Korea's economic troubles strike home

Rising unemployment and household debt make for an unstable cocktail.

The plight of Seung-tae, a salary-man employed in the electronics division of a mid-sized conglomerate, is becoming increasingly common in Korea. A "wild-goose" father, Seung-tae lives alone in a small Seoul apartment, sending a large part of his salary as well as borrowed cash to his wife and daughter, Ji-ae, in Toronto. Ji-ae, like many Korean teenagers on the threshold of university, is being educated abroad.

The problem is that the cost of that cramming has risen by more than half in the past year due to the depreciating won; and even worse, Seung-tae, already steeped in debt, has been forced to take a pay-cut and reduction in working hours.

The Bank of Korea (BOK) said in mid-February that outstanding household debt amounted to W688.2 trillion ($492 billion) in December, up W57.6 trillion or 9.1% from a year ago. That translates into a record high of W41.3 million on average for each household owed to financial institutions and credit card firms, according to the National Statistics Office (NSO).

It could hardly happen at a worse time. Korea's GDP contracted 5.6% during the final quarter of 2008 and even the government predicts a 2% decline this year, resulting in the first recession since 1997/98. The most pessimistic analysts forecast a contraction this year of as much as 7%, which would make this the biggest downturn in 40 years of industrialisation. For ordinary people this means static or falling salaries and rising unemployment.

The nation's employment conditions have deteriorated to a level unseen since the 1997/98 Asian financial crisis. In January, Korea lost 103,000 jobs after a net fall of 12,000 in December. Strategy and finance minister Yoon Jeung-hyun has said the country will lose around 200,000 more jobs than it generates during 2009 -- far worse than after the bursting of the credit card bubble in 2003 when 30,000 jobs disappeared.

Some people seem to have given up finding a job before they've tried. About 38% of 20-somethings -- about 2.5 million people -- are outside the job market, as they either prepare for employment or simply idle away at home with no intention of searching for work, according to the NSO. The economic participation rate among people in their 20s was 61.8% in January, the lowest since February 1988. Meanwhile 600,000 new high-school and university graduates are set to join the job market.

A total of 1.77 million people opted to "take a break" from employment without specific reasons in January, the highest level since January 2003 when the numbers started to be compiled, according to the NSO. South Korea's jobless rate -- officially 3.6% -- doesn't take this figure into account although they are a significant part of Korea's unemployed. The finance ministry's Shin Je-soon reckons the true jobless level is over 7%.   

In response, the government recently unveiled a set of measures, including a job-sharing programme aimed at encouraging companies to keep their workers by cutting salaries. The finance ministry said that state-owned firms will cut their entry-level graduates' salaries by 20%-30% this year. Online recruiter Job Korea polled 914 working people and found that 67% have completed their salary negotiations for this year, and among them 70% accepted a pay freeze or reduction, while 30% were awarded a raise. Last year, 81% of respondents said they were given a salary increase.

Large Korean corporations say they're not cutting their workforces. Samsung Group, the nation's biggest conglomerate, has said it has no plans to ''artificially rationalise'' its workforce, and LG Electronics has said that it will not cut its number of employees. Nor will SK Group, Lotte Group or cash-strapped Hynix Semiconductors. Many chaebol (Korea's family-controlled conglomerates) made massive cutbacks a decade ago and may be reluctant to lay off employees in case business suddenly picks up. Job-sharing is also seen as an alternative to redundancies. According to the Korea Chamber of Commerce & Industry, one in two top 500 private corporations opted for job sharing to retain its workforce. In the public sector, job sharing is already the trend.

Meanwhile, unionised workers at Hyundai Motor are expected to demand that the car maker raises wages this year by 4.9%, despite a fall in sales and a cutback in production, and have threatened strike action.  

The government is now spending W51 trillion to stimulate the economy, mainly in tax cuts and infrastructure spending, while the Bank of Korea cut its interest rate to a record low of 2% on February 12. A supplementary budget bill, which will include measures to help small- and medium-sized enterprises, will shortly be presented to the National Assembly.

And, in January, the finance ministry announced a "green new deal", under which the government aims to generate nearly one million jobs by investing W50 trillion in eco-friendly business projects. In addition, the government is proposing to issue food stamps, both to help the poor and to boost consumption, which so far has shown few signs of responding to recent tax cuts and rebates.

Small businesses have been especially hard hit as consumers have stayed away from their doors. Others have been encumbered with debt repayment costs that have almost doubled after they were persuaded -- as many were -- to borrow in yen when it was cheap to do so. Many of these businesses are "mom and pop" stores set up by salaried workers laid off in the 1997/8 crisis (around 33% of Korea's workforce is self-employed -- the highest in the OECD). But according to the NSO, the number of small business owners dropped to 5.97 million in 2008 from 6.05 million a year earlier, falling below 6 million for the first time since 2000.

So Seung-tae doesn't have the option that unemployed or under-employed salary-men had during the crisis a decade ago. The small business sector is already over-populated. Instead, he cuts costs, shops for bargains in the Namdaemun market and has time to while away afternoons in American coffee shops with other young Koreans who are blogging or, like him, applying for jobs on their lap-tops. Seung-tae hasn't decided whether to tell his wife about this yet, thinking things might get better. Paying for his daughter's education is still his priority.

¬ Haymarket Media Limited. All rights reserved.
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