KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR Income Support in Response to Labor Market Shocks: Korea‘s Basic Livelihood Security System

This study examines how labor market conditions and labor policy changes affect benefit receipt under Korea’s National Basic Livelihood Security (NBLS) system. Given the substantial coverage gaps in employment insurance, NBLS serves as the last-resort safety net for low-income individuals who are able to work. Assessing its responsiveness to economic shocks and policy changes is essential for evaluating the effectiveness and limitations of the current income support system.

First, the study analyzes the responsiveness of NBLS benefit receipt and expenditures to key labor market indicators, such as the unemployment rate and the employment rate. The results show that, overall, NBLS has not exhibited meaningful counter-cyclical responsiveness to labor market fluctuations. Although a modest increase in benefit responsiveness to the unemployment rate is observed following the 2015 reform, responsiveness remains broadly limited ― even during the COVID-19 period. However, in contrast to the weak correlation with the aggregate employment rate, declines in the employment rate of middle-aged unpaid family workers show a clear association with increases in NBLS receipt. These findings suggest that NBLS has limited responsiveness to labor market fluctuations among the working population, though it appears responsive for specific vulnerable groups such as unpaid family workers.

Second, the study examines the effects of minimum wage increases ― a key labor policy targeting vulnerable workers ― on NBLS benefit receipt. The analysis shows that sharp minimum wage hikes increased both overall NBLS receipt and livelihood benefit receipt, particularly among middle-aged individuals. Monthly analyses that control for other NBLS reform effects also confirm that minimum wage increases raised benefit receipt among the working-age population. Moreover, this increase was driven primarily by new entrants to NBLS rather than by a slowdown in exits.

These findings align with the earlier results showing that NBLS receipt is particularly responsive to labor market shocks among certain vulnerable groups, such as middle-aged unpaid family workers. Previous studies have shown that minimum wage increases reduce employment rates among vulnerable groups in the labor market, including the self-employed and unpaid family workers. Taken together, the analysis suggests that employment shocks experienced by unpaid family workers may constitute a key channel through which NBLS benefit uptake rises ― particularly among the middle-aged population.

This paper emphasizes the importance of establishing and strengthening an income support system that is responsive to labor market dynamics, especially in light of anticipated structural changes and labor policy reforms. Moreover, because labor and welfare policies often target overlapping populations and interact in practice, it is essential to carefully consider these interconnections in the design and implementation of related policies.

Summary

KDI FOCUS Drivers of the Growth of Marginal Part-Time Work and Policy Recommendations

Marginal part-time work has risen rapidly in South Korea’s labor market, driven by a policy structure in which labor costs increase sharply at 15 hours per week. Policy adjustments are needed to moderate the excessive cost differential at a specific working-hour threshold.

- Among wage workers, the share of marginal part-time workers―defined as those working fewer than 60 hours per month―more than doubled, rising from 3.7% in 2012 to 8.5% in 2024.

- Social insurance coverage remains low for marginal part-time workers, with few signs of improvement.

- The rapid expansion of marginal part-time work means that jobs outside the worker protection framework are increasing, calling for policy attention.

- Because many worker protection schemes apply only to workers with contractual hours of 60 or more per month, marginal part-time work falls within a blind spot of the worker protection framework.

- The cost discontinuity at 60 hours per month creates incentives for employers to hire marginal part-time workers.

- Since the 2010s, compliance with worker protection schemes for workers employed at least 60 hours per month has improved.

- Improved compliance with worker protection schemes has stimulated the expansion of marginal part-time work.

- Improved compliance with worker protection schemes is empirically correlated with the expansion of marginal part-time work and explains a substantial share of that increase.

- Improved compliance with worker protection schemes may reflect greater public awareness and understanding of these schemes.

- The labor market structure with a sharp cost discontinuity at 60 hours per month warrants adjustments.

- While revisiting the weekly holiday allowance is necessary to mitigate the cost differential that encourages both marginal part-time work and long working hours, adjustments should be framed as a longer-term objective and pursued
cautiously.

- The following principles should guide the formulation of a policy mix: set eligibility criteria in light of the overall cost structure; proceed gradually and combine policy measures to mitigate adverse effects; avoid placing disproportionate adjustment costs on specific groups; and conduct sufficient social dialogue and institutional review.

Summary

Research Monograph KOR Drivers of Part-time Work Growth and Policy Recommendations

This study examines the causes of part-time work growth in South Korea over the past decade and offers policy insights. Chapter 2 analyzes 2012-2022 data from the Additional Survey by Type of Employment of Economically Active Population Survey and the Survey of Labor Conditions by Employment Type, identifying when and which types of part-time workers increased. The growth, notable during 2016-2019, was primarily driven by older workers, part-time workers with extremely short hours (under 15 hours weekly), and service sector employees. It proposes three hypotheses: (1) workforce composition shifts, including aging and service sector expansion; (2) the adoption of a nonlinear labor cost schedule with a significant discontinuity at 15 hours per week; and (3) the minimum wage increases in 2018-2019.

Chapter 3 employs DiNardo et al.’s (1996) decomposition methodology to assess the contribution of workforce composition changes to part-time work growth. Findings reveal limited explanatory power, as within-group part-time trends dominate and declining youth employment offsets rising elderly employment, suggesting institutional and policy factors as primary drivers.

Chapter 4 analyzes the growth of extremely short-hour work driven by institutional factors affecting labor demand, focusing on a nonlinear labor cost schedule with a significant discontinuity at 15 hours per week (or 60 hours per month). Enhanced compliance with this institutional structure in the 2010s, measured by industry-level variations in social insurance enrollment rates for workers with 60-99 monthly hours, strongly correlates with the growth of part-time workers with very short hours, particularly among new hires.

