Financial Crisis and Foreign Workers in Korea -- Kil-Sang Yoo
Korea Labor Institute
Prior to the financial crisis occurred in November 1997, Korea has achieved its economic miracle over the last three decades. Between 1965 and 1996, GNP per capita in Korea increased 100 times, from US $105 to $10,543.
Until the early 1970s, Korea was an agrarian society containing a big rural population. With the successful economic growth, however, the Korean labor market passed the era of the Lewis-type "unlimited labor supply" around 1974_1975(Bai, 1981). Nevertheless, steady migration from rural to urban areas enabled continuous high economic growth without labor shortage until the mid 1980s.
Due to continuous high economic growth and the end of migration from rural to urban areas, Korean labor market began to face labor shortage from the late 1980s. The shortage of labor supply rapidly increased the wage of Korean workers, and labor-intensive sectors such as textile industry began to lose competitiveness in international markets and cannot attract domestic workers with the wage level offered to them.
Relative high wage and enough employment opportunities in Korean labor market began to attract foreign workers from late 1980s. Between late 1980s and 1997, many foreign workers from China, Indonesia, Vietnam, Bangladesh, Philippine, and other countries emigrated to Korea searching for "Korean dream", and the number of foreign workers was 268 thousands in 1997 which was equal to 1.3 percent of total Korean labor force.
The financial crisis occurred in November 1997 has drastically changed Korean economy and its labor market. The economic growth rate sharply decreased from 5.5% in 1997 to -5.3% in first half of 1998. The unemployment rate increased from 2.5 percent in 1997 to 7.6 percent in July 1998. Sharp economic downturn and high unemployment rate reduced demand for foreign workers in Korean labor market. Foreign workers began to leave Korea after financial crisis, and this resulted in reduced number of foreign workers in Korea. From January to June of 1998, 104 thousands of foreign workers, which is 40 percent of foreign workers in Korea, left Korea.
_. Korean Labor Market Before Financial Crisis
1. Transition of Labor Supply
Before the mid-1980s, Korea was in the situation of excess supply of labor and was one of the labor exporting countries. In 1963, out of total employed persons, 63.0 percent were employed in the agriculture, forestry and fishing, and only 8.7 percent were employed in mining and manufacturing. The unemployment rate was 8.1 percent in 1963. The difficulties in finding a job in the domestic market led Koreans to look at foreign labor markets.
Korea's labor export dated back to 1963 when 247 mine workers emigrated to West Germany. From then on, emigration of mine workers' to West Germany increased and in 1965 Korean nurses began to emigrate to West Germany.
Emigration of seemen on foreign ships and construction workers in Thailand's express construction were followed in 1965. These were starting points of emigration of Korean workers(Kang, 1996).
From 1962, Korean government launched the Five-Year Economic Development Plans. With the success of the Five-Year Economic Development Plans, a lot of new jobs were created in the urban areas, and this created massive migration of young people from rural to urban areas. This unlimited supply of labor from rural areas made it possible for Korea to develop its industry with very low labor cost until the mid 1970s. The success of industrialization increased employment in the manufacturing and service sectors and decreased employment in the agricultural, forestry and fishing industry.
In 1970s, Korean constructuring companies extended their businesses to the Middle East. Right after the first oil crisis in 1974, Korean construction companies rushed to the Middle East, and there was a "Middle East Construction Boom" in Korea. A lot of Korean workers emigrated to the Middle East countries searching for oil dollars and this created shortage of skilled workers in Korean labor market in mid 1970s.
It is said that a country reaches its turning point in migration when the unlimited supply of labor from the traditional sector of that economy to the modern sector is not available anymore (Lewis, 1954). It is believed that Korea passed that turning point in the mid 1970s(Bai, 1981).
With rapid economic development and increasing outward direct investment to other countries, Korea began to solve high unemployment problem from 1970s.
From the late 1960s, the unemployment rate dropped drastically and it remained at 3_4 percent level until 1987 except 1980 right after the second oil crisis(See Figure 1).
