Labor regulations raise transaction costs and need reform

Park Young-bum

The author is an honorary professor of economics at Hansung University

Korea’s labor market urgently needs better jobs. In the first quarter of this year, the number of unemployed people exceeded 1 million for the first time in five years, and one in four unemployed individuals was a young adult. Last year, the number of people classified as “resting” — neither working nor seeking employment — reached a record 2.55 million. Among them, 179,000 held college degrees or a higher level of education. Since 2023, employment growth has been driven mainly by workers aged 60 or older. Excluding older workers, total employment in 2025 actually declined.

Labor markets are more heavily regulated than most other markets, and the design of such regulation strongly influences both the quantity and quality of jobs. Regulations should protect workers without undermining the market’s ability to function. But in Korea, several recent policies have instead increased transaction costs while failing to achieve their intended goals. Examples include the “Yellow Envelope” law, the Serious Accidents Punishment Act and restrictions on the use of fixed-term workers.

With changes in the government’s labor stance and the implementation of the Yellow Envelope law, labor practices that had largely disappeared under the previous administration have re-emerged, from tower crane operators demanding unofficial monthly payments to labor groups pressuring firms to hire union members. Since the law took effect, subcontractor unions have increasingly demanded collective bargaining with primary contractors. According to the Ministry of Employment and Labor, more than 1,000 unions made this request during the first month of enforcement, though few companies complied. Labor authorities have also broadly recognized the bargaining rights of subcontractor unions, widening the definition of employer responsibility.

Many companies are expected to challenge those rulings in court, potentially creating prolonged legal disputes. Critics argue that the law itself creates uncertainty because the gap between labor board decisions and court rulings remains unresolved. Moreover, clearer government standards alone cannot solve the problem; the legislation requires broader revision.

The Serious Accidents Punishment Act presents a similar issue. Although passed through bipartisan agreement, the law focuses more on punishing visible industrial accidents than addressing their structural causes. Korea imposes relatively severe penalties compared to other countries, and public attention often centers on the criminal punishment of executives after fatal accidents.

Britain, by contrast, mainly imposes heavy fines on corporations for inadequate safety systems, and Germany relies more on administrative and insurance-based measures. In the United States, criminal penalties are generally reserved for deliberate or severe violations.

Several years after implementation, the Korean law has shown limited effectiveness in reducing workplace deaths. Even after the law’s coverage expanded in 2024 to include workplaces with fewer than 50 employees, the number of serious industrial accidents still increased. The Ministry of Employment and Labor reported 605 workplace deaths under investigation in 2025, up by 16 from the previous year.

As a result, companies have focused less on improving safety itself and more on compliance paperwork, manuals and legal risk management. According to critics, the law has mainly benefited labor consultants, lawyers and former officials. Smaller businesses, which account for roughly 60 percent of serious industrial accidents, often lack the capacity to respond effectively to such incidents.

Japan’s experience offers another path. Although Japan once suffered frequent construction accidents, it sharply reduced fatalities during the 1990s through broader reforms that addressed subcontracting practices, excessive competition and weak safety culture. Public procurement reforms that shifted away from lowest-price bidding toward comprehensive evaluation systems have contributed as well.

Meanwhile, Korea’s protection law for nonregular workers has produced unintended effects. Introduced in 2007 to encourage regular employment by limiting fixed-term contracts to two years, the law instead deepened labor market duality. According to the Ministry of Employment and Labor, only 8.6 percent of fixed-term workers were converted to regular status in the second half of 2024.

Korea’s labor polarization also continues to worsen. According to the Hyundai Research Institute, workers in the primary labor market — regular employees at large firms — earn about 1.7 times more than workers in smaller companies or nonregular jobs, even though they account for only 15.9 percent of total employment.

The government should review the side effects of labor regulations that have created what many describe as a “regulatory paradox.” Reforming the Yellow Envelope law, shifting workplace safety policy toward voluntary corporate participation and easing rigidities in large-company labor markets would do more to improve employment conditions than expanding ineffective regulations.

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.