International comparisons, such as those reported in the previous section, highlight the low effective reach of unemployment benefits in Korea, and the very limited income support that is available for longer-term jobseekers. Following the complete erosion of the EI programme’s original link between benefits and past earnings, current benefit provisions can nevertheless result in benefit entitlements that are close to – and sometimes above – the in-work incomes of low-wage workers. Weak work incentives resulting from EI provisions counteract Korea’s significant policy initiatives to make work pay, e.g. through successive expansions of the earned income tax credit. Financial disincentives also translate into challenges for activation policies, notably in the context of Korea’s efforts to expand income support to non-standard workers.
Efforts to strengthen income security for non-standard workers are timely, and their scope and ambition compare favourably with initiatives in other OECD countries. Establishing reliable income protection for non-standard workers is, indeed, particularly urgent in Korea, given the particularly high prevalence of non-standard work. At the same time, promoting an inclusive labour market and harnessing Korea’s human resources and skills also calls for tackling long-standing challenges that have hindered access to support for standard workers, including weak compliance with EI mandates and the complete exclusion of certain categories of “voluntary” jobseekers from EI benefits.
Based on the analysis in this report, priorities in Korea’s ongoing and emerging reform programme include the following.
Maintain the recent reform momentum with successive steps to tackle support gaps for the large number of non-standard workers. Recent extensions of EI mandates to some groups of independent workers add to the urgency of including also other self-employed in order to avert loopholes. Support levels and eligibility should account for the specific support needs and earnings opportunities of different non-standard workers, including their ability to choose when and how much to work. Reforms in this area should build on Korea’s experience with recent extensions to certain categories of workers, and on the emerging practice in other OECD countries.
Strengthen the enforcement of existing EI mandates, in addition to expanding the scope of EI to additional/remaining groups of non-standard workers. Along with suitable sanctions for non-compliance, continued investment into enforcement infrastructure would also be in line with broader objectives of tackling labour market informality and ensuring adherence to key standards of job quality and employment conditions. With a broadening scope of the EI mandate, it will be important to proactively review whether additional enforcement capacities are needed to ensure compliance, especially among the large number of small and very small businesses.
Accompany benefit reforms with sustained efforts to incentivise active job search and participation in employment-support measures. Non-standard workers can have significant scope for arranging work or earnings patterns in a way that is compatible with benefit receipt. Broadening the scope of income‑support entitlements calls for additional efforts to formulate and enforce clear and reasonable responsibilities for benefit recipients. Ensuring active job search and active participation in re‑employment measures is a necessary counterweight to extending benefit rights to new groups of jobseekers. In a context of more accessible income support for non-standard workers, it is useful to monitor patterns of repeat benefit claims. Although repeat claims may reflect genuine labour-market insecurity, they can also point to unintended incentives for “gaming” unemployment benefit provisions, e.g. by timing hires and layoffs in a way that maximises benefit entitlements.
Reduce EI benefit levels for low-wage earners, by cutting the unusually high benefit floor. A process should be established to maintain a suitable distance between benefit floor and benefit ceiling in the future, in order to re‑establish and maintain a meaningful link between benefit entitlements and past earnings/contributions. Transforming the existing EI programme into a genuine flat-rate income support may be an alternative. This would constitute a major reform, however, and would have additional implications. For instance, financing should then also be de‑linked from worker earnings (and come from general tax revenues).
Ensure that active employment support is effective and accessible for all jobseekers. With an expanding scope of income insurance and safety nets for jobseekers, it becomes all the more important to address existing structural challenges, and to ensure that support promotes good-quality employment. In the context of Korea’s heterogeneous labour market, raising PES capacity and staff levels, and aligning them with international good practice, remains a priority.
Consider a further softening of the “involuntary unemployment” requirement as an eligibility criterion for EI. Although many OECD countries operate specific benefit provisions for voluntary job quits without good cause, most allow benefit receipt in principle, e.g. delaying or reducing benefits instead of removing entitlements entirely. It can be difficult in practice to distinguish voluntary from involuntary unemployment. Workers can be as well placed as employers to decide that an existing job does not provide a good match for their skills and experiences. EI will be more effective at facilitating efficient labour market outcomes, if it provides some degree of income and employment support both to dismissed workers, and to those quitting to find better-suited employment. The distinction between voluntary and involuntary job loss can be particularly difficult in the context of ongoing extensions of EI to non-standard workers, who act more independently than standard employees. It can also appear incoherent with provisions of the expanding NESP programme, which (appropriately) does not require involuntary job loss.
Review whether additional extensions of EI benefit durations become feasible, notably from a financial point of view, to strengthen income security further, and to facilitate better job matches by allowing for a more thorough search and preparation for new employment.
