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How Did Unions Protect Workers Rights after the 1997
Economic Crisis in Korea?
Young-Myron Lee
Dongguk University
In-Gang Na
University of Incheon
Abstract
Until the 1997 foreign currency crisis, unions in Korea
worked to increase wages and to improve benefits, because job security
was implicitly guaranteed by the patriarchal culture of Korean firms.
After the crisis, the firms strongly demanded layoffs to overcome their
financial difficulties by reducing labor costs and increasing labor flexibility.
This paper analyzes the unions' response during the four-month period
right after the crisis. Firms with unions used pseudo-voluntary retirement
programs more frequently than firms without unions. There was no difference
between unionized and nonunionized firms in the use of layoffs, however.
Unions influenced the downsizing process by participating in decision-making
procedures.
Introduction The foreign currency crisis of November 1997 severely affected
the lives of Koreans, especially those of Korean workers. Before the crisis,
while in the process of negotiation with management, Korean workers demanded
higher wages and better benefits; they did not, as a rule, demand guarantees
of job security because that was already a given. Unfortunately, the crisis
fundamentally changed this practice. With the onset of the crisis, firms
argued that it was inevitable to layoff workers to save companies facing
serious financial difficulties. To respond to this argument, unions had
to have a new strategy to protect workers' jobs. Did they have a new strategy
prepared shortly after the crisis? If so, what was it? These are the main
issues to be discussed in this paper.
The second question about the unions' roles during and after the financial
crisis deals with the process of downsizing. A union might be effective
in managing the downsizing process even though it might not be effective
in preventing layoffs. For example, unionized firms might use alternatives
to avoid layoffs such as reductions in working hours, wage freezes, and
"pseudo-voluntary retirement (PVR)" with lucrative severance pay.1
A Brief History of Recent Industrial Relations in Korea Industrial relations in Korea prior to 1987 can be described
as "controlled" or as "state corporatism." In this period of employer-dominated
industrial relations, the labor movement, at least in terms of trade unions,
was extremely limited because of the growth policies of the government.
In addition, social conditions, in which the supply of labor far exceeded
the demand, played a significant role. As a consequence, industrial relations
developed in an "employer-dominant and employee-submissive" form (Kim
1999, 3; KOILAF 1998).
Industrial relations in Korea, however, experienced a major change with
the Declaration of Democratization on June 29, 1987. After the "June 29"
declaration, the labor movement was revitalized. For the first time, workers
were granted meaningful rights: to bargain over wages and to strike without
the threat of government oppression (Bognanno 1988). Before 1987, the
number of labor disputes averaged 200 a year; in 1987, the number totaled
3,749. Because of changes in union organizing, the number of union members
leaped from 1.04 million in 1986 to 1.93 million in 1990 (KOILAF 1998,
5).
During the first half of the 1990s, the industrial relations climate appeared
calm. However, labor-related issues such as the mounting pressure to allow
the unionization of the public sector, the right to collective bargaining
for teachers, and the recognition of the Korean Confederation of Trade
Unions (KCTU) plagued the government. KCTU was the Federation of Korean
Trade Unions' (FKTU) increasingly effective rival. In May 1996, both the
FKTU and the KCTU were invited, along with business and public interest
representatives, as participants to the Presidential Commission on Industrial
Relations Reform (PCIRR) (Park 1999, 215).
Charged with evaluating Korea's industrial relations institutions, the
PCIRR recommended that attention be paid to the following major issues:
(1) the organization of "multiple" trade unions should be allowed; (2)
unions should be granted the same rights as the industry to participate
in political action; (3) a tripartite Labor Relations Commission, independent
of the Ministry of Labor, should be created; and (4) the Labor Standards
Act should be changed. These recommendations were all realized, although
the enforcement of laws regarding the organization of multiple trade unions
was postponed. In addition, a flexible working hours system was installed
that reduced employer overtime payrolls. Finally, employee layoffs were
newly enacted and to be applied in two years of legal delay.
In November 1997, everything changed. Beginning with the Hanbo and Kia
bankruptcies, a financial crisis was precipitated that led to a sharp
downturn in the economy. At that point, the government negotiated with
the IMF for $58.3 billion in relief funding. Loan conditions included
tight macroeconomic policies and structural adjustments, such as greater
labor flexibility, corporate reform, increased transparency, restructuring
of the banking industry, and the creation of stronger financial reporting
systems.
