If the active policy share increases by 0.1%p of GDP
unemployment rate decreases by about 0.24%p
Instead of only providing job-seeking benefits that reduce labor motivation,
incentives for job-creating companies and increased vocational training are needed
[Asia Economy Reporter Moon Chaeseok] There has been a call to reform labor policies to focus on increasing the provision of vocational training and offering incentives to companies that increase employment. The argument is that simply increasing unemployment benefit payments is insufficient to solve employment issues. In fact, there are criticisms that unemployment assistance actually reduces the motivation of unemployed individuals to work.
On the 21st, the Korea Economic Research Institute under the Federation of Korean Industries released the results of a study titled "Analysis of the Impact of Active Labor Market Policies on Unemployment Rates." Active policies refer to measures that encourage labor market participation through employment services, vocational training, direct job creation, and startup incentives. Passive policies refer to income support measures such as unemployment benefits and unemployment assistance.
According to the Korea Economic Research Institute, Korea’s expenditure ratio on active policies is only half that of the Organization for Economic Cooperation and Development (OECD). Based on 2019 data, which allows international comparison, Korea’s active policy expenditure as a percentage of GDP was 0.37%, about half the OECD average of 0.72% among 33 member countries. Korea ranked 20th, placing it in the lower-middle tier. The ratio of active policy expenditure relative to total labor policy spending was also lower in Korea at 44.05%, compared to the OECD average of 52.55%, a difference of 8.5 percentage points. Among active policies, the employment incentive policy ratio was only 0.09% of GDP, just one-quarter of the OECD average of 0.33%.
Notably, the indirect policies centered on unemployment assistance, which have often been criticized as excessive handouts, were found to actually increase the unemployment rate. An empirical analysis of OECD panel data from 2000 to 2019 showed that increasing the ratio of passive policy spending on income support for the unemployed (such as unemployment benefits and unemployment assistance) by 0.1 percentage points of GDP raised the unemployment rate by 0.44 to 0.48 percentage points. The long-term unemployment rate, calculated by dividing total unemployed by those unemployed for over a year, also increased by 0.27 to 0.29 percentage points. In other words, increasing unemployment benefits led to a higher unemployment rate. The Korea Economic Research Institute explained, "Income support such as unemployment benefits and unemployment assistance may actually cause unemployed individuals to become complacent, weakening their motivation to work and thereby increasing the unemployment rate, supporting existing literature claims."
Conversely, increasing the ratio of active policy spending by 0.1 percentage points of GDP was found to reduce the unemployment rate by approximately 0.24 percentage points. The long-term unemployment rate also decreased by about 0.17 percentage points. Looking at detailed components, raising the employment incentive ratio by 0.1 percentage points of GDP lowered the unemployment rate by about 0.76 percentage points and the long-term unemployment rate by about 0.59 percentage points. Expanding investment in vocational training by 0.1 percentage points of GDP reduced the unemployment rate by about 0.43 percentage points and the long-term unemployment rate by about 0.21 percentage points.
The Korea Economic Research Institute argued that policies such as employment incentives and vocational training (active policies) should be pursued rather than income support policies like unemployment benefits (passive policies). Eugene Sung, a senior researcher at the Korea Economic Research Institute, emphasized, "Among active policy components, employment incentives and vocational training programs have been shown to impact unemployment reduction, and Korea’s spending in these areas is lower than the OECD average. There is a need to strengthen policies related to these fields."
Regarding active policies, the Korea Economic Research Institute pointed out the need to improve the efficiency of employment services and startup incentive programs. For the "direct job creation" policy, which creates short-term jobs through government funding, it was noted as the only active policy with a "non-significant" effect and suggested that it should be reduced. Korea’s spending ratio in this area is about 0.1% of GDP, roughly twice the OECD average of 0.05%. The Korea Economic Research Institute stated, "It is necessary to gradually reduce this ratio in the future."
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