From 1988 to 1997, the unemployment rate dropped further and it remained at two percent level(See Figure 1). The two percent level of unemployment rate means labor shortage in Korean labor market. As shown in Table 1, labor shortage problem became key issue from 1998 in Korea. Especially labor shortage of unskilled workers and production workers was very severe, and the shortage of labor forced Korean government to import foreign workers under the "technical trainee" program from 1992.
The excess demand for labor rapidly increased wage of Korean workers as shown in Table 2. The rate of nominal wage increase from 1987 to 1996 was 14.6 percent and the rate of real wage increase during the same period was 8.1 percent.
What caused the labor shortage in Korea during that period?
On the demand side labor shortage was due to overheated demand. The accelerated economic growth over the past 1986_1988 period was the main reason for the labor shortage in the manufacturing sector. The average economic growth rate during 1986_1988 period was 11.5 percent and high economic growth rate around 8_9 percent was continued until 1996.
On the supply side, the labor market entry of the baby boom generation born between the late 1950s and early 1960s has mostly ended. This change in the population structure imply that the labor shortage problem is not cyclical but structural.
The labor shortage was severe especially among blue-collar workers, among small and medium size firms, and among unskilled and semi-skilled workers. Such labor shortage problem forced Korean government to change the policy toward foreign workers, so-called "open door policy".
2. Foreign Workers Before Financial Crisis
There are three types of foreign workers in Korea: legal employees, trainees and illegal workers.
The Korean Immigration Law allows the employment of skilled workers to only a few categories whose skills are necessary to Korea. For a foreigner to be legally admitted into Korea under these categories, he or she should submit an evidence of having a job in Korea. The Korean government issues a visa as long as there is a Korean employer who wants to offer a job to the foreigner. Therefore legal migrant workers are all professional and technical workers such as professors, researchers, or entertainers.
The Korean Immigration Law does not allow unskilled foreign workers to enter Korea for the purpose of employment except in the case of technical trainees. The "technical trainee" program was introduced in 1992 to help small and medium-sized businesses cope with the severe shortage of labor.
With globalization of production since late 1980s, big companinies needed to train foreign workers in their Korean factories, who would go back to work in their overseas branches. The Korean government permitted this kind of training within one year and this was the beginning of the industrial and technical training program. Later, this program was extended to the medium and small size companies in the manufacturing sector. Employer who were suffered from labor shortage welcomed the foreign trainees. In this way, the training program has been changed to the migration program in Korea.
Three industries can bring foreign trainees without any foreign affiliation; small manufacturing, fishing, and construction. This system was first introduced to help small manufacturing sector. In 1996, it was expanded to include the fishing and the construction sectors.
The foreign trainee system for manufacturing firms without a foreign affiliation is managed by the Foreign Training Cooperation Corporation(FTCO) under the Korea Federation of Small Business. Trainees under this category are to return to their home countries after a maximum of three years.
The maximum number of foreign trainees per firm is 10 percent of the workforce with the limit of 20 trainees. The FTCO manages the trainee system with the aim of helping the small manufacturing sector by supplying unskilled labor.
Companies need to put a security deposit of 300,000 Korean wons per trainee with FTCO. If a trainee flees due to the companies' faults, the deposit has to be given up. The recruiting agency also has to give up the security deposit of 100 US dollars per trainee which is hold by the FTCO while the trainee stays in Korea However, quite a few foreign trainees leave their companies.
After the first two years, a trainee who passes a qualification test can stay for another year as a worker, which was introduced in 1997. Only the trainees brought after April 1998 are entitled to this change.
As wages have been increased and labor shortage became much more severe since early 1990s, illegal migrant workers came to Korea to find employment opportunities. They are illegal in the sense of violation of Korean Immigration Law. Most of illegal workers are persons who have stayed to work longer than the period of permission. Also, many illegal workers violated their purpose of stay(namely, the status of visa). Not many but some foreign workers entered Korea without any legal permission of stay. All those workers can be classified as illegal migrant workers.
Any foreigner who stays in Korea after his/her visa expires is subject to the fine of up to 1 million Korean wons. The Korean immigration authorities differentiate fines depending on the length of period the foreigners overstayed. Illegal foreign workers also have to pay the cost incurred to send them back to their home countries.
