Firms’ Adjustments to Employment Protection Legislation: Evidence from South Korea

Abstract

The authors examine the impact of employment protection legislation on firm-level outcomes such as employment and profitability in South Korea. The 2007 Act on the Protection of Temporary Workers restricted the use of specific types of temporary contracts to a period of two years. Exploiting the fact that the impact of the reforms was greater for establishments that intensively used the affected temporary workers, the authors apply a difference-in-differences framework. Their results show that businesses responded to the Act by reducing the use of temporary contracts protected by the reforms and partially substituting them with permanent and other unprotected temporary contracts. As a result, the reform decreased overall employment level of establishments. Furthermore, the authors find that the newly introduced regulations had a limited negative impact on firms’ profitability. Evidence suggests that establishments also improved their capital intensity and their labor productivity in response to the labor reform.

Do anti-discrimination laws alleviate labour market duality?

“…There are several papers that explore the impact of the other main part of the labour reform in Korea, shortening the maximum use of fixed-term workers, and these papers do not produce concluding results on the effect of the regulation on employment. Baek and Park (2018) and Yoo and Kang (2012) suggest that curbing the use of temporary workers has a small negative impact on the total employment level, while Lee (2009) argues that the decrease in the level of employment observed after the reform is not associated with the regulation. According to Yoo and Kang (2012), the effect of the regulation over the use of temporary workers on employment of temporary workers is negative at first Labour market duality and fades away over time, and Baek and Park (2018) find that the regulation does not have a significant impact on firms' profitability.…”

Labor Reforms in Rajasthan: A Boon or a Bane?

“…The adverse impact of the strict labor laws have been discussed for other countries also; likeYoo and Kang (2012) andBaek and Park (2018) for South Korea,Ingham and Ingham (2011) for Poland,Bossler and Gerner (2020) for Germany .…”

The Productivity Puzzle, Management Practices and Leadership

“…There are a few possible explanations for this finding. Firstly, dismissal protection gives firms incentives to substitute labor to other factors of production, such as further capital investments which raise the productivity of labor (Autor et al, 2007;Baek & Park, 2018). Therefore, even under strict employment protection, it can be possible to achieve high productivity while still maintaining good people management practices with decreased labor intensity, explaining the insignificant moderation results we obtained.…”

“…Secondly, higher costs attached to the strictness of employment protection could lead firms to invest more in their workforce (Bjuggren, 2018;Koeniger, 2005;Nickell & Layard, 1999) and substitute burdensome temporary contracting with permanent. Through longer employment terms, employees can acquire more firm-specific knowledge and skills, which can be advantageous for productivity through increased levels of human capital (Baek & Park, 2018;Belot, Boone, & Van Ours, 2007). So strict EPL can have a negative impact on the effective use of certain people management practices, while concurrently, it may prove advantageous for enhancing human capital at firms.…”

“…complicating the use of temporary contracts, and impeding employee dismissals by i.e. obligatory severance payments (Autor, Kerr, & Kugler, 2007;Baek & Park, 2018). Thus, they influence firms' ability to attract talent, eagerness to hire, capability of building a skilled workforce, and adaptability to changing market conditions (OECD, 2020b).…”