Korea Inc. grapples with aging workforce

Korea Inc. grapples with aging workforce
Militant labor unions blamed for high wage and low productivity

2013-09-01

By Lee Hyo-sik

Korea has emerged as a global manufacturing powerhouse since the Korean War. Over the past six decades, automakers, shipbuilders, steelmakers and other manufacturers have become leaders in the industry. Companies like Samsung Electronics and Hyundai Motor are selling Korean-made products that are in demand across the world. While demand is high, local manufacturers are facing a ticking time bomb: a rapidly aging workforce. As a result, Asia’s fourth-largest economy is facing higher wages and falling labor productivity, which is chipping away at Korea’s ability to compete.Companies refrain from employing young workers during the economic downturn and strong labor unions keep businesses from hiring new recruits. The nation’s low birthrates and aging population are also contributing to the problem.
The country’s labor laws that make it difficult to increase or decrease a workforce has also discouraged companies from employing young workers. Plus, the government’s drive to force businesses to extend an employee’s retirement age has contributed to the changing demographics.

As a result, the average age of an employee at companies like Hyundai Motor, GM Korea, Hyundai Heavy Industries and other leading domestic manufacturers is now late 40s to early 50s.

Employees at small- and medium-sized manufacturers are even older than their counterparts at large companies because young jobseekers do not want to work in small manufacturing firms.

Analysts warn that the aging workforce will greatly undermine the foundation of Korea’s manufacturing industry, saying local manufacturers will face increasing labor costs and falling productivity.

They say companies should bring foreign workers to Korea to keep wages down and adopt a new wage peak system, which cuts an employee’s salary at a certain age in return for job security. The government also needs to help turn the labor market more flexible and offer greater incentives to companies that hire young jobseekers.

Militant labor union and aging demographics

According to the Ministry of Employment and Labor, the average employee’s age will exceed 40 by the end of this year because of falling birthrates and extended life span. The figure stood at 39.9 years in 2012, up from 38 years in 2008.

The numbers also show workers in the manufacturing sector are older than those engaging in services and other industries.

For example, the average age of employees in the steel industry stood at 42.7 years in 2012, according to the Korea Institute for Industrial Economics & Trade. Employees in textile, shipbuilding and machinery were 42.3 42.2 and 41.2 years old, respectively.

The institute said the average age of production workers is much higher than that of office employees.

Hyundai Motor, the country’s largest automaker, has an aging workforce but struggles to hire young workers.

“It is difficult for us to add as many new employees as we want to our manufacturing force. Once we hire them, we cannot dismiss them even at a time of an economic slump because of our militant labor union, which stages a strike frequently,” Hyundai Motor public relations manager Park Byung-chan said. “The union is the No.1 culprit behind our rapidly aging workforce, which sharply increases wages and decrease labor productivity.”

Park said the firm’s domestic plants are losing their competitive edge as plants overseas produce more cars in a shorter period of time at lower costs.

“Knowledge transfer from older workers to younger ones is very important for a manufacturing firm, but this doesn’t happen at Hyundai Motor because we cannot hire as many young employees as we need to,” the manager said. “We really think our labor structure needs more flexibility. To make it so, policymakers and lawmakers should take all possible measures to help us rein in our militant labor unions. Otherwise, we have no choice but to shift more production abroad.”

GM Korea has also seen its labor force age over the years.

“The average age in our Bupyeong plant in Incheon has reached 50, which is extremely high. The situation is pretty much the same at two other plants in Gunsan, North Jeolla Province, and Changwon, South Gyeongsang Province,” GM Korea official said, declining to be named.

The official blamed the aging work population on labor unions.

“Under the management-labor agreement, the retirement age for our production workers is set at 60. The management cannot force workers to retire before they reach that age,” the official said. “We simply cannot enlarge our workforce because once we hire employees, we cannot dismiss them. We would like to manage our labor force flexibly in accordance with business conditions. Then, the company will be more prosperous and be able to hire more workers.”

She said GM Korea’s labor productivity has fallen over the years due largely to the aging workforce. “Of course, older workers are more experienced. But this cannot offset their declining labor productivity. Plus, they receive higher wages than younger ones.”

Kumho Tire, Korea’s second-largest tire maker, echoes the same thoughts.

“It is important for manufacturers to keep labor costs down and boost productivity, but we are facing increasing difficulties in doing so due to the rapidly aging workforce,” said a company spokesman, who declined to be named.

To inject vitality into the labor force, the company needs to hire many new workers, he said. “But we cannot do so because of our militant labor unions. We simply cannot dismiss underperforming workers. We are currently under a creditor-managed workout program so this makes it more difficult for us to manage manpower on our own.”

Solutions to aging workforce remain elusive

Analysts say that it is almost impossible for Korea to rejuvenate its workforce, given the country’s demographic changes. But the government and companies themselves need to make an all-out effort to slow down the aging of the workforce, they said.

“Many manufacturers are reluctant to hire new workers because of the ongoing economic slump and the increasingly militant labor unions,” said Rhee Im-ja, a senior researcher at the Korea Institute for Industrial Economics & Trade. “Coupled with Korea’s aging population, it becomes extremely difficult to make the working population younger. However, if we don’t do something about it, the nation’s manufacturing industry will follow in the footsteps of the Japan’s industry, which has long suffered from high wages and low labor productivity.”

She said the government should create legal and social environments that will allow companies to be more flexible with their manpower.

“Companies need to adopt the wage peak system to lower labor costs and make experienced workers share their knowhow with junior employees. The government also needs to bring more foreign laborers into the country to make up for the labor shortfall. Labor unions, for their part, must put down their vested rights,” Rhee said.