Korean employers who hire illegal foreign workers are also subject to penalties. In October 1996, the Korean government toughened these sanctions in order to reduce the growing number of illegal foreign workers. Korean employers can be imprisoned for less than three years (one year before October 1996) or they can be given a fine of less than 10 million Korean wons (5 million Korean wons before October 1996). The Korean employers also have to pay the cost of returning their foreign employees to their home countries if the illegal foreign workers can not pay the cost.
Table 3 shows the trend of foreign workers in Korea in recent years.
_. Financial Crisis and Foreign Workers.
1. Financial Crisis and IMF Programs
For the past several decades, Korean Economy has grown rapidly. With per capita GDP rising at an annual rate of nearly 7 percent, a once poor agrarian economy has been transformed into an advanced industrial economy. In 1996, Korea became the world's 11st largest economy and became the member of OECD countries.
However, since the beginning of 1997, an unprecedented number of highly leveraged conglomerates("chaebols") had moved into bankruptcy. The bankruptcies severely weekened the financial system of Korea and nonperforming loans rose sharply to the equivalent of 7.5 percent of GDP. At the same time, the steep decline in stock prices cut the value of banks' equity and further reduced their net worth. These developments exacerbated the existing weekness in the Korean banking system. The weak state of the banking sector has led to successive downgrades by the international credit rating agencies and a sharp tightening in the availability of external financing.
Thus Korean economy narrowly survived on overnight loans from international financial institutions. The value of Korean won fell by more than 100 percent against the U.S. dollars between October and December 1997.
In order to solve financial crisis Korean government decided to approach the International Monetary Fund(IMF) for a rescue plan on November 19, 1997 and IMF approved a comprehensive financing package of about 58.4 billion U.S. dollars on both a multilateral and bilateral basis.
On the condition of receiving IMF's rescue programs, the Korean government should provide:
(1) strong macroeconomic measures designed to facilitate the orderly reduction of the external current account deficit; rebuilding of foreign reserve at the Bank of Korea; and containment of inflationary pressure through tighter monetary and fiscal policy;
(2) a comprehensive strategy to restructure and recapitalize the financial sector, and make it more transparent and market-oriented, and improve the supervision of financial institutions;
(3) measures to reduce the high degree of short-term debt of private corporations and financial institutions and to allow a better diversification of risk in the economy.
The IMF programs, as originally designed, were intended to narrow the external current account deficit to below 1 percent of GDP in 1998 and 1999, contain the inflation rate at or below 5(later changed to 9) percent, and limit real GDP growth rate to about 3(later chanted to -4.2) percent in 1998, followed by a recovery toward full potential in 1999.
Despite the IMF's rescue package, during the last week of December 1997, Korea was on the verge of defaulting on its foreign debts. It narrowly avoided that fate by working out a last minute emergency loan package put together by the IMF and G-7 countries including the United States.
Ever since Korea applied for the IMF rescue programs, Korean economy has been experiencing a severe trouble.
The IMF insists that Korea's first priority should be its structural adjustment. In order to induce structural adjustment of private corporations and to invite foreign capital, the IMF insists that the interest rate should be very high through very tight monetary and fiscal policies. The IMF also insists that all financial institutions must keep their owned capital ratio in terms of the BIS(Bank for International Settlement) criterion as higher than 8 percent by the end of 1998 and that any financial institution which fails in upgrading its BIS ratio should be closed immediately after 1998.
Because the BIS ratios of most financial institutions in Korea were much lower than 8 percent, financial institutions began to withdraw loans to the private firms and almost stop new loans. Interest rates soared to as high as 40 percent and this superhigh interest rates and withdrawal of loans increased default risks of firms. Increasing bankruptcies of firms soared interest rates further and froze loan to the firms.
This vicious circle of financial institutions and firms has created credit crunch and has paralyzed function of financial system in Korea.
Collapse of financial system has weekened growth potential of Korean economy. Even the firms that are financially sound and very competitive in the internal market are being pushed to the point of bankruptcy.
