Rigid dual structure of the labor market holds back growth

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

By contrast, employment growth in Korea has occurred mainly through small and micro enterprises, while the qualitative imbalance in the labor market has steadily worsened. This goes beyond a mere problem of how job opportunities are distributed; it is also acting as a direct constraint on the productivity and innovative capacity of the Korean economy.

The stagnation of the primary labor market is also evident in the numbers. According to Statistics Korea data, the number of jobs at large firms with 300 or more employees rose only slightly from 4.28 million in 2016 to 4.91 million in 2023. Over the same period, however, jobs at small and medium-sized enterprises increased sharply from 13.99 million to 16.03 million. Even when measured by large corporations’ sales, job growth remains stagnant, meaning that there is a quantitative shortage of the high-productivity jobs young people want. Structural changes in industry, including automation, digital transformation, and the relocation of production bases overseas, are further entrenching this stagnation.

The problem is not simply the difference in the number of jobs, but the qualitative gap in wages, job security, and welfare benefits. According to a survey by the Korea Chamber of Commerce and Industry (KCCI), 64% of university students hoped to work for large corporations, but the actual share of employment at large firms is only 18%. The average wage at large corporations is about twice that of small and medium-sized enterprises, and there are also major differences in fringe benefits and the ability to retain workers. This gap intensifies the concentration of young people toward large firms and creates a vicious cycle that further raises barriers to entry.

A number of institutional factors have been pointed to as causes of the labor market’s dual structure. First, protections for regular workers have been strengthened excessively, leading firms to focus more on retaining existing employees than on hiring new ones. The bargaining power of militant unions has secured wages above productivity levels, widening the gap between productivity and compensation while further reducing entry opportunities for outside workers. The seniority-based wage and welfare system also overprotects those inside large corporations, while leaving small and medium-sized enterprises and non-regular workers in blind spots.

Labor regulations also worsen the problem. Laws such as the Fixed-Term and Part-Time Employees Act and the Dispatched Workers Act have instead reduced labor flexibility and deepened the divide between insiders and outsiders. Small and medium-sized enterprises that have become marginal firms rely on similar and overlapping government support and, despite low productivity, are not being forced out of the market. As a result, the dual structure of “a closed internal market and an open external market” has become entrenched. This is a structural problem that constrains productivity gains and growth potential.

Ultimately, the dual structure of Korea’s labor market is the result of a combination of strong insider protection, rigid regulations, a wage system disconnected from productivity, and the weak competitiveness of small and medium-sized enterprises. Any approach that claims it can solve the youth employment problem while ignoring this issue is bound to be hollow.

Therefore, to fundamentally resolve the dual structure of the labor market, labor flexibility must above all be increased so that firms and workers can freely enter into contracts on hiring, working hours, contract extensions, and dismissal. Second, the wage system must be shifted to one centered on job duties and performance. Third, marginal firms should be swiftly exited from the market, while productivity should be raised through selective support for small and medium-sized enterprises with innovative capacity. This is not simply a matter of increasing the number of jobs, but of improving 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 high-quality large-firm jobs preferred by young people be expanded. Now is the time to restore a free and dynamic job ecosystem through labor market reform and revive the growth potential of the economy as a whole.

Gwang yong Go, Policy Director, Center for Free Enterprise (CFE)

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Original title: 경직적인 노동시장 이중구조, 성장 발목 잡는다

Author: Gwang yong Go

Date: 2025-10-15

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=28201