"Low Birth Rate Makes Labor Reallocation Difficult... Need to Strengthen Vocational Competency and Higher Education" [Issue Interview]

Kyung Hyun Koo, Head of Trade and Investment Policy at KIEP
Analyzing Employment Changes from Trade Shocks
"Welfare Losses Due to Difficulties in Labor Reallocation"
Challenges Faced by Workers in Import-Competing Industries
High Incidence of Involuntary Unemployment and Lower Income
Policies Needed to Facilitate Transition to Industries with Comparative Advantage

"In the past, even though the cost of labor reallocation between industries in Korea was quite high, we were still able to secure a workforce for newly competitive industries to some extent because young people were entering the labor market. Rather than replacing existing workers, it was easier to allocate new entrants to industries with comparative advantage. However, now, due to the low birth rate, we can no longer expect this compensatory effect. Therefore, countermeasures are needed."

Kyung Hyun Koo, Head of the Trade and Investment Policy Team at the Korea Institute for International Economic Policy (KIEP), made these remarks during an interview with Asia Economy at the KIEP office in Sejong City on the 21st of last month. He stated, "We need to redesign support policies and systems that can facilitate smooth labor reallocation," and emphasized, "Rather than simply imitating other countries, we must find our own way to survive, and in this process, there should be significant investment and restructuring in vocational competency policies and higher education policies."

Kyung Hyun Koo, Head of Trade and Investment Policy Team at the Korea Institute for International Economic Policy (KIEP), is being interviewed by Asia Economy at the KIEP office in Sejong City on the 21st of last month. Photo by Kim Pyeonghwa

Mr. Koo is the lead author of the report "The Impact of Trade on Domestic Labor Reallocation and Policy Implications," published in December last year. This is his third report, following those in 2020 and 2022, examining the impact of trade shocks resulting from the rapid economic growth of China and Vietnam on Korea's highly trade-dependent industries and employment. The latest report highlights that labor reallocation in response to industrial changes caused by trade shocks has not been properly achieved, resulting in welfare losses.

Mr. Koo explained that Korea's labor market has been significantly affected by changes in the trade structure. These effects manifested in two ways. Workers in export-increasing industries experienced income growth and, even if they lost their jobs, had a high probability of re-employment within the same industry group. In contrast, workers in import-competing industries faced a higher likelihood of involuntary unemployment, and even if they found new employment, it was difficult for them to move to industries with comparative advantage, which inevitably led to a decrease in income.

The representative sector of import-competing industries is "textiles, apparel, and leather products." Mr. Koo stated, "In the case of textiles, apparel, and leather, the industry underwent restructuring due to overseas relocation of factories and the rise of large corporations." He added, "While restructuring cannot be viewed as entirely negative, the longer it took for displaced workers to find new employment, the lower their income growth rate became." He explained that such cumulative difficulties faced by workers in import-competing industries have also intensified income polarization.

To address these issues, Mr. Koo stressed the importance of the government's role through vocational competency policies and higher education policies. He said, "Vocational competency policies should focus on equipping workers in import-competing or less competitive industries with new skills so that they can transition to industries with comparative advantage," and "Higher education policies should focus on proactively enhancing vocational skills, since there are limitations to post-employment education."

He particularly mentioned the need for transformative ideas in higher education, such as utilizing regional universities as hubs for worker retraining, going beyond education solely for university students. Mr. Koo explained, "Incentives for vocational competency policies must be strengthened," and added, "For example, incentives should be provided not only to workers who receive retraining but also to companies that hire them, so as to revitalize the re-employment market."

Inter-ministerial cooperation to address changes in the trade environment and the resulting impact on industry and employment is also cited as a challenge. Mr. Koo said, "Although sophisticated policy design is required, it is possible to some extent to predict how the global order will change and how trade will be affected by tariff policies, and to reflect this in employment policies." To prevent silos between ministries, he argued that "systematic policies should be promoted based on comprehensive decision-making at higher levels of government."

Mr. Koo concluded, "Ultimately, people are Korea's only resource," and added, "In the rapidly changing global economic structure, our labor market will continue to be forced to adapt." He emphasized, "Now is the time for more proactive measures, not only to alleviate income inequality but also to strengthen industrial competitiveness."