The economic growth rate in terms of real GDP recorded -3.9 percent in the first quarter and -6.6 percent in the second quarter of 1998(Table 4). Production activities have shrunk suddenly. As shown in Table 4, production contracted by 2.8 percent in the first quarter and 6.0 percent in the second quarter of 1998. The reduction of production was especially severe in manufacturing and construction industry. Due to severe credit crunches and sudden fall in the value of real estates, consumption expenditure shrank by 9.7 percent in the first quarter and 12.2 percent in the second quarter of 1998. Contraction of consumption expenditure increased inventory stock of products, and thus average operation ratio of production plants fell from 80.6 percent on October 1997 to 63.7 percent on July 1998. The severe shrink of consumption expenditure and operational ratio and too high interest rates have reduced investment expenditure by 23.0 percent in the first quarter and 29.8 percent in the second quarter of 1998.
The immediate impact of the sharp economic downturn on the labor market is the drastic increase of unemployment. The unemployment rate in Korea has been increased drastically from 2.1% in October 1997 to 7.6 percent in July 1998 and the unemployed persons increased from 454 thousands to 1,651 thousands(See Table 5).
The rising unemployment rates are mainly due to the job destruction. From July 1997 to July 1998, total employment contracted by 6.5 percent coupled with the 1.0 percent reduction of the labor force as shown in Table 5.
However, when we consider that population who are not in the labor force has been rapidly increased throughout this year, which represents so called "discouraged worker effect", the situation of unemployment is more serious than that the statistics show(See Table 5).
After the financial crisis, many Korean people believe that foreign workers should be sent to their home countries since even Korean nationals find it difficult to find a job. The first step for reducing foreign workers was to banish undocumented foreign workers. So Korean government offered an amnesty program to undocumented foreign workers. Those who reported to the authorities from January to March 1998 were allowed to leave the country without paying the fines. About 53 thousand undocumented foreign workers left the country under this program. Only a small number of Chinese workers did not take the program(Table 7). Many of the other nationals accepted the offer. The number of undocumented foreign workers decreased from 148,048 persons on December 1997 to 95,027 persons on June 1998.
A growing number of the foreign trainees are also loosing their jobs. From January to November 1997, 589 companies gave up 2,024 trainees, while 4,050 foreign trainees in 1,226 companies lost their training companies from December 1997, when Korea asked help from the IMF to March 1998.(Y. Park, 1998)
During the period of from December 1997 to June 1998, 50,253 foreign trainees left Korea, which is 48.5 percent of foreign trainees. During the same period, total number of foreign workers has been reduced from 267,546 persons to 159,994 persons, which means 107,552 persons(40.2 percent of foreign workers in Korea) left Korea (See Table 6). This means about six hundred of foreign workers are leaving Korea everyday after financial crisis.
However, Korea still needs unskilled foreign workers. Despite rapidly growing number of unemployed persons, not many Korean workers want to have a so-called three-D(difficult, dangers and dirty) job. Small firms in labor-intensive manufacturing sector still have difficulties in recruiting Korean workers. The Korea Federation of Small Business strongly insists that the number of foreign trainees should not be reduced and some measures should be done to facilitate the process of relocating the foreign trainees who loose their jobs to a new training place.
The Foreign Training Cooperation Corporation(FTCO) under the Korea Federation of Small Business did a survey on May 1998 on the use of foreign trainees of 6,418 companies which hired the foreign trainees. The labor shortage of surveyed companies' was not serious. Only 7.9 percent of the surveyed companies (510 companies) answered that they are in the situation of labor shortage. The number of needed workers was 1,605 persons which was 0.55 percent of the existing workers. Among the 6,418 surveyed companies, 31.1 percent(2,011 companies) answered that they used less foreign trainees on May 1998 than on December 1997. The number of foreign trainees declined by 6.4 percent during the same period. On the other hand, in the companies which used less foreign trainees, Korean workers replaced only 14.3 percent of the jobs which were previously hold by the foreign trainees.
Base on the results of this survey, the concerned government ministries reached the following agreements:
(1) The quota of foreign trainees will be frozen during 1998. However, the case of fishing industry will be reconsidered in the second half of 1998;
(2) Since drastic change of the "technical trainee" program may deteriate labor shortage of small firms, replacement of trainees will be allowed within the existing quota of trainees, when trainees go back to their countries after completing training. The case of those fleeing the training place will be decided based on the employment situation of the second half of 1998;
(3) For the trainees in the process of being brought in Korea, only those for manufacturing will be allowed.
