Yellow envelope law risks overlooking incentives in market economy

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Yellow envelope law risks overlooking incentives in market economy

Published: 20 Mar. 2026, 00:03

Audio report: written by reporters, read by AI

Kim Dong-ho

The author is an editorial writer at the JoongAng Ilbo.

When policymakers design institutions based on one-sided perspectives, unintended consequences tend to follow. Korea has seen this pattern before. The Act on the Protection of Fixed-term and Part-time Employees, introduced in 2007 under the Roh Moo-hyun administration, aimed to protect vulnerable workers. It required companies to convert contract workers into full-time employees after two years of service. The intention was widely praised as fair and humane.

Members of the Korean Confederation of Trade Unions chant slogans during a rally in Sejongno, central Seoul, on March 10, the first day of the enforcement of the so-called “yellow envelope law” (revisions to Articles 2 and 3 of the Trade Union and Labor Relations Adjustment Act). The signs they hold read, “Real boss, come out!” [YONHAP]

In practice, however, many firms responded differently. Rather than offering permanent positions, they dismissed contract workers before the two-year threshold. What was meant to promote job security instead led to greater instability, particularly for young workers who cycled through temporary positions without gaining stable employment. It was an example of how market responses can undermine policy goals.

A similar pattern emerged with the Moon Jae-in administration’s push to raise the minimum wage to 10,000 won ($6.67) per hour. The policy resonated with public sentiment that workers deserved fair compensation. Yet the rapid increase placed pressure on small business owners and self-employed operators. Many responded by cutting part-time staff, often the most vulnerable workers. Convenience store owners reduced hiring, while the spread of kiosks accelerated as businesses sought to offset rising labor costs.

The revision of the Distribution Industry Development Act in 2012 during the Lee Myung-bak administration followed a comparable trajectory. Designed to protect traditional markets, the law imposed mandatory closures and restricted operating hours for large retail chains. While the policy addressed concerns about small merchants, it failed to account for broader shifts in the retail sector. During this period, online commerce expanded rapidly, and the domestic market was reshaped, with Coupang, backed by U.S. capital, emerging as a dominant player.

The recently implemented “yellow envelope law,” which revises the Trade Union and Labor Relations Adjustment Act, may have even broader implications. On its first day of enforcement on March 10, subcontracted workers at 407 workplaces launched coordinated actions calling for direct negotiations with primary contractors. Companies have already begun accelerating automation and the introduction of robotics. The likely economic consequence is a contraction in employment.

Efforts by labor unions to resist these changes may intensify, but technological adoption is part of a broader structural trend that is difficult to reverse. In some cases, expansive bargaining demands by subcontracted unions could hasten the shift toward automation rather than slow it.

These policies — covering nonregular employment, minimum wages, retail regulation and labor relations — share a common feature: They were introduced with the goal of advancing fairness and protecting weaker groups. Yet their outcomes have often destabilized employment conditions for those very groups and disrupted the broader economic ecosystem.

Why do such policy outcomes recur? One explanation is the tendency to focus on a single perspective. In economics, it is widely recognized that any policy produces both benefits and side effects. The absence of such balanced consideration can lead to outcomes that diverge from initial intentions.

The government should consider supplementary measures without delay. Simply encouraging labor and management to resolve disputes through mediation procedures is unlikely to be sufficient. A more pressing concern is the rapid substitution of human labor with automation, even in roles that remain viable for workers.

If lawmakers were to place themselves in the position of business operators, the likely response becomes clearer. Faced with repeated demands for negotiations over managerial decisions and sustained pressure for wage increases, firms may seek to reduce or terminate subcontracting relationships. This response reflects a basic principle of market economies.

As Adam Smith argued in “The Wealth of Nations” (1776), a baker does not produce bread out of benevolence but out of self-interest. The same logic applies to firms responding to regulatory pressures.

Participants hold placards during a business community rally calling for revisions to the proposed amendments to the Trade Union and Labor Relations Adjustment Act on the steps in front of the main building of the National Assembly in Yeouido, Seoul, on Aug. 19, 2025. [YONHAP]

Few would dispute the intent behind the yellow envelope law. In a highly specialized and fragmented production system, it is difficult to sustain a healthy economic ecosystem if primary contractors capture most of the value created. As President Lee Jae Myung noted in a social media post, even predators depend on a functioning ecosystem.

If the goal is to promote coexistence between labor and management, the policy framework should be designed in a way that employers can also accept. One possible approach is to maintain the law while adopting a positive regulatory system that clearly defines permitted actions and limits indiscriminate bargaining demands.

Under the current structure, managerial decisions can become subjects of negotiation if they affect working conditions and multiple bargaining channels may be allowed. This can lead to continuous labor disputes throughout the year. Clearer criteria should be established to determine when subcontracted unions can demand negotiations with primary contractors.

Without adjustments, the economic consequences are likely to become increasingly evident. Policymakers should avoid overlooking predictable outcomes in the name of good intentions.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.