"Buying Chanel with Unemployment Benefits"... Catching the Cheating Group Sucking Up 'Syrup Benefits' [News Explanation]

(28) How to Reform 30 Years of Unemployment Benefits
Job-Seeker Allowance Sometimes Exceeds Minimum Wage
Key to Reform: Preserve Purpose While Preventing System Abuse
Government to Reduce Repeated Claims and Prevent Abuse

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The government has taken a tough stance on unemployment benefits (job-seeking benefits). The main point is to reduce the benefit amount for repeat recipients. Although the detailed reduction criteria will be delegated to enforcement ordinances and are yet to be determined, a previous amendment proposal suggested reductions of 10% for the 3rd time within 5 years, 25% for the 4th time, 40% for the 5th time, and 50% for the 6th time or more. This is an effort to establish a brake system to prevent the practice of abusing unemployment benefits through repeated claims and short-term job contracts. Unemployment benefits, which were created to stabilize the lives of the unemployed and facilitate their swift return to the labor market, have recently been called 'sweet syrup benefits.' When did this term start being used?

The controversy over 'syrup benefits' surfaced prominently in July last year. During the government's and ruling party's efforts to revise the minimum amount of unemployment benefits, several problematic remarks emerged, leading to public opposition and the amendment process fading away. At a public hearing on the unemployment benefit system improvement, Park Dae-chul, then chairman of the People Power Party's Policy Committee, referred to unemployment benefits as 'syrup benefits,' and a former official from the Seoul Regional Employment and Labor Office stated, "People use unemployment benefits to travel abroad and buy Chanel sunglasses." The repeated claims exploiting gaps in the system continue. According to the Ministry of Employment and Labor, the detected cases and amounts of fraudulent claims are ▲ 28.243 billion KRW (25,753 cases) in 2021 ▲ 26.859 billion KRW (23,885 cases) in 2022 ▲ 11.486 billion KRW (9,527 cases) as of May 2023.

Another issue is that the difference between the minimum wage and unemployment benefits is not significant, resulting in a low 'employment incentive effect' for low-wage workers. Under the Employment Insurance Act, job-seeking benefits are set at 60% of the average wage received during the three months before unemployment, but if this amount falls below a certain threshold, it is set at 80% of the minimum wage. In other words, with the minimum hourly wage at 9,860 KRW this year, the minimum monthly job-seeking benefit is 1,893,120 KRW. After deducting the four major social insurance premiums and other taxes from the minimum wage (2.06 million KRW), the net amount received is about 1.86 million KRW, which means that job-seeking benefits can actually exceed the minimum wage, creating a reversal. Next year, with the minimum wage rising by 170 KRW (to 10,030 KRW per hour, or 2,096,720 KRW monthly based on 209 working hours), the minimum job-seeking benefit will also increase to 1,925,760 KRW.

The government and ruling party also cite the low reemployment rate as one of the reasons for reforming the unemployment benefit system. Although the reemployment rate surpassed the 30% mark for the first time in seven years last year, it had remained in the 20% range since 2016 (31.1%), with rates of ▲ 29.9% in 2017 ▲ 28.9% in 2018 ▲ 25.8% in 2019 ▲ 26.8% in 2020 ▲ 26.9% in 2021 ▲ 28.0% in 2022. Additionally, the depletion of the Employment Insurance Fund is cited as a reason for discussing unemployment benefit reform. The Ministry of Employment and Labor has stated that the Employment Insurance Fund's actual reserve is about 3.9 trillion KRW in deficit, calling for discussions on reforming unemployment benefits.

South Korea introduced the unemployment benefit system in 1995. At the time of introduction, the eligibility condition was that the individual must have been enrolled in employment insurance for at least 12 months out of the previous 18 months before unemployment. There was no minimum amount, and only 50% of the average wage was paid for a period ranging from a minimum of 30 days to a maximum of 210 days depending on the length of employment. Subsequently, the payment period was extended, and minimum amount regulations were introduced. In 1998, the minimum payment period doubled to 60 days, and the minimum amount was set at 70% of the minimum wage. In 2000, the minimum payment period increased to 90 days, and the minimum amount rose to 90% of the minimum wage. In 2019, the payment rate increased from 50% to 60% of the average wage, while the minimum amount was lowered from 90% to 80% of the minimum wage.

The key to reforming unemployment benefits is to prevent moral hazard among recipients without undermining the original purpose of the system. Labor groups worry that excessively lowering or abolishing the minimum amount would make it difficult to maintain income support for low-income groups during unemployment periods. Vulnerable groups may include young people aged 15 to 29, who have a high non-regular employment rate of 40.8% and an average job tenure of only 10.9 months.

According to the Korea Labor Institute's report on 'Employment Safety Nets and Income Support Systems for Low-Income Groups,' statistically, the highest employment rates were observed in the wage replacement rate range of 60-80% (the ratio of average daily job-seeking benefit to average daily wage). The report explains, "The wage replacement rate influences job-seeking activities, leading to employment outcomes," and "When looking at employment within six months after receiving unemployment benefits, the highest employment success rate was in the 60-80% wage replacement rate range, while other ranges showed lower employment rates." However, even when the wage replacement rate exceeded 100%, the employment rate remained around 68%, indicating that a higher wage replacement rate does not necessarily lead to higher employment rates.