage early retirement. Hyundai, Samsung, LG, and Kookmin Bank have already adopted the wage-peak system and have come out in support of the new reforms. Greater protections will also be provided for temporary contract workers, by allowing them to work in more industries and increasing minimum contract lengths from two to four years. In addition, a reduction of working hours is expected to create more jobs and improve efficiency.


Union opposition


The proposed reforms have attracted fierce opposition from trade unions, and strikes and protests are expected to intensify in the coming months as the government pushes to pass the legislation before the 13 April 2016 general election. Although the changes to short-term contracts are broadly welcomed by temporary staff, this has not alleviated union opposition to the reforms, which they fear will lower wages and undermine the job security of permanent employees. These concerns caused a surge in labour unrest in the past year. In April 2015, 200,000 workers went on strike across the country, with protests held in Seoul in subsequent months attracting tens of thousands of people at a time.


Labour disputes associated with union opposition also pose a serious challenge to productivity in the year ahead. A December 2015 survey by the Korea Employers Federation found that 67.1 percent of 304 major companies believe labour relations will deteriorate in the next 12 months, illustrating the anticipated scale of the problem and the impact of unrest seen in the previous year. A three-day strike at Hyundai in September 2015 involving 48,000 unionised workers cost the company more than 10,000 units in lost production. In August 2015, workers for Kumho Tires staged a 39-day strike against the wage-peak system that cost around USD 129 mn in lost sales. With the controversy surrounding the labour reforms showing no sign of abating, many companies are preparing for further unrest in the next 12 months.


Labour unrest to continue after reforms are passed


Despite the opposition, the government is likely to be successful in passing the reforms due to unified support from the president, her Saenuri party and South Korea’s largest businesses. The principal challenges stem from the opposition Minjoo party, which is calling for alternative labour reforms that would require companies to share profits with staff, rather than restructure workforces. In order to secure the three-fifths of parliamentary support necessary to pass the bill, the government will have to reach a compromise with factions of Minjoo, likely by exploiting existing divisions within the party relating to a leadership struggle. In the event the government is unable to secure a deal with Minjoo party members before the April election, it will stand a better chance of passing the reforms after the vote, when Saenuri is expected by polling agencies to secure a supermajority in parliament. In the less likely scenario that Saenuri fails to increase its majority, there is the potential for delays to the reforms as the government is forced to resume negotiations with opposition parties. Such a scenario could lead to some watering down of the more contentious reform proposals, particularly dismissal procedures.


Worsening relations between the government and unions mean further strikes and protests are likely in the lead-up to the passage of the reforms and as companies begin to implement the new laws. Any major redundancies announced after the passing of the legislation will likely be met with fierce opposition from unions, eager to set a precedent under the new regulatory regime and deter companies from applying the new laws too liberally. The automotive sector is especially vulnerable to disruption from strikes, with both Hyundai and Kia expecting a second year of weak sales amid growing pressure to reduce headcount and increase efficiencies. As has been the case in the past, there is the potential for these strikes to last weeks or months, leading to significant loss in output. Strikes are frequently accompanied by protests at company facilities and in Seoul, with the potential for prolonged unrest and disruption in the capital.


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