The number of legal migrant foreign workers who are all professional and technical workers has been decreasing after financial crisis. Legal foreign employees in Korea shrank from 15,900 persons on December 1997 to 11,622 persons on June 1998 (See Table 6).
It has been pointed that foreign workers often face inferior working conditions since trainees are not considered workers under the Korean Labor Standard Act and many foreign workers are in illegal status. The working conditions of the foreign workers are believed to become worse after the financial crisis hit Korea, which is confirmed by local newspapers. Even working conditions of Korean workers have been becoming inferior due to many Korean firms' financial difficulties. Most workers in Korea have to accept their pay-cut and it is reported that the cases of unfair labor practices are greatly increasing after financial crisis. The government has introduced various measures to deal with unfair labor practices. However, the foreign workers are mostly neglected partly due to the lack of the administrative capacity to protect the foreign workers.
By offering the amnesty program to undocumented foreign workers right after the financial crisis, Korean government revealed its intention of using foreign workers as a bumper to ease economic impacts of the crisis. The Korean government seemed to achieve its objective. About one thirds of the illegal workers left Korea under this program. However, by sending the foreign workers to their home countries, employment opportunities for local workers were not generated, either. Many Korean firms still have difficulties in hiring local workers for the jobs which were previously hold by the foreign workers.
This indicates that foreign workers in Korea are helping the Korean economy by taking the jobs with the conditions which the Korean workers would not consider. The position of Korean government on the foreign labor has been that Korea does not need unskilled foreign workers; only trainees have been brought through a legal channel. However, two thirds of the foreign labor is still undocumented.
The Korean government should reconsider its position. Foreign trainees should be accepted as a worker. The need of changing the foreign labor policy has been debated in Korea. The Ministry of Justice recently revealed its position of illegal foreign workers being also protected by the Korean Labor Standard Act. Considering the overall employment situation in Korea, the employment opportunities will be certainly decreased. However, the government should give fair treatments to the foreign labor who is already in the country. This can be achieved only by recognizing the foreign labor as a worker(S. Uh 1998, Y. Park 1998).
Table 1. Labor Shortage Ratio(1985_97)
(Unit : percent) 1985 1988 1990 1993 1995 1997
Note: Labor shortage ratio = unfilled vacancies/current employees.
Source: Ministry of Labor, Employment Forecasting Survey, Each Issue.
Table 2. GDP Growth Rate and Wage Increase Rate in Korea
(Unit : percent) Year GDP
Source: KLI Labor Statistics, 1998, Korea Labor Institute
(Unite : person, %) Year Total legal stay illegal stay
Table 4. Major Macroeconomic Indicators in Korea
(Unite : percent) 1997 1998
Consumption Expenditure 4.4 5.1 5.1 -0.2 -9.7 -12.2
Table 5. Major Labor Market Indicators in Korea
(Unit : thousand persons, percent) 1997 1998
Labor Force Participation Rate
Population not in Labor Force
Note : Numbers in parentheses are rates of change with respect to the same period of the previous year.
Source : Office of Statistics, Monthly Employment Trend, each issue.
Table 6. Foreign Workers in Korea
(Unit : person) Total Employees Trainees Illegal Stay
Note: 1) Numbers in parentheses are proportion of each category out of total.
2) The number of trainees until December, 1997 included the trainees who fled the training places.
Source: Ministry of Justice. Korea(unpublished data)
Table 7. Undocumented Foreign Workers in Korea by National December 1997 June 1998
Total 148,048 95,027
Kang, Su Dol, Globalization of the Labor Market: Foreign Labor Issues in Korea, Korea Labor Institute, September 6, 1996.
Korea Labor Institute, KLI Labor Statistics, 1998.
Lewis, W. Arthur, Development with Unlimited Supplies of Labor, Manchester School, May 1954.
Ministry of Labor, Employment Forecasting Survey, Each Issue.
Park, Young-bum, "Financial Crisis and Foreign Workers in Korea", July 1998. (Unpublished paper).
Uh, Soobong, "Immigration and Labor Market Issues in Korea", Workshop on International Migration and Labor Markets in Asia, 29 and 30 January 1998, Japan Institute of Labor.