SMBA: "Government Work Hour Reduction Negatively Impacts New Job Creation"

Headquarters of the Small and Medium Business Venture Institute.

[Asia Economy Reporter Donghyun Choi] A study has found that the government's reduction of working hours has a negative impact on the creation of new jobs.

The Small and Medium Business Venture Research Institute announced this on the 20th through a report titled "The Impact of Working Hours Reduction on Employment in Small and Medium Enterprises." The report evaluated that the policy effects expected from the Moon Jae-in administration's revision of the Labor Standards Act in March 2018, which reduced the maximum weekly working hours from 68 to 52, such as improving workers' 'work-life balance' (Work-Life Balance) and revitalizing job creation, have essentially failed.

The government previously applied the timing of the working hours reduction differently according to company size, considering workers' income reduction and management burdens on small and medium enterprises. The revision of the Labor Standards Act was applied to workplaces with 300 or more employees in July 2018, to workplaces with 50 to 299 employees in January 2020, and to workplaces with 5 to 49 employees in July 2021.

Based on this, the Small and Medium Business Venture Research Institute analyzed the impact of working hours reduction on job creation using the difference-in-differences method. The difference-in-differences method evaluates the effect of an event by subtracting the changes that occurred in the comparison group from the changes that occurred in the treatment group.

According to the institute, after the application of the Labor Standards Act revision, total employment in medium-sized enterprises increased by an average of 3.76 employees compared to the comparison group, but new employment decreased by an average of 4.06 employees. Senior Researcher Suhwan Lim of the institute explained, "Looking at the trend of new employment before the reduction of working hours in medium and small enterprises, the trends were parallel, but after the reduction, a decrease in new employment in medium-sized enterprises was confirmed. It can be seen that companies responded to the reduction of working hours by maintaining existing workers rather than hiring new ones to minimize labor costs."

To explain the fact that total employment increased but new employment decreased due to the reduction of working hours, the institute also examined the hiring and resignation rates of businesses. For total employment to increase while new hires decrease, the resignation rate of existing workers must decrease. The institute divided total employment into three groups: new hires, resignations, and continuing workers, and calculated the hiring and resignation rates from 2018 to 2020. As a result, the decline in hiring rate (-22.2 percentage points) from 2018 to 2020 was greater than the decline in resignation rate (-15.4 percentage points). Researcher Lim stated, "The fact that the decline in hiring rate is greater than the decline in resignation rate suggests that businesses managed the resignation of existing workers rather than hiring new personnel. Businesses with incentives to minimize labor costs tend to maintain existing workers who are relatively more productive rather than bearing the costs associated with new hires." He added, "To achieve the policy goal of creating new jobs through the reduction of working hours, government support is needed for the costs incurred during the new hiring process. Additionally, support for matching services that consider the capabilities of workers and small and medium enterprises is also necessary."