Chapter 5 conducts an event-study analysis with a continuous treatment variable of the effects of the 2018-2019 minimum wage increases on working hours distribution, finding substantial wage increases for low-wage workers but no clear causal link to the growth of part-time workers with very short hours, which follows the pre-2017 trend. Evidence suggests that this growth likely stems from sustained improvement in compliance with the nonlinear labor cost schedule analyzed in Chapter 4 rather than minimum wage increases.

Chapter 6 concludes with a summary of empirical findings and offers policy recommendations to reduce discontinuities in the nonlinear labor cost schedule at 15 hours per week. Focusing on the Weekly Holiday Allowance, it outlines institutional reform directions and addresses implementation challenges.

Summary

Policy Study KOR The Impact of Demographic Changes on Productivity

Demographic transitions in South Korea are projected to slow its potential economic growth through declining labor input and lowering total factor productivity (TFP). However, the TFP channel has been relatively underexplored compared to the labor input channel due to data limitations. To address this gap, this study constructs a comprehensive firm-level dataset by combining KISDATA from the NICE Information Service with income tax records from the National Tax Service. The resulting dataset includes information on both firm-level productivity and the age composition of employees, enabling a quantitative analysis of how workforce aging affects TFP.

The analysis reveals five key findings. (1) An inverse U-shaped relationship exists between employee age composition and TFP, peaking at ages 35-49. (2) Among employees aged 50 and older, TFP significantly decreases as their share rises. Relative to the 35-39 reference group, an increasing share of 40-49 year-olds has no statistically significant effect. However, a 1%p increase in the 50-54 share decreases TFP by 0.2%, and a 1%p rise in those aged 55 and above shows a larger 0.5% decline. (3) The negative impact of workforce aging is more pronounced in firms in the Seoul metropolitan area, firms with 50-299 employees, manufacturing and construction sectors, and firms operating over 30 years. (4) Firms with low average education and wage levels, high labor intensity, or low value-added per employee exhibit greater TFP declines due to workforce aging. (5) While strong seniority-based wage systems are associated with an earlier peak in the inverse U-curve, firms with weak seniority wages experience larger TFP declines due to aging.

The findings suggest that overlooking the TFP channel may lead to underestimating the demographic effects on economic growth. Mid-to-long-term population projections indicate that population aging will reduce TFP by an annual average of 0.2% between 2031 and 2041. The persistent downward pressure on productivity should be incorporated into assumptions about the future TFP trajectory.

This study identifies firms most vulnerable to population aging through heterogeneity analyses, offering targeted policy recommendations for South Korea's labor supply strategies. As industries become more labor-intensive, low-skill, and low-wage, their productivity declines are expected to be even steeper from workforce aging. Expanding younger foreign worker inflows in the short term can bolster labor supply, while long-term strategies should enhance productivity in these industries to attract domestic youth. Additionally, as seniority-based wage systems exacerbate the productivity impact of aging, reducing reliance on seniority and expanding task- and performance-based compensation systems is advisable for improving TFP.

Summary

KDI FOCUS The Impact of Demographic Change on Household Debt

Over the past two decades, Korea’s household debt-to-GDP ratio has trended upward, reflecting greater incentives for asset accumulation amid rising life expectancy. Household debt has increased through different asset accumulation patterns across generations: older cohorts prepare for longer post-retirement years by building financial assets that supply funds, whereas younger cohorts borrow them mainly to acquire housing. However, this trajectory is forecast to reverse in the coming years as longevity gains slow and accelerating population aging reshape intergenerational financial flows. Maintaining stability in the short to medium term will require close coordination between prudent financial policies and non-financial reforms, such as improving labor market flexibility.

- Korea’s household debtto-GDP ratio has risen steadily over the past two decades, pointing to structural rather than cyclical drivers.

- Declining interest rates amid sustained debt growth suggest that fund supply has outpaced demand.

- This study examines whether rising life expectancy can explain the sustained co-occurrence of increasing household debt and declining interest rates.

- The sustained rise in household debt over the last decade, despite income and wealth inequality remaining broadly unchanged, suggests structural drivers
beyond inequality.

- Household debt ratios tend to rise with longer remaining life expectancy and decline with higher old-age dependency ratios, suggesting demographic shifts as a major driver in shaping debt dynamics.

- Life expectancy has risen rapidly, but with the retirement age unchanged, the postretirement phase has lengthened, strengthening incentives for asset accumulation.

- Middle-aged and older cohorts primarily invest in financial assets and supply funds, while younger cohorts build housing assets by borrowing from them,
accumulating debt.

- In the past decade, per capita debt has increased among younger cohorts and decreased for older cohorts.

- Changes in age profile have influenced household debt dynamics.

- A declining share of younger cohorts borrowing for housing, combined with a rising share of older cohorts drawing down assets for consumption, may lower the household debt-to-GDP ratio.

- A one-year increase in life expectancy raises the household debtto-GDP ratio by about 4.6%p, while a 1%p shift in population share from the younger (2544) to the elderly (65+) cohorts reduces it by roughly 1.8%p.

- The empirical analysis indicates that rising life expectancy explains most of the increase in Korea’s household debt-to-GDP ratio over the past two
decades.

- The household debt ratio is projected to peak in a few years before entering a downward trend.

- Stronger incentives for asset accumulation from rising life expectancy, together with portfolio differences across age groups, have been the primary drivers of household debt growth.

- With slowing gains in life expectancy amid accelerating population aging, the household debt ratio is likely to enter a downward trend.

- Flexible, performance-based wages can strengthen labor market efficiency and ease household debt pressures.

- Household debt policy should prioritize repayment capacity and soundness of financial institutions over arbitrary aggregate targets.

- Scaling back DSR exemptions will be critical.

- Excessive policy financing may