On using mandatory retirement to reduce workforce in korea

Abstract

Since the financial crisis in 1998, many Korean corporations with low profitability and excessive liabilities cut operating costs. They had to deal with exorbitant wage increases that outpaced productivity and were generated by the traditional seniority-based wage system. The empirical analysis of this study suggests that those companies with many long tenure workers under the Japanese-style personnel management system are more likely to utilize mandatory retirement in order to adjust employment. Moreover, blue-collar jobs are more likely to be associated with mandatory retirement. This suggests that the labour unions may tacitly approve of this practice.

Keywords:

• Mandatory retirement
• employment adjustment
• labour cost
• labour union

Acknowledgements

The authors are grateful for the comments and suggestions by participants and particularly Professor Jungyoll Yun in the 2005 international conference on ‘Flexibility and Performance’ held by Korea International Economic Association. This work was supported by the Soongsil University Research Fund.

Notes

¹Limitations apply in defining typical paradigms for employment contracts, personnel management, professional human resources, form of employment, education and training in the US and Japan. However, HRM experts describe the US paradigm as the market-buyer type while the Japanese form is defined as an immersion-internal maker type (Walton, 1985). This paper follows this classification and makes use of the two models. Question 2-1 on the WPS is also designed to distinguish between the two paradigms.

²During these past periods when the Korean economy enjoyed a rapid economic growth, the mandatory retirement system would induce workers not to quit, resulting in more aged workers, stronger seniority-based system and a closed internal labour market. However, our study argues that firms with many aged workers, a seniority-based system and with a closed internal labour market are likely to have a effective mandatory retirement system as a means of controlling the size of workforce since the financial crisis.

³In the case of the personnel backlog resolution model, one solution shows how personnel stagnancy can be resolved by retiring a few executives in the top ranks (Levine, 1988). Such replacement provides young workers with the incentives to try harder for future promotions, creates a corporate culture preferred by the younger generation. Such a model would also supply theoretical conviction to the retirement system implemented in some industries. For instance, knowledge of young workers has greater added value than that of older workers and young employees tend to post a low voluntary turnover rate, so the model is more suitable to the industries with frequent promotion congestion problems. If the promotion backlog is the main reason for maintaining the retirement system, however, the model cannot offer enough reasons for relying excessively on the retirement system without using such complementary measures as work evaluation, personnel rotation or voluntary retirement. Also, there is criticism that the percentage of low-level workers who can be rescued by retiring upper-level workers is quite low. Nevertheless, Levine's (1988) personnel backlog resolution model presents a number of suggestions to Korea, which experienced rapid growth until the financial crisis, then underwent drastic downsizing through wage cuts and expanding numerical employment adjustment in the early part of the crisis.

⁴Cases of Dongbu Chemicals in 1991 (Supreme Court ruling no. 91da8647) and Dongjin in 1992 (Supreme Court ruling no. 90nu9421) have received a more generous interpretation of ‘the dismissal due to urgent managerial needs,’ which was one of four requirements (urgent managerial needs, efforts to avoid dismissal, faithful consultation with workers, reasonable and fair selection) for managerial dismissals. Such a trend was maintained up until the Act on the Restriction on the Dismissal Due to Managerial Reasons was passed in 1998. Refer to a study by Cho & Kim (2001) for more details on the overall effect of labour system's rigidity on the labour market.

⁵Looking at the 1999 Employment Outlook of OECD (1999), Korea was ranked second in terms of stringent protection against dismissal among the OECD member nations, following Portugal. Large companies cited the difficulty in negotiating with labour unions as the biggest hurdle in dismissing employees for managerial reasons, followed by ‘the narrow scope of the term managerial reasons’ (Cho & Kim, 2002). Therefore, the regulation in the current managerial dismissal law stipulating the employer to negotiate with the labour union is found strongly to bind large corporations from dismissing employees. Moreover, as the narrow scope of dismissals by managerial reasons was found to hinder the dismissal of employees for managerial reasons, personnel managers at workplaces may have an even narrower perception of the clause than the interpretation of precedents or the actual law.

⁶The purport of the ruling in 2002 (Supreme Court ruling no. 2001da29452 on Jul. 9, 2002) is that the legitimacy of the dismissal criteria, even those lacking in terms of worker protection (older employees by rank, long-time employees, workers with poor job performance), may be recognized. In this case, the employer (a bank) decided to dismiss high-ranking employees (above grade 3), who are not qualified to join the labour union. The dismissal criteria agreed with the majority of the labour unions specified the number of employees that can be laid off by grade and targeted employees in each grade, who were most senior, worked for the longest time, and performed poorly. However, those with good job performance who fall in the first two categories were excluded. The Supreme Court ruled, ‘Considering the seniority-based salary system unique to Korea and all the factors that could have minimized the number of dismissed employees if the aged and high ranking officials with relatively high pay and longtime employees were dismissed, the above criteria set by the defendant may be accepted as reasonable and fair criteria under the circumstances at the time.’ The need to restore stability by quickly dismissing employees may not be interpreted otherwise just because individual circumstances of workers susceptible to subjective judgement were not considered.

⁷Hwang (2004) provided supporting evidences such that the wage profile for Korean individual workers is much steeper than the productivity profile. More specifically, the wage in large firms increases two times higher than the entry level wage, and its inclining tendency is maintained up to the late 50s. On the contrary, the productivity increases only marginally and even decreases with an increase in workers' tenure.

⁸During the periods when the Korean economy enjoyed a high growth rate in the past, the rigidity of the personnel dismissal system and of the seniority-based salary system facilitated the recruiting of good quality workers and contributed to upsizing the internal labour markets of Korean firms. However, after the financial crisis, the corporate environments in Korea have been drastically changed and most firms facing cost pressure were forced to downsize their employments. Then, the rigidity of the personnel dismissal system and of the seniority-based salary system no longer played a beneficial role for the downsizing firms, and thereby the firms have been more reliant on the mandatory retirement system as a means of employment adjustments in order to avoid those rigidities.

⁹The cases where the mandatory retirement system was actually functioning were confined to workplaces that answered yes to question 52: ‘Is the mandatory retirement system in operation?’ and among them, those who replied to question 78, ‘Do you intend to continue running the mandatory retirement system?’, positively. The reason for defining the dependent variable this way was to exclude the cases where the retirement system is not actually operated as a means of employment adjustment, although the retirement clause is included in the company policy.