Labor flexibility was considered essential to attract foreign capital,
which was key to easing corporate restructuring and the private sector's
crushing debt burden. In January 1998, president-elect Kim formed another
Tripartite Commission, including representatives of labor, management,
and the ruling party to discuss ways to overcome the crisis. The Commission
worked to figure out a stable solution to the crisis (Haggard 2000, 104).
This situation raised questions about whether the unions' position against
layoffs due to the nationwide financial crisis was counter-productive
or even unpatriotic. Labor representatives grudgingly agreed to accelerate
the pace of mass layoffs. In February 1998, the Labor Standards Act was
amended to incorporate this concession.
Job Security in Korean Industrial Relations As mentioned earlier, job security was not the major issue
in Korean industrial relations until the 1997 crisis. Under the patriarchal
culture of Korean firms, job security was a basic condition of employment
and was integral to an "implied" social contract. At banks and big businesses
in Korea, where the Japanese practices of lifetime employment and the
seniority system had been inherited, mass layoff was unthinkable until
the financial crisis occurred (Kim 1999, 14).
Korean cultural practices regarding job security became an issue as economic
development slowed down in the 1990s. Uh mentioned two employment security
problems from a macroeconomic perspective: frequent labor turnover among
blue collar workers and emerging employment security problems (Uh 1993,
51). Companies were confronted with aging workers and increasing labor
costs because no company-driven retirement system was enacted. They tried
to solve the problem of aged workers by actively using PVR with severance
pay incentives. The number of workers who voluntarily retired, however,
was far less than expected.
After the crisis, companies strongly demanded massive layoffs. Unions
needed to protect their members from these layoffs but were without experience.
Social consent, however, on overcoming the financial crisis as smoothly
and as quickly as possible was so strong that unions faced constraints
against moving towards job security independently. Concessions became
common in collective bargaining. To avoid layoffs, unions suggested wage
freezes, wage cuts, working-hour reductions, and hiring freezes.
At the national level, employees aggressively protested against massive
layoffs. On July 20, 1998, the workers at Hyundai Motor Company went on
strike. This dispute was regarded by the Korean labor movement as a defining
moment in the struggle against the restructuring of work by the Korean
government and as an important incident in the struggle to reject layoffs
as a tool to adjust employment (Neary 2000, 1). The strike began when
the company attempted to reduce the workforce by ten thousand. The company
claimed the reduction was a necessary step to avoid global overproduction
and economic difficulties. After a thirty-seven-day strike, the company
and the union agreed to dismiss 277 workers with consolation bonuses and
to have over one thousand workers leave for eighteen months of unpaid
vacation, with retraining provided during the leave.
As seen in Table 1, employment adjustment has become a common practice
since the crisis. Before the crisis, about one third of surveyed firms
adjusted their employment level (see the first column of the table). This
practice increased sharply in the four-month period right after the crisis
and in the next seven-month period. This means the firms harshly adjusted
the employment levels after the crisis using PVR, layoffs, and other tactics.
The most basic role of the union is to give job opportunity and job
protection (Belous 1989). This role has not been questioned for a long
time, although this role has been weakened over the last couple of decades.
For example, technology workers in Silicon Valley, who have been reluctant
to join unions, were recently unionized even though they knew unions couldn't
prevent layoffs with collective bargaining agreements. They instead opted
to have their salaries cut or working hours reduced as an alternative
to layoffs (Dash 2001).
Before the crisis, only a small portion of Korean collective agreements
explicitly mentioned the layoff of workers. In 1987, the layoff was an
agenda of labor-management committees only in nine out of fifty-seven
collective agreements (KLI 1989, 139). In 1989, only 48 unions out of
the 797 in Korea, or 6 percent, mentioned that job security was one of
the major issues that unions should focus on in the future while 283 unions,
or 47.9 percent, mentioned wage increases as a major issue (Park and Park
1990, 169).
Another survey showed that layoff clauses were mentioned in 49 percent
of a sample of 834 collective agreements that covered 824,000 union members
in April 1989 (Yoon et al. 1990, 112). Most of the contracts, however,
did not specify the difference between disciplinary termination and layoffs
caused by the firm's bad economic performance. Only 24.4 percent of contracts
had clauses about the union's involvement in employment adjustment.
