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This chapter analyzes how the small proportion of the workforce covered by employment protection—as well as decentralized industrial relations based on large chaebŏl unions—have shaped the political dynamics of Korea's labor market reform over the past two decades. Under the conditions of less institutional practices of employment protection covering a small segment of the workforce, Korea's employers and policy makers promoted comprehensive labor market reform for all workers in times of economic crisis—contrary to their Japanese counterparts. Meanwhile, insiders endeavored to secure their high level of employment protection in the face of labor market reform, but with no political allies to support them. This comprehensive labor market reform resulted in the reinforcement of inequality and dualism between insiders.

This chapter details three key institutional aspects of the labor market and social protection—employment protection, industrial relations and wage bargaining, and social protection programs—in Japan and Korea in comparative context. Well known for the institutional similarities of their national political economies, these two countries developed similar labor market arrangements. However, Japan and Korea presented different trajectories of labor market reform. Japan adopted labor market liberalization for outsiders, while retaining a high level of employment protection for insiders, which led to the strengthening of labor market inequality and dualism between insiders and outsiders. In contrast, Korea promoted labor market liberalization for all workers, targeting regular workers in the large chaebŏl sector, in exchange for the improvement of workers' basic rights to unions as well as protections for non-regular workers.

This chapter examines the political processes and outcomes of Japan's labor market reform over the past two decades. During this time, Japan has adopted more market-oriented principles in the labor market than before, such as the increase of labor market flexibility and the diversification of employment and working conditions. However, it did not conform to the neoliberal model of the labor market, represented by easy hiring and firing practices in response to the fluctuations of the business cycle. The institutional arrangements of employment protection systems and decentralized industrial relations affected the trajectory of Japan's reform by shaping the incentives and strategies of employers, workers, and policy makers; and leading to the formation of a political coalition in support of reform for outsiders, while retaining insider-favored social protections. Such institutional configurations transferred the costs of labor adjustments to an increasing number of outsiders, exacerbating inequality and dualism in the Japanese labor market.

This chapter discusses the origins and development of the labor market and social protections in Japan and Korea during the industrialization period. In the case of Japan, permanent employment practices consolidated a high level of employment protection at the firm and national levels in the postwar period. While shuntō, led by leading export-oriented private firms, played an important role in coordinating wage bargaining over the Japanese economy, its decentralized industrial relations formed a dualistic labor market along the lines of firm size and employment status. Nonetheless, its sustainable economic growth, lasting until the late 1980s, did not aggravate the serious problems of inequality and dualism in the Japanese labor market. Likewise, Korea's large firm-centered industrial policies as well as a small welfare state structured the dualistic labor market and social protection system. Nevertheless, the authoritarian state artificially preempted the rise of inequality and dualism through interventionist policies in the Korean labor market.

This chapter focuses on the institutional arrangements of the labor market to explain the political process and outcome of labor market reform. Under the institutionalized practices of employment protection covering a large proportion of the workforce, insiders, employers, and policy makers are more likely to form a political coalition in order to promote reform for outsiders, while privileging the interests of insiders and minimizing the political and economic costs of reform on these workers. In contrast, if employment protection systems have been less institutionalized with the coverage of the very small segment of the workforce, employers and policy makers are more likely to advance labor market reform for greater flexibility across the board. Decentralized industrial relations based on large enterprise unions are more likely to reinforce labor market inequality and dualism because such institutional configurations incentivize employers and insiders to opt for “segmentalist” approaches to the labor market and social protections.