South Korea pays heavy price for education

October 9, 2013 7:15 am

South Korea pays heavy price for education

By Jung-a Song in Seoul

Park Sang-hee, is a new breed of university drop out. The 21-year-old South Korean ditched his music degree not to hit the hippy trail or to develop the next Google; but to train as an electrician. The pragmatic Mr Park may be a sign of things to come. In his home market, the deluge of graduates – 7 out of every 10 high school students go to university – and the subsequent skills surplus and labour underutilisation is taking a toll on theeconomy.It is not just a problem for South Korea, where education is held in high regard and directly linked to job prospects and marriage. The US too has a more educated workforce than it can use to show for the nearly $1tn of student debt amassed, while OECD countries on average send 56 per cent of their 18-year-olds to university.

South Korea, however, is top of the league table when it comes to producing too many over-educated workers. The number of college graduates in excess of the job market’s demand is estimated at about 50,000 a year, compared with an annual supply shortfall of more than 30,000 high school graduates, according to the labour ministry.

This zeal for learning has been a driving force behind South Korea’s rapid economic development over the past half century, creating one of the world’s most educated workforces.

But the country is learning the dark side of its obsession with education: underutilisation of the labour force and, with many choosing to pursue education over other costly pursuits like raising a family, adding to the country’s exceptionally low fertility rate.

“Over-education has led to a decline in labour utilisation, thus weighing on economic growth,” says Eom Dong-wook at the Samsung Economic Research Institute, estimating that more than 40 per cent of the country’s college graduates are overeducated. “With an excess number of young people going to college, thus delaying their entry into the labour market, the contribution of labour input to GDP growth has been negative since 2009.”

That compares with around 2 per cent in the years between 1970 and 1990.

Indeed, by skipping university and going directly to work from high school, over-educated graduates could add a full percentage point to economic output, Mr Eom estimates.

Higher education is partly a default option. Devoid of natural resources, Korea’s recourse has been to making the most of its human capital and Koreans strongly believe that higher education will be the key to retaining the country’s economic prowess.

Thus diplomas from the right universities impact careers, marriages and, of course, wages: degree holders earn an average 33 per cent more than high school graduates. That compares with a 66.7 per cent gap for instance in the UK.

“Koreans continue to believe that a university education is the only route to a good job, despite mounting evidence to the contrary,” McKinsey said in a recent report, noting that the net present value of a university education now trails the value of a high school diploma, due to huge private education costs. “The high cost of education is a clear factor in limiting family size and depressing the fertility rate.”

There are many positions that high school graduates can fill and we don’t want to hire university graduates for such positions, because those overqualified people would likely leave the company soon

– Lee Young-kwan, human resources manager, KT

Korean families spent about Won20tn on after-school education in 2011, accounting for 1.63 per cent of the country’s GDP, which has led to high household debt. That in turn is constraining domestic consumption and contributing to the low birth rates – at just 1.2 children per woman of childbearing age it is among the lowest in the world.

University tuition fees are on average high – Won7.3m a year in a country where the annual salary is Won26.6m – and impose a huge financial burden on Korean parents as only 15 per cent of university students use loans to pay for tuition, according to the education ministry.

The distorted economics of education and a greater willingness by big companies to put high school graduates into white collar jobs as well as production lines is already wreaking change. To further incentivise the likes ofSamsung, LG, CJHanwha and banks, the government is offering tax incentives for those that hire more high-school graduates

“There are many positions that high school graduates can fill and we don’t want to hire university graduates for such positions, because those overqualified people would likely leave the company soon, not satisfied with their job,” says Lee Young-kwan, a human resources manager at the telecoms company KT.

KT revived hiring of high-school graduates in 2010, employing 300 last year in customer service, marketing and sales activities. The company plans to increase that number to 500 this year – half its annual intake – as their performance has been much better than expected.

Samsung, the country’s biggest conglomerate, last year opened some white-collar jobs to high-school graduates for the first time, hiring 700 high school graduates for software development, engineering and other office work. And it plans to add 700 more high school graduates this year for more diverse white-collar positions.

However, experts caution that it will take a long time for Korean companies to change their hiring practices. “To me, the recent examples just look like sample hiring due to the government pressure. It remains questionable how far those high-school graduates can advance in the workplace,” says Kwon Tae-hee, researcher at Korea Employment Information Service.

“The social bias in favour of academic credentials is so strong that it will take a long time for merit-based hiring to become a mainstream practice.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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