In December 1996, the conditions for lawful layoffs in the Labor Standards
Act were specified (revised in March 1997), and a period of two years
was set for their implementation. After the financial crisis at the end
of 1997, however, the law was revised again so as to be effective immediately,
with broader scope given to companies planning layoffs. The courts began
to interpret transfers, mergers, and acquisitions as urgent management
need for layoffs. With the Great Compromise of the Tripartite Committee,
unions indirectly accepted layoffs into the Korean industrial relations
system.
After the crisis, union actions were not so speedy. In the analysis of
the 1998 collective agreement done by the Korean Council of Trade Unions,
only 8.5 percent of agreements explicitly mentioned the joint committee
on job security. Fourteen percent of agreements required union consent
to layoffs while twenty-two percent required consultation with unions
on layoffs.
In previous studies the union's role in employment security is framed
by several different arguments. One side argues that the union works to
slow the downsizing process while the other side argues that the union
speeds up the downsizing process because unions in the United States prefer
to have workers laid off rather than have them face any reduction of working
hours (Burgess 1988; Hamermesh 1993; Medoff 1979).2 A study using Korean
data showed that unions were somewhat effective in reducing the ratio
of laid-off workers to the total number of workers, although the effect
was not strong in a statistical sense with 1998 and 1999 data (Lee et
al. 2001). Meanwhile, the other study using 1998-99 data from Kwangju
mentioned that the union was not an effective device to protect workers
in the downsizing process (Kang and Hong 2001, 241). Methods used to respond
to employment adjustment in Korea include job security clauses in labor
contracts and union consultation rights with management at the labor-management
council (Yoon 1996, 42).
Unions, however, may be effective at protecting workers at firm-level
negotiation on layoffs although unions accept the layoffs at the national
level. Unions may protect workers in the process of employment adjustment.
For example, the union may be an effective tool in revealing that the
company's financial situation makes layoffs avoidable. Firms should persuade
the unions about the necessity of layoffs before they execute them. The
union may ask the firm to run a program of voluntary retirement first.
Outplacement programs and lucrative severance incentives can be another
option the union could offer. Under these circumstances the union has
at least tried to do something for those about to lose their jobs, which
is more than what would have been achieved without the union.
Now, the questions to be answered in the following empirical analysis
section are: whether the union protected the workers from being retired
by PVR and layoffs, and whether the union alleviated the effect of being
laid-off with employee support programs, including severance pay, outplacement
programs, and so on.
Data Description and Empirical Analysis Results The data used for the empirical analysis was collected in
March 1998 by the Korea Labor Institute. Three hundred companies were
surveyed. The basic statistics for the sample are presented in Table 2.
Among the firms in the sample, 8 percent used PVR between December 1997
and March 1998. Firms with unions used PVR more frequently than those
without unions: 1.9 percent of firms without unions used PVR compared
to 14.5 percent of firms with unions. For the same time period, unions
did not make a significant difference in the practice of layoffs. Seventeen
percent of workers were laid-off; 16.7 percent of firms without unions
and 17.9 percent of firms with unions used this tactic.
The Unions' Influence on Selecting Employment Adjustment
Methods To respond to the financial crisis, companies adopted many
employment adjustment methods, from working-hour reduction and wage freezes
to PVR and layoffs. Table 3 shows the distribution of methods used to
respond to the crisis. Paid holidays, wage freezes, wage cuts, and transfers
were among the most common methods used to adjust employment levels. To
see the effect of the unions in selecting employment adjustment methods,
a t-test was used. Paid holidays, full-time training, transfers, and voluntary
retirement were used more frequently in unionized firms than in nonunionized
firms.
The first question to determine the union's role is whether it has an
influence in employment-related issues. Here, we focus on only two methods,
voluntary retirement and layoffs, both of which severely affect workers'
lives.3 Probit analysis is used because the dependent variable is a binary
choice variable. To control for the firm's characteristics, the firm's
financial condition, and industry, firm size variables are included. Table
4 shows a union's effect on the use of PVR by the firm. To control for
the effect of restructuring, three models were set up. In Model 1, all
three restructuring variables were included in the model. Model 2 dropped
all the restructuring variables. In Model 3, only one variable, subcontracting,
was included. Contrary to the hypothesis that the union would reduce the
probability that the firm would choose the PVR as a way of adjusting employment
level, the union positively affected the probability that the firm would
choose the PVR.
