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Korea’s income-led growth model “risky”: Nobel laureate Paul Romer

Paul Romer

South Korea’s income-led economy is a risky model that could backfire if companies are discouraged to add new hires, warned Paul Romer, co-winner of the 2018 Nobel Prize for Economics.

“What we see in many countries (with such a policy) is very high levels of unemployment especially among young people who should be acquiring skills,” said Romer, professor of economics at New York University’s Stern School of Business, in an exclusive interview with Maeil Business Newspaper.

President Moon Jae-in has raised the minimum wage under an economic platform to boost growth through higher income. But the double-digit hikes have been met with fierce backlash from the corporate sector, especially small businesses that often cannot pass on the higher costs to customers.

Romer said the wage-driven economy could work if, by raising wages, the government encourages firms to provide better education on the job and the workers are worth as much as the firms have to pay. Other international experts including the Organization for Economic Cooperation and Development have warned about the ill effects from the wage-led growth policy when unaccompanied by improvement in productivity.

The economist said there were better ways to get firms to provide the necessary skills to workers than just raising wages. “I would encourage any country to think what tools they need for firms to make sure they are a good form of schooling,” he added.

Romer stressed the need for policies that encourage more companies to actually help workers acquire new skills, an idea he expressed in a slogan “work is school.”

If you ask companies who you would rather hire, a person with one more year of school or a person with one year of working at Toyota, most would choose the latter, Romer explained. “We often neglect how important it is for people to learn on the job,” he said.

If higher incomes restrict labor turnover, this is a sign that the policy is going wrong, Romer continued.

A labor market with very little turnover, he said, often shows high unemployment with many young people having trouble getting a job. In a market with a high rate of turnover, lots of people leave jobs or get laid off each year but lots of new jobs are created, making it a “better system for incorporating the young into the job market.”

“I would focus on how to make sure there is plenty of turnover in the job market,” he said. “Ensuring high flows in and out of different jobs, this is an important part of freedom for people.”

Romer was the co-recipient of last year’s Nobel economic prize for his work on how new ideas powered by technological innovation drive growth. He is one of the pioneers of the endogenous growth theory, which holds that economic growth is primarily the result of endogenous forces like investment in human capital and knowledge.

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