Soften the very steep drop in income support for people with longer unemployment spells. One option would be to continue boosting the generosity of means-tested safety nets. Alternatively, or in parallel, it can be useful to consider reducing EI entitlements in steps, rather than stopping them abruptly. However, such a “degressive” benefit schedule makes limited sense as long as overall EI durations remain very short.
Ensure effective access to unemployment assistance for economically vulnerable jobseekers. It would be desirable to review whether BLSS recipients and other jobseekers without EI entitlement, could be actively directed to NESP and associated employment-support measures. There is scope for increasing the number of beneficiaries of means-tested income assistance provided by the NESP programme, and of associated employment-support measures. For instance, (OECD, 2018[2]) suggested that a three‑ to five‑fold increase in the number of beneficiaries in ESPP (NESP’s predecessor) could be desirable. Emerging data on recipient trends since the NESP introduction in 2021 will allow assessing progress towards such a scenario. It will also provide valuable input possible measures to strengthen take‑up, such as additional outreach efforts about programme eligibility, e.g. to jobseekers, who are judged to be unemployed “voluntarily”, or to others groups not entitled to EI.
Financing represents a key issue for reforms in this area. While some of the priorities suggested above can create additional fiscal space, others require additional spending, including in the short term. The financial soundness of the EIS had deteriorated following the employment shock in the wake of the pandemic, but also because of additional spending commitments resulting from recent EI reforms. Following a number of measures, the fiscal balance of the EI fund was positive in 2022 and is currently projected to remain in surplus in 2023. Nevertheless, in a challenging broader fiscal context, considering opportunities for curbing spending increases and raising revenues will remain a central part of necessary efforts to adapt and strengthen income protection in Korea. Further options for improving the budgetary outlook of unemployment support programmes include the following:
Continue redesigning the Duru-Nuri Social Insurance Subsidy Programme, or abolish it altogether. Duru-Nuri seeks to encourage participation of low-paid workers in small firms in the (mandatory) EI and National Pension schemes. From 2021, subsidies stopped for existing members, but continued for new subscribers, with support covering 80% of contribution burdens for up to 36 months. However, past evaluations have pointed to very high deadweight costs and underlined that premium subsidies do not solve the problem of low EI coverage in Korea in very small businesses, which emerge and disappear with high frequency. Supporting up to 80% of contributions for up to 36 months indeed remains very generous, especially in the Korean context of short job durations. A number of other OECD countries also provide significant contribution subsidies, but the objective is typically to lower labour costs or boost work incentives, rather than “encourage” enrolment in a programme that is mandatory in any case.
Review whether the Early Re‑employment Allowance provides sufficient value for money. The allowance pays a large share of remaining unemployment benefit entitlements to individuals who find a steady job early on during their benefit spell. Earlier assessments have pointed to very high deadweight costs, e.g. because the allowance was mainly taken up by men in their 30s and 40s, who had comparatively good employment prospects anyway (Hwang, 2013[60]). Partly in response to those findings, successive reforms have tightened entitlement criteria. But even after these adjustments, it is unlikely that the allowance makes a substantial difference for those with weaker employment prospects. For instance, entitlement requires remaining in the same job for 12 months, which can be long relative to the short job tenure of many workers in Korea (Figure 2.2, Table 2.1), and can exclude those with the greatest labour market problems. If a form of re‑employment allowance is maintained, the government could consider targeting it more narrowly and channelling the resulting savings towards more cost-effective employment-support measures.
As in other OECD countries, revenues can be boosted by widening the tax and contributions base, e.g. by aligning the tax and contribution treatment of different forms of work, removing unintended fiscal incentives for short contract durations and self-employment, and by combating so-called “false” self-employment. An essential element of such a strategy is limiting opportunities for selective opt-outs that are present in all systems where membership is, in part, voluntary. This includes the extension of mandates to dependent self-employed and artists, as already in force since July 2021. This report argues that the broadening of EI mandates to further groups of self-employed, which currently remains under discussion, should remain a priority. There is also a good case for including those public sector workers, who still contribute on a voluntary basis. Indeed, a limited reach of unemployment support, combined with significant opt-out opportunities, not only reduce the effectiveness of social protection for the individuals concerned. They also compromise its financial and political sustainability.1 Key characteristics of non-standard workers in Korea suggest that the fiscal effects of opt-out opportunities may be sizeable. For instance, median earnings of the self-employed are very close to those of standard workers, while they are typically much lower in other OECD countries.
Relatedly, the government should consider whether mandates can be unified across different parts of the social protection system. Currently, some groups of workers may be legally required to subscribe to some provisions (e.g. old-age pensions), while membership in the unemployment scheme remains optional. Such differentiation can go against more encompassing concepts of social risk sharing across both individuals and risk types and, in doing so, it may exacerbate selective opt-in/opt-out behaviour. Packaging unemployment, pensions and other social protection elements through a unified set of mandates and regulations reduces the scope for “cherry picking” and can help to maintain a more diversified risk pool.
