Rigid Dual Labor Market Structure Holds Back Growth

One of the most prominent structural features of Korea’s labor market is the stark divide between the primary labor market and the secondary and tertiary labor markets. The primary labor market—centered on large corporations and major manufacturing firms—remains highly attractive to young people, yet its actual employment scale has not expanded significantly over the past several decades.

By contrast, job growth in Korea has occurred mainly through small and micro-sized firms, deepening qualitative imbalances in the labor market. This goes beyond a simple issue of how employment opportunities are distributed and has become a direct constraint on productivity and innovation across the Korean economy.

The stagnation of the primary labor market is evident in the data. According to Statistics Korea, the number of jobs at firms with 300 or more employees increased only marginally, from 4.28 million in 2016 to 4.91 million in 2023. Over the same period, employment at small and medium-sized enterprises rose sharply from 13.99 million to 16.03 million. Even when measured against corporate sales growth, large-company job creation has remained stagnant, leaving an insufficient supply of high-productivity jobs that young people aspire to. Structural shifts such as automation, digital transformation, and the relocation of overseas production bases have further entrenched this stagnation.

The issue is not merely the numerical gap in job creation but the qualitative disparities in wages, job security, and welfare benefits. According to a survey by the Korea Chamber of Commerce and Industry, 64 percent of university students aspire to work for large companies, yet large firms account for only 18 percent of total employment. Average wages at large corporations are roughly double those at SMEs, and substantial differences also exist in fringe benefits and workforce retention capacity. These disparities intensify youth concentration in the primary labor market and raise entry barriers, creating a vicious cycle.

Multiple institutional factors underlie the dual structure of the labor market. Excessively strong protections for regular employment encourage firms to prioritize retaining existing workers over hiring new ones. The bargaining power of militant labor unions has secured wages that exceed productivity levels, widening the gap between productivity and compensation and further restricting entry opportunities for outsiders. Seniority-based wage and benefit systems overprotect insiders at large firms while leaving SME workers and non-regular employees in blind spots.

Labor regulations have also exacerbated the problem. Laws governing fixed-term and dispatched workers have reduced employment flexibility, deepening the divide between insiders and outsiders. Marginal SMEs, reliant on overlapping government support programs, remain in the market despite low productivity, reinforcing a dual structure of “closed internal markets and open external markets.” This has become a structural barrier to productivity growth and long-term economic potential.

Ultimately, Korea’s labor market dualism is the result of a combination of strong insider protection, rigid regulation, wage systems disconnected from productivity, and the weak competitiveness of small firms. Any attempt to address youth unemployment while ignoring these root causes is bound to fall short.

To fundamentally resolve labor market dualism, Korea must first enhance labor flexibility so that firms and workers can freely negotiate contracts covering hiring, working hours, extensions, and dismissal. Second, wage systems should be shifted toward job- and performance-based models. Third, marginal firms should exit the market swiftly, while selective support should be provided to innovative SMEs to raise overall productivity. This approach aims not merely to expand employment, but to improve the qualitative structure of the labor market.

Only by making the labor market more open and flexible can the gap between the primary and secondary labor markets be narrowed and the supply of high-quality jobs favored by young people expanded. Now is the time to restore a free and dynamic employment ecosystem through labor market reform and revive the Korean economy’s overall growth potential.

Kwang-yong Ko
Director of Policy, The Center for Free Enterprise

Korean version: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=1&idx=28201