Critical review of welfare dependency in active labor market programs in Korea: existence, causes, and interpretations

Abstract

This paper comprehensively analyzes the existence and causes of welfare dependency in active labor market programs (ALMPs) administered by the Korean Government. For this analysis, we utilize the Ministry of Employment Labor’s database, using data collected from 306,410 ALMP participants from 2006 to the first quarter of 2012. According to our analysis, 4.4–12.9% of ALMP participants are likely to be in the ‘welfare trap.’ The probability of falling into the welfare trap is affected by individual characteristics. For instance: the elderly, women, and highly educated people are shown to be particularly vulnerable. Moreover, when ALMPs’ benefits are larger than the official minimum wage, individuals tend to stay in the job programs longer. At the same time, if a participant lives in a district with more people in the welfare trap, he or she is less likely to exit from ALMPs. Despite the fairly significant proportion of participants shown to have fallen into the welfare trap, most of the cases are not due to moral hazard or generously designed financial incentives; rather, our research suggests that people with a lower level of job capacity for the private labor market cannot but stay longer in ALMPs.