Japan and South Korea are in stark contrast. Japan’s unemployment rate dropped to 2.4% last January, the lowest rate in 24 years. On the other hand, South Korea’s unemployment rate hit 4.5%, with the number of Koreans out of work reaching 1.25 million in May. The situation is considerably worse for people aged between 15 and 29, with youth unemployment hitting 11.6%, a two-year high.

What is causing such divergence in the two economies?

1. College, university enrollment rates

The proportion of high-school graduates going to college or university in South Korea is approximately 70%, one of the highest rates in the world, according to Statista statistics. On the other hand, the enrollment rate in Japan is only 50%. The share of the population holding a university degree was also 10 percentage points larger for 25-to-34-year-olds in South Korea than in Japan in 2016.

The population of South Korea is approximately 51 million, with a gross domestic product of US$1.4 trillion, while Japan has 130 million people and a GDP of $5 trillion. In other words, although Japan’s population and economy are more than three times the size of Korea’s, the number of college and university graduates entering the job market since 2006 has been cumulatively similar or larger in South Korea.

Since 2006, South Korea’s share of the population holding a degree has surpassed that of Japan, and in 2016 it stood at about 70% compared with 60% in Japan.

College enrollment1
Source: OECD data

The oversupply of college-level workers has resulted in a mismatch between lower-level blue-collar jobs that are in demand and higher-paying white-collar jobs that are not, thereby contributing to a higher employment rate in South Korea.

2. Differences in salary

In 2017, 51 Japanese and 15 Korean companies were on the Fortune 500 Companies List. The list is not a barometer for measuring the caliber of companies – it simply shows how many big companies there are in a country. Japan obviously has more big corporations than South Korea, and thus could afford to hire more college graduates.

Moreover, the number of small and medium-sized enterprises (SMEs) that pay good salaries is much lower in South Korea than in Japan. In addition, the salary gap between big keiretsu (系列) and the SMEs in Japan is much smaller than the gap between the chaebol (財閥) and the SMEs in South Korea. This is partly because big Korean companies pay higher salaries than their counterparts in Japan, and also because Japanese SMEs pay better than Korean SMEs.

The number of well-paying jobs at big companies is larger in Japan than in Korea, and young Koreans, therefore, do not want to work for SMEs because of their low-paying, unstable job prospects at the beginning of their careers

According to the Korea Herald, a comparison based on purchasing power parity showed that US and Japanese employees at SMEs received 30% and 5% more than their Korean counterparts respectively, while big US firms paid workers 14% less than large Korean companies and big Japanese firms paid 28% less.

In other words, the number of well-paying jobs at big companies is larger in Japan than in Korea, and young Koreans, therefore, do not want to work for SMEs because of their low-paying, unstable job prospects at the beginning of their careers. They would rather wait until they can go straight to big companies than start their careers at SMEs, a phenomenon that further exacerbates the already severe youth unemployment rate.

3. Population structure

According to data released by the Federal Reserve Bank of St Louis, the number of active workers in Japan aged between 15 and 64 years has decreased from its peak of 63 million in 1997 to 59 million in 2017. Simply put, Japan has a rapidly aging population and there are not enough young people to support them and provide a full workforce.

On the other hand, although South Korea has a population structure that is similar to Japan’s, in the long run, it peaked in terms of the number of working-age population in 2017 with 37 million, only to show a decreasing trend more recently. In 10 to 20 years from now, South Korea may have a labor shortage similar to Japan’s, but right now the rapidly aging population trend is more pronounced in Japanese society.

This population structure has led to a shortage of labor, spurring Japanese companies to frantically look for young workers, whereas in South Korea the working-age population is still relatively large.

4. Government policies

After returning to power in December 2012, Japanese Prime Minister Shinzo Abe initiated a comprehensive economic policy dubbed Abenomics that was designed to grow the country’s perennially sluggish economy. Abenomics consists of three major policy tools, which Abe calls “arrows”: expansionary fiscal policy, aggressive monetary easing, and structural reforms aimed at lagging sectors like agriculture, as well as business reforms such as improving Japan’s corporate governance.

The revival of the Japanese economy cannot be attributed solely to Abenomics, but it is true that it seems to be overcoming the prolonged economic recession afflicting the country since the 1990s.

On the other hand, the Korean government recently raised the minimum wage by 16.4% and plans to raise it again by around 20% by 2020 to achieve a rate of 10,000 won ($9) per hour. It also raised corporate tax from 22% to 25% for companies with taxable income of more than 300 trillion won.

These policies will help minimum-wage workers and increase tax revenues, but they could negatively affect Korean companies that are already wary of a looming economic recession and make them hesitant about hiring more workers in the future.

In conclusion, the unemployment rate of 4.5% in South Korea may not look really bad at a glance. However, in reality, South Korea faces a much worse unemployment rate because 600,000 Korean men serving in the military and a vast number of students studying to become public servants are, by definition, not included in the workforce, and thus are not counted in the unemployment rate.

In fact, college and university graduates in South Korea moving to Japan to get a job because of the mismatch in the labor markets between the two countries doubled from 2008 to 2016.

The South Korean and Japanese economies are diverging, and the prospect of a reversal does not seem very likely at the moment.

This article is originally from Joon’s Blog.