[Open Forum] Lessons from Germany’s Labor Reform

Hartz reforms slash youth unemployment from 10.4% to 4.9%

The government is revising the labor law, provoking strong backlash from both labor and management. The government and the ruling party say they adjusted the bill to conform to the relevant conventions in order to ratify the core conventions of the International Labour Organization.

The key changes allow workers who are not employed at a given business or workplace to join enterprise-level labor unions, and remove the provision prohibiting wage payments to workers engaged exclusively in union affairs. The amendment also deletes the problematic proviso, thereby allowing dismissed workers and the unemployed to join enterprise-level unions. In effect, this allows non-incumbent union members such as dismissed workers to engage in union activities with the consent of management.

The revised three labor-union laws are expected to tilt the already uneven balance of power further toward labor. This will likely lead to increased excessive demands by unions and a more hardline struggle-oriented approach. In addition, by deleting the provision banning salary payments to full-time union officials, labor is likely to demand additional wage payments from companies. For businesses, this will inevitably expand labor-management conflict, and confrontation between the two sides will drain energy that should be directed outward.

If pro-union laws continue to proliferate, there is a high risk that the labor market will become more rigid and labor productivity will decline. This will burden the Korean economy, where manufacturing is highly developed. Korea’s labor productivity is so low that it falls short even of the OECD average.

In any country, the more flexible the labor market, the greater its ability to create jobs. The most representative example is the United States. Because the United States operates according to market principles, it has the most flexible labor market in the world. As a result of this system, it has the world’s highest labor mobility and the lowest long-term unemployment rate. On this basis, the United States has achieved lower unemployment than other advanced countries. Despite being the country most severely hit by the global financial crisis, the United States posted the highest average annual growth rate, demonstrating its position as the world’s No. 1 economic power.

In Europe, unions were once extremely powerful, but their role has changed considerably in recent years. This is because high wages and labor-market rigidities led Western European companies to relocate to Eastern Europe or Asia. To address this, European countries have pursued policies aimed at making labor markets more flexible through labor reform. Germany, a country often cited as a successful case of reform, had a labor market in the early 2000s that was more rigid than Korea’s. Germany, once called the “sick man of the European economy,” implemented labor reforms known as the “Hartz reforms” to address youth unemployment. As a result, Germany’s labor-market flexibility ranking rose by 42 places, and its youth unemployment rate fell sharply from 10.4% to 4.9%. Korea should follow this example and overhaul its system through labor reform to make the labor market more flexible, as Germany did.

A labor union is an organization formed by workers themselves for the purpose of maintaining and improving working conditions. To achieve that, labor-friendly policies should be pursued. Labor-friendly policies are those that provide job seekers with sustainable jobs in both quantity and quality and that improve workers’ welfare. Pro-union policies, however, are not labor-friendly policies but policies for a small group of vested interests. Such policies block the entry of new workers in order to preserve existing vested interests. The jobs available to workers who are shut out will be lower in both quantity and quality. Over time, entrenched unions can only shrink in scale as they pursue only their own interests. Pro-union policies are not for workers; they are harmful.

The government should abandon union vested interests and pro-union policies and make the labor market more flexible. That is the truly labor-friendly policy that protects workers.

Sihyeong Lee, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [자유발언대] 독일의 노동개혁에서 배워야 할 점

Author: Si-hyeong Lee

Date: 2021-04-02

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=11&idx=23601