Evaluating Welfare Systems in Dualized Labour Markets: Insights from South Korea

Labour market dualism contributes to the growing level of inequality. The system of welfare needs to be made more inclusive so that it can better protect the labour market outsiders.

East Asian welfare regimes are known for their near obsession with economic growth. Central to this is the idea that welfare programs have a specific role to play other than promoting wellbeing of the populace. The productivist thesis argues that welfare programs are subordinate to economic objectives and serve the purpose of economic growth. Welfare programs should not get in the way of ensuring a smooth supply of labour to productive sectors of the formal economy. The developmental state thesis is similar in that it treats welfare programs as a tool to grow the national economy. Different from the productivist thesis, however, welfare programs are part of a broader developmental strategy, not just for economic growth but also for political legitimacy gaining. In both cases, welfare programs exist and develop primarily to grow the national economy. More specifically, they are designed to accumulate capital and to build markets.

Arguably, this almost single-minded pursuit of growth-oriented strategy led to the spectacular growth of the national economy. In 1968, South Korea was as poor as Ghana. By 2022, Korea was as rich as Japan in GDP per capita terms. Between 1960 and 2019, Korea’s GDP grew 420 times. Contrary to the economic theory whereby an early stage of economic development is accompanied by a growing level of inequality, East Asian miracle economies (e.g., Japan, South Korea, and Taiwan) developed what is known as the “growth with equity” model. Since the mid-1980s, however, this model has been in doubt. In fact, the 2022 World Inequality Report states that inequality in Korea is “higher than in Western Europe and closer to that observed in the United States.” It notes that the top 10 percent earn 14 times more than the bottom 50 percent on average. This is worse than Germany (10 times), Japan (13 times), and the UK (9 times).

These figures do not fully reflect the extent to which state intervention reduces inequality as the income figures here do not include other taxes and transfers individuals pay and receive other than their pensions and public unemployment insurance schemes. In order to see the extent to which welfare regimes intervene to reduce the level of inequality, it is more useful to look at the difference between market income inequality (i.e., pre-tax and transfer) and disposable income inequality (i.e., post-tax and transfer).  In 2011, pre-tax and transfer income inequality was 0.418 (i.e., Gini-coefficient where 0 refers to perfect equality and 1 refers to perfect inequality) whereas post-tax and transfer income inequality was 0.388. State intervention reduced income inequality by 0.03. The corresponding figures for 2021 was 0.405 and 0.333. Income inequality was reduced by 0.072. Between 2011 and 2021, in other words, the inequality reduction effect of tax and social transfer systems increased. Despite this improvement, Korea was ranked at 23 out of 27 Organisation for Economic Co-operation and Development (OECD) countries where income inequality data are available for 2021.

In fact, the inequality reduction effect of tax and social transfer systems in Korea is one of the smallest in the OECD area. This is partly because the overall size of the welfare state is too small and partly because the public transfer systems are not particularly well targeted. Public social spending is often considered as a country’s welfare effort as it measures the share of government spending on cash benefit, direct in-kind provision of goods and services, and tax breaks with social purposes. Korea’s public social spending is well below the OECD average and one of the lowest in the OECD area. In 2021, for instance, public social spending was 14.9 percent of GDP, which was substantially lower than the OECD average of 22 percent. While Korea does not spend much on welfare, it does not target those in need particularly well either. In 2021, the bottom 20 percent of the households received on average 6 million Korean won (approximately A$6,516) from the public transfer systems. While this constitutes 45.4 percent of their total income, they received less than what the 2nd and 3rd quintile group received from the public transfer systems in absolute terms.

Of the different sources of total household income such as labour income, business income, property income, public transfer, and private transfer, it is the labour income that has the largest difference between the bottom and the top income group. The richest 20 percent of the households have over 30 times more labour income than the poorest 20 percent of households. Given that the labour income constitutes over 64 percent of the total household income, the difference in labour income is the major contributor to the income inequality.

A substantial part of the reason why there is this large difference in labour income is because Korea has one of the most dualised labour markets in the OECD area. As of 2021, Korea had the highest rate of temporary employment as a percentage of dependent employment. Known as non-regular employment in Korea, the number of people working part-time, on temporary contracts, and outsourced accounted for 37 percent of Korea’s 21.95 million salaried workers. Non-regular workers are paid less than 45 percent of regular workers’ wages and their average length of service is around one third of the regular workers.

An inclusive system of welfare would have been an important mechanism to offset this structural labour market issue. But the systems of welfare in Korea protect the regular workers better than the non-regular workers. For example, almost all regular workers are protected by old-age pensions and employment insurance. But nearly half of all non-regular workers are excluded from these social insurance programs. In fact, the lower the level of household income, the lower the level of social insurance coverage. Not surprisingly, the same pattern is found in the private insurance membership for healthcare and old-age pensions. The relatively better off with secure employment tend to be protected by the systems of welfare while the relatively worse off with insecure employment are left behind.

If we are serious about a growing level of inequality, we should seek ways to make the labour market more integrated and the systems of welfare more inclusive. Efforts have been made to reduce the number of non-regular workers and to provide financial help for them to join contributory social insurance programs. Nevertheless, the progress has been rather slow, and especially hampered by the COVID-19 pandemic and sluggish economic growth. Instead of increasing direct government support to individuals and businesses, Korea’s budgeted COVID-19 spending was one of the lowest in the OECD area. Going against the idea of fiscal expansion at the time of economic difficulties, income inequality in Korea worsened. Between 2020 and 2021, for instance, only the top 20 percent of the households experienced growth in their income while the total income from the public transfer system on average was reduced. As IMF studies have found, a growing level of inequality is not only bad for social solidarity but also harmful for a country’s growth potential. Inclusive systems of welfare can do much more than picking up the pieces from the economic hardship. They can prevent the hardship in the first place. This should be the new direction of East Asian welfare regimes.

Gyu-Jin Hwang is senior lecturer in Discipline of Sociology and Criminology, School of Social and Political Sciences, University of Sydney. He specialises in comparative social policy development in East Asia. His latest publication includes Building Markets: Distributional Consequences of Social Policy in East Asia (Edward Elgar, 2022).

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