South Korea's Stalling Job Market and Moon's Economic Push
September 18, 2018
Moon Jae-in’s push to boost the economy has produced a stall in hiring. How long will South Koreans give him to fix it?
The popularity pattern for South Korean presidents is always the same: high at the start and then drifting down, usually near the end of the first year, and never getting back to where it was. The reason for that drift is also the same: discontent with the economy.
And now, it looks like the pattern is happening to President Moon Jae-in, though a bit later than the first anniversary of his May 2017 election. Moon has become internationally known for deftly maneuvering U.S. President Donald Trump away from confrontation with North Korea’s Kim Jong-un. But South Koreans pay as much, and perhaps more, attention to his attempt to spur the economy with policies that are labeled “income-led growth.” Moon’s idea is that raising the minimum wage will lift household income, spur consumption and, in turn, boost business production and investment.
But for much of this year, the economic data coming out of South Korea has been poor, particularly for young people who were key to Moon’s political base. Some of it is as bad as during the country’s financial crisis in 1997 and 1998. His popularity recently fell below 50 percent in some polls. And as it has declined, Moon risks losing support for his North Korea outreach, which continued this week with another summit with Kim in Pyongyang. Moon took dozens of business leaders with him on the trip, but he left behind the finance minister and other economic policymakers. His chief of staff said that decision reflected “a myriad of important domestic issues such as economic conditions and the real estate market.”
Moon took office last year with perhaps the best prospects of any leader to break that pattern of declining presidential popularity. He saw his mentor Roh Moo-hyun’s presidency get sidetracked by economic difficulties, Lee Myung-bak’s economic plans thwarted in the opening months of his presidency, and Park Geun-hye do so little on the economy for so long that she had no goodwill with the public when controversy came her way. On top of that, Moon brought into his administration one of the foremost thinkers about South Korea’s slowing economy, Jang Ha-sung, a Korea University professor who advised his rival Ahn Chul-soo in the 2012 campaign.
Last week, the South Korean government reported that the country created just 3,000 jobs in August. For July, the job creation figure was 5,000. That makes a two-month total that is less than one U.S. state—Minnesota, the one where I live—created in July alone. And Minnesota has one-tenth the population and workforce of South Korea and a higher per-capita income, meaning, in theory, it should have a harder time growing. July and August may have been aberrations. But through June, the number of job additions in South Korea was about 800,000, half the number of the same period in 2017. Meanwhile, the number of unemployed last month reached the highest since 1999 when the country was coming out of the financial crisis.
Moon’s political opponents, and many in the right-wing media in South Korea, blame his push to raise the country’s minimum wage, saying it is going up too high, too fast. At the start of this year, it rose 16.4 percent to 7,530 Korean won, or $6.71 at current exchange rates, from 6,470 won, the biggest increase since the 1990s. It is to rise another 10.9 percent to 8,350 won, or $7.41 at current exchange values, on Jan. 1, 2019.
Those are huge increases, particularly for the mom-and-pop owners of the small shops and restaurants who count on minimum-wage workers to staff their businesses. But South Korea is facing bigger challenges that are working against Moon’s efforts. For instance, the nation’s shipbuilders and automakers are in cyclical downturns and are unlikely to produce more of their high-wage jobs until demand for their products turns up again. More importantly, China, South Korea’s largest trading partner, is in its third year of relatively slow growth of below 7 percent, diminishing its ability to push up the South Korean economy.
During his work with Ahn in 2012, Jang correctly diagnosed that South Korea needed to make structural changes in its economy. He focused on the country’s growth potential, a figure that sagged for South Korea earlier than it had for other wealthy countries. Jang argued the country for too long relied on its major conglomerates, or chaebol, and state-led projects to drive growth. “People still think, ‘If Samsung does it, it will be OK. If Hyundai will do it, it will be OK,’” he said. “But that is no longer the case.”
Jang bemoaned the fact that most of his students had a narrow ambition to work for a chaebol company. He said that the government will have to level the playing field so that small and midsize companies can compete with the capabilities of bigger Korean firms to bring innovations to the market. And he said cultural attitudes will also have to shift so that Koreans recognize successful careers can be had outside of the chaebol and government employers. In all, he was talking about creating equality of opportunity. “We want to make an environment where the newcomer, a new challenger, can succeed,” he said back then.
After one dismal economic report last month, Jang emerged to speak to the Blue House press corps and asked South Koreans to be patient, saying Moon’s “income-led” policy needs more time to have an effect. He then echoed some of his 2012 themes. “The Moon administration is seeking a paradigm shift in managing the economy, for the first time in decades,” Jang said.
How long will South Koreans give Jang and the rest of Moon’s economic team to make that shift? Another year seems likely. Moon remains personally popular, the North Korea outreach, even if it goes slowly, continues to be a positive for him and, for now, the slump in jobs growth has not translated into a broader slowdown. South Korea’s overall economic growth is expected to be around 2.9 percent this year, the same as Park’s average over her four years in office. Moon is cranking up government spending, which may have a stimulative effect. He has proposed a 9.7 percent increase for 2019 after a 7.1 percent increase at the start of this year plus some supplemental spending in May.
Moon’s team still needs to do more to tackle structural problems, including the relatively low productivity of the nation’s workforce and the impediments faced by women, younger and older workers, and immigrants to finding a job. Too many people remain on the margins of the Korean workforce. But employers are reluctant to put them to work when the cost of employing them is rising by government order rather than market conditions.
Evan Ramstad is a nonresident senior associate with the CSIS Office of the Korea Chair. He has served as one of the leading analysts of the economic and business scene in Korea. A journalist since 1987, he is currently deputy business editor on the business news desk of the Minneapolis Star Tribune. Before that, he was chief Korea correspondent for the Wall Street Journal from 2006 to 2013. He holds a B.A. in political science and journalism from Trinity University in San Antonio, Texas.