Table 5 shows a union's effect on layoffs. The dependent variable is whether
or not a firm laid off its workers. In Model 1, both the subcontracting
and reduction in production line variables were included. In Models 2
and 3, each variable was included but not both. The results show that
presence of a union was not a factor in the layoff decision although the
union dummy has a negative sign.
It is possible that the companies did not differentiate between PVR and
layoff in their restructuring process to survive after the crisis. If
this is the case, PVR and layoff can be regarded as one event, employment
reduction. As mentioned earlier, twenty-four companies practiced PVR and
fifty-two companies laid off workers. Ten companies practiced both PVR
and layoffs. Unfortunately, the union dummy was not a significant variable
in a regression equation where employment reduction is a dependent variable.4
The regression results above imply that the union might prefer PVR to
layoffs in negotiation of restructuring with the management although the
union could not avoid the employment adjustment.
The Unions' Influence on the Downsizing Process The above discussion on the union's role in the employment
adjustment process implies that the union was not effective in protecting
workers' rights after the November 1997 crisis. Instead, unions influenced
firms' choice of PVR as an adjustment method. But is that the whole story?
Table 6 shows that the union had a voice on the issue of employment adjustment.
For PVR, the union had a right to agree on or at least to consult on the
program before the downsizing program was initiated, although the sample
size is not large enough to draw a statistically valid conclusion. For
layoffs, it is clear that the union had a strong influence: only one firm
without a union was required to agree with the workers before the action
was taken, while seven firms with unions were required to agree on the
layoff before taking any action.
A similar effect of the unions on severance incentive pay (except
legally required retirement pay) in PVR can be considered. The average
severance incentive pay was 11.5 months worth of wages.5 Firms without
unions paid only twenty months of salary as a maximum severance payment,
while firms with unions paid up to forty-eight months of salary. These
statistics, however, have a limitation in interpretation because of the
small number of cases for the No Union category.
Implications There are some implications from the empirical results above.
First, we may tentatively conclude that Korean unions were not effective
in avoiding layoffs right after the crisis despite many union protests
at both national and regional levels. This conclusion should be further
analyzed for confirmation with data from a longer period after the crisis.
Second, unions had voices in the downsizing process. Unionized firms preferred
PVR to layoffs. It was a necessary process for firms with unions to bargain
with the unions for agreement on employment adjustment while it was not
necessary for firms without unions. The unions' negotiation with firms
resulted in possibly better severance pay packages under the PVR. A maximum
of four years worth of wages were offered to retirees in unionized firms
while a maximum of two years were offered in nonunionized firms.
Third, we may expect different results with more recent data, because
unions have now had enough time to respond to firms' demands for downsizing.
For example, an explicit clause on layoff policy can be added to collective
agreements. After experiencing the layoffs of their workers, unions may
be able to show that companies were wrong to argue that downsizing was
an effective tool to save companies or increase productivity.
Acknowledgements The authors are grateful to the Korea Labor Institute for
use of the data set in this paper. Comments by Byoung-Hoon Lee, Wonduck
Lee, and Funku Park at the Winter Meeting of KIRRA 2002 and by anonymous
referees for the 56th IRRA Refereed Papers Competition were valuable in
revising this paper.
Notes
1. The term "pseudo" is added to
"voluntary retirement" because there was often a nonvoluntary aspect to
voluntary retirement programs in Korea right after the 1997 crisis. In practice,
a company commonly asked certain workers to apply for the program and leave
the company although it looked like the program was opened to all workers.
2. See Cameron (1994), Cascio
(1993), Marks (1993), Freeman (1994), Heenan (1989), and Pfeffer (1998)
for the effect of downsizing, including layoffs and voluntary retirement,
on workers, unions, and companies.
3. The regression analysis for
fourteen other employment adjustment methods including reduction in working
hours and wage freezes were done with the same independent variables presented
in Table 4. The effects of unions were not statistically significant except
the positive effect on the transfer to other companies and the recruiting
freeze.
4. The regression results of
the union dummy variable on employment reduction do not show any statistical
significance with different regression equations.
5. This average is for the period
between January 1997 and March 1998. See page 25 of Choi and Lee (1998).
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