23 Things They Don't Tell You About Capitalism

An obvious possibility is that, for whatever reason (e.g., an ageing population), the relative earnings of medical doctors have risen and the youngsters are merely responding to changes in the incentives – the market wants more able doctors, so more and more able people are going into the profession. However, the relative incomes of medical doctors in Korea have been falling, with the continuous increase in their supply. And it is not as if some new government regulation was introduced that makes it difficult to get jobs as engineers or scientists (the obvious alternative choices for would-be medical doctors). So what is really going on?

What is driving this is the dramatic fall in job security over the last decade or so. After the 1997 financial crisis that ended the country’s ‘miracle years’, Korea abandoned its interventionist, paternalistic economic system and embraced market liberalism that emphasizes maximum competition. Job security has been drastically reduced in the name of greater labour market flexibility. Millions of workers have been forced into temporary jobs. Ironically enough, even before the crisis, the country had one of the most flexible labour markets in the rich world, with one of the highest ratios of workers without a permanent contract at around 50 per cent. The recent liberalization has pushed the ratio up even higher – to around 60 per cent. Moreover, even those with permanent contracts now suffer from heightened job insecurity. Before the 1997 crisis, most workers with a permanent contract could expect, de factoif not de jure, lifetime employment (as many of their Japanese counterparts still do). Not any more. Now older workers in their forties and fifties, even if they have a permanent contract, are encouraged to make way for the younger generation at the earliest possible chance. Companies cannot fire them at will, but we all know that there are ways to let people know that they are not wanted and thus to make them ‘voluntarily’ leave.

Given this, Korean youngsters are, understandably, playing safe. If they become a scientist or an engineer, they reckon, there is a high chance that they will be out of their jobs in their forties, even if they join major companies like Samsung or Hyundai. This is a horrendous prospect, since the welfare state in Korea is so weak – the smallest among the rich countries (measured by public social spending as a share of GDP).[1] A weak welfare state was not such a big problem before, because many people had lifetime employment. With lifetime employment gone, it has become lethal. Once you lose your job, your living standard falls dramatically and, more importantly, you don’t have much of a second chance. Thus, bright Korean youngsters figure, and are advised by their parents, that with a licence to practise medicine they can work until they choose to retire. If the worst comes to the worst, they can set up their own clinics, even if they do not make much money (well, for a medical doctor). No wonder every Korean kid with a brain wants to study medicine (or law – another profession with a licence – if they are in the humanities stream).

Don’t get me wrong. I revere medical doctors. I owe my life to them – I have had a couple of life-saving operations and been cured of countless infections thanks to antibiotics they have prescribed for me. But even I know that it is impossible for 80 per cent of the brainiest Korean kids in the science stream all to be cut out to be medical doctors.

So, one of the freest labour markets in the rich world, that is, the Korean labour market, is spectacularly failing to allocate talent in the most efficient manner. The reason? Heightened job insecurity.

The welfare state is the bankruptcy law for workers

Job security is a thorny issue. Free-market economists believe that any labour market regulation that makes firing more difficult makes the economy less efficient and dynamic. To start with, it weakens the incentive for workers to work hard. On top of that, it discourages wealth creation by making employers more reluctant to hire additional people (for fear of not being able to fire them when necessary).

Labour market regulations are bad enough, it is argued, but the welfare state has made things even worse. By providing unemployment benefits, health insurance, free education and even minimum income support, the welfare state has effectively given everyone a guarantee to be hired by the government – as an ‘unemployed worker’, if you like – with a minimum wage. Therefore, workers do not have enough incentive to work hard. To make things worse, these welfare states are financed by taxing the rich, reducing their incentives to work hard, create jobs and generate wealth.

Given this, the reasoning goes, a country with a bigger welfare state is going to be less dynamic – its workers are less compelled to work, while its entrepreneurs are less motivated to create wealth.