Dismissal law and human resource management in SMEs: Lessons from Korea

Abstract

The Korean economy was severely affected by the Asian financial crisis of 1997, which culminated in Korea requesting emergency financial assistance from the IMF. To fulfill the conditions set by the IMF, in February 1998, the Korean government passed dismissal law allowing firms to more readily dismiss permanent workers for managerial reasons. The results of our empirical analysis demonstrate that the incidence of unjust dismissal after the adoption of the new dismissal law soared and was much more prominent in small- and medium-sized enterprises (SMEs) than in larger organizations, while it failed to achieve its intended objective of creating greater employment flexibility. The 1998 dismissal law has had an important effect on contemporary human resources practices. Since 2000, employers have frequently bypassed the rigidity of the dismissal law for permanent workers, both by hiring non-standard workers and by outsourcing. Moreover, legal interpretations of the laws have gradually changed to render the dismissal law more flexible in the employers’ favor. Ultimately, Korea’s experience described herein shows that any change in the labor law, if not congruent with the needs of the labor market, may result in it neither achieving its intended objective, nor being sustainable.