By Jiyeun Lee
(Bloomberg) — The South Korean government’s push to restructure debt-laden companies is set to cost tens of thousands of workers their jobs in an economy where social security is limited and a rigid labor market reduces the likelihood of getting rehired in a full-time position.
Many of the layoffs will be in industrial hubs along the southeast coastline, where shipyards and ports dominate the landscape. These heavy industries, which helped propel South Korea’s growth in previous decades, have seen losses amid a slowdown in global growth, overcapacity and rising competition from China. As a condition of financial support, creditor banks and the government are pushing companies to cut back on staff and sell unprofitable assets.
In Korea, losing a permanent, full-time job often means sliding toward poverty, one reason why labor unions stage strikes that at times lead to violent confrontations with employers and police. A preference for hiring and training young employees, rather than recruiting experienced hands, means that many workers who get laid off drift into day labor or low-wage, temporary contracts that lack insurance and pension benefits, according to Lee Jun Hyup, a research fellow for Hyundai Research Institute.
“The possibility of me getting a new job that offers similar income and benefits is about 1 percent,” said one of about 2,600 employees to be laid off following a previous restructure, of Ssangyong Motor in 2009. The 45-year-old worker, who asked only to be identified by the surname Kim as he tries to get rehired, initially delivered newspapers and worked construction after losing his permanent job. He’s now on a temporary contract at a retailer and taking night shifts as a driver to get by. Despite having these two jobs, his income has been halved. Being fired was “like being pushed into a desert with no water,” Kim said.
President Park Geun Hye last month underscored the need for the painful restructuring during a cabinet meeting, likening procrastination on the issue to a sick person frightened about undergoing life-saving surgery. Korean exports have fallen for more than a year and mounting levels of corporate debt are weighing down companies that need to find new growth engines.
The government’s priority is on restructuring the hard-hit shipbuilding and shipping industries. Daewoo Shipbuilding & Marine Engineering Co. plans to cut about 10 percent of its workers, or about 1,300 people, from its payroll by the end of 2018. Hyundai Heavy Industries Co. said it is offering early retirement, after reducing the number of executives by 25 percent.
The number of layoffs are expected to balloon as the downsizing of major companies hits subcontractors. Ha Chang Min, an official at the subcontractors’ labor union for Hyundai Heavy, said the union expects about 10,000 workers to lose jobs this year as projects end.
About 205,000 workers were employed in Korea’s shipbuilding industry as of the end of 2014, according to the Korea Offshore & Shipbuilding Association. Hana Financial Investment Co. analyst Lee Mi Seon wrote in a report this month that 10 percent to 15 percent of workers in the industry are estimated to lose their jobs. With average monthly income in the shipbuilding industry at about 4.5 million won ($3,800) last year — relatively higher than other industries — the layoffs could lead to a downturn in consumption and weigh on the regional economy, Lee wrote.
Similar problems face China, whose companies compete with Korea in the global market. China has continued lending to keep its corporate sector growing but the expansion of credit has reached record levels. China’s efforts to curb overcapacity in some heavy industries will come at the price of jobs and may lead to labor unrest. This is a concern to China’s Communist Party leadership whose legitimacy is underpinned by steady employment, analysts say.
Strain is already seen in job markets at Ulsan, a key industrial city on Korea’s southeast coast. The number of unemployment benefit claims rose 18 percent in the first quarter from a year earlier, compared with a 1.3 percent increase for the whole country, data from the labor ministry show.
The government is currently reviewing designating the shipbuilding industry as a “special employment support industry,” according to Lee Hyun Ok, a director for regional and industrial employment policy at Korea’s Labor Ministry. If designated, the government will offer job training to those who are made unemployed and offer financial support to companies that keep their workers, Lee said.
The worst may be yet to come. The value of new orders at Korea’s shipbuilders fell 94 percent in the first quarter from a year earlier, and is forecast to fall 85 percent in 2016, according to Export-Import Bank of Korea. Plunging new orders suggests companies will no longer have room to hold on to employees once current ship-building projects end.
Korean unemployment benefits are a maximum of 43,416 won a day for a maximum 240 days. The exact amount depends on age, number of years the person has paid employment insurance, and final salary.
The proportion of income that is replaced by unemployment benefits in Korea was lower than the average for Organisation for Economic Co-operation and Development in all scenarios listed by the institution. The OECD analyzed various cases depending on the number of money earners and children in a family.
“It will be difficult for those laid off, as with the economy growing slowly, new jobs aren’t being created,” said Cho Seong Jae, director for industrial relations research at Korea Labor Institute. Also, people aren’t aware of the magnitude of the upcoming joblessness because most workers are contract-based and not well represented by unions, he said. “The government should think beyond traditional job support measures to support them,” he said.
–With assistance from Sam Kim.
© 2016 Bloomberg L.P