In a country where labor disputes are deepening a recession that began in the first half of 2003, that's a question on everyone's lips. Summer is traditionally strike season, but even by South Korea's fist-pumping, sloganeering standards, union disputes have been extraordinarily frequent and militant this year. Walkouts by metal workers, rail workers, factory workers, teachers, truckers and bankers have cost the world's 12th-largest economy billions of dollars in the past few months. In July, South Korea registered its biggest month-to-month drop in economic output in seven years, a 3.9% dip blamed chiefly on stoppages at auto companies Hyundai Motor and Kia Motors. Production has fallen for three of the past four months—and calls are mounting for South Korean President Roh Moo Hyun to crack down on strikers by jailing members of a constituency that helped get him elected. For Roh, it's a particularly personal and unexpected crisis: as a lawyer, he made his name defending labor activists and spent a few weeks behind bars in 1987 for attending a protest by striking workers at Daewoo Shipbuilding.
Nonetheless, Roh has recently taken a tougher stand, helping to end disruptive walkouts by rail workers and truckers. But labor activists, still sensing kindred spirits in the administration, continue to push hard for more money and job security to protect union members during a period of economic uncertainty. The strikes just keep on coming. A 47-day stoppage at Hyundai Motor, the country's biggest carmaker, cost the company an estimated $1.2 billion in exports. That walkout provoked a strike at sister company Kia Motors, which was settled last week with an 8.8% pay rise. Labor disputes in June forced the government to delay by three years its plan to sell its majority stake in Chohung Bank—and these fiery protests prompted nervous customers to withdraw $4.6 billion in deposits, forcing a bailout by the central bank. Striking truckers paralyzed ports around the country in May as they demanded pay rises. In mid-August they again walked off the job, costing exporters more than $500 million in lost output. "It's time to pull the emergency cord," says Dominic Barton, director of management consultant McKinsey & Co.'s Seoul office. "The government really needs to show some leadership."
The economic damage goes beyond social disruption, lost production and forgone revenue. Many local and foreign investors are becoming convinced that doing business in South Korea is too much hassle. It's now one of the few industrialized countries in which wage increases are outstripping productivity growth—in other words, workers' output isn't keeping up with ballooning pay. Salaries in the manufacturing sector, the wellspring of labor strife, outpaced productivity improvements by nearly 4% last year. The gap is expected to be closer to 10% this year.
Meanwhile, Draconian labor laws make it tough for management to cut spiraling wage bills by sacking workers. So companies have stopped hiring permanent workers, who now make up only half of the labor force. The other half is either part time or on contract, hence easier to let go. Faced with rising wages and unable to adjust to economic slowdowns, some companies are shifting jobs to China, where wages are up to 20 times lower and strikes rare. Foreign investment in South Korea has plunged by more than a third since 1999, partly due to strike fatigue. "Korea is losing its competitive edge," warns Sunny Yi, a management consultant at Bain & Co. "Unions are making things worse."
President Roh won plaudits for staring down a rail strike in July by pressing ahead with rail privatization and sending police to break up a sit-in. He's also promising to make layoffs easier. But his mishandling of strikes earlier in the year, say labor economists, is the main cause of persistent strife. Elected last December by young, change-hungry voters and seen by unions as sympathetic, Roh initially eschewed tradition by refusing to bust strikes with riot police. When protests flared at Doosan Heavy Industries early this year, he sent in government negotiators, who urged the company to pay striking workers—a violation of the country's "no-work, no-pay" rules. Peace was similarly bought from striking truckers with tax cuts and state-subsidized fuel. "Now the unions think that by striking they gain lots and lose nothing," says Nam Sung Il, a labor expert at Sogang University in Seoul. "So their view is, why not just keep striking?"
The crisis is made all the more complicated by the history of South Korea's labor movement. Until the late 1980s, unions were outlawed—seen as inseparable from political activists who agitated for the overthrow of the authoritarian governments that ruled the country until 1987. In the fight for democracy, militancy was a valuable asset. But long after democracy was achieved, unions continued to employ the hardball tactics and rhetoric of old. Replacing striking workers with picket busters is illegal in Korea, which puts timid companies on the back foot. And police are often unwilling to discipline union leaders, leading to such abuses as vandalism of equipment and physical intimidation of staff. At a strike in August at KGI Securities, a foreign brokerage in Seoul, CEO Michael Chang was barricaded in his office by unionists for 12 hours. "They tried to ram the door, then put their noses to ours and yelled insults," says KGI managing director Kim Seong Won.
At the headquarters of the most militant union umbrella group, the Korean Confederation of Trade Unions (KCTU), protest politics are everywhere in evidence. On the front door, there's a map of Korea marked with locations of alleged U.S. Army atrocities committed in the Korean War. Fishing vests the unionists call fighting jackets—with the words "fight and unite" emblazoned in red—hang from seats, waiting for the next call to arms. The KCTU, which was only legalized in 1999, sees its job as fighting for the common man's rights. "Our economy is large," says spokesman Sohn Nark Koo. "Asking us to accept labor laws like those in Bangladesh is just not right."
These days, the global economy forces companies to streamline their workforces to boost productivity and compete with cheap labor from places like China. It's a tall order for businesses in South Korea, yet some are finding ways to adapt even while keeping peace with the unions. As president of the first wholly foreign-owned company in South Korea, Eric Nielsen was expecting big trouble from labor. His company, Volvo Construction Equipment, bought a sick business from Samsung in 1998, when the economy was still reeling from the Asian financial crisis. A union quickly formed, but Nielsen says only one strike has taken place in five years, and that was settled amicably. Nielsen says his secret is erasing the winner-take-all mentality that usually characterizes labor disputes. Workers are sent monthly income reports and balance sheets to make them feel included, and grievances are quickly dealt with at shop-floor discussions in which he often participates. "It gives me the pulse of what's going on," he says. "I answer all their questions, from whether we'll leave Korea to why we don't have more bathrooms."
But trust and communication between labor and management are hardly the norm. And there are growing fears that organized labor's recent victories will make Korean companies less competitive globally. In the long run, generous wage packages might even force the collapse of the weakest, costing everyone their jobs while also hurting the earning power of strong companies. Case in point: Hyundai Motor, where a strike was called off only after a monumental cave-in that gave workers an 8.6% pay rise on top of their $40,000 average annual salaries. Tucked away in the agreement are clauses doubling the value of Thanksgiving and New Year gifts for workers to no less than $254 each, and those with 25 years at the company will receive free holidays in China and Southeast Asia. Workers also got one-off "harmony bonuses" to compensate for wages lost during the strike.
That's nothing compared with Clause 32, which enshrines labor's right to a big say in management decisions affecting local jobs. From now on, layoffs and factory closures at Hyundai need union agreement. If a global recession makes closures necessary, foreign factories are to be shut first. Hyundai denies the deal gives unions too much sway. Others disagree. "It's a big negative," says Kim Hyo Sung of the Korean Chamber of Commerce and Industry. Adds Sogang University's Nam Sung Il: "All the unions want is power."
Instead of dealing with strikes piecemeal, the Roh administration wants to rewrite some of the rules regulating unions. But a Blue House proposal for a labor-law overhaul due to be unveiled in October could end up making things worse. Key presidential aides are leaning toward a version of the so-called "Dutch model," which favors including workers in managerial decisions, as at Hyundai. "I personally prefer the Dutch model, where everybody takes a share of the burden," says Lee Joung Woo, the top policymaker at the Blue House. But officials at some European companies operating in South Korea point with alarm to surging labor costs in Holland that have hobbled economic growth. One alternative is to adopt the more efficient, management-friendly U.S. system, whereby layoffs can be made fairly easily in response to changing economic conditions. Lee says the government will cherry-pick the best elements of each system, but he remarks, "The U.S. model seems a bit cold."
Try telling that to Nestlé's Sam Lee. One day in late August, he locked his union out of the building, marking a new escalation in the dispute. At the beginning of the strike, he tried to bridge the gap with the union by wearing a fighting jacket of his own. But his carried a different message: "Theirs say 'fight and unite.' Mine says 'unite with management and fight the competition.'" Until organized labor realizes that the real enemy is the Chinese factory worker toiling patiently for $2 an hour, that message will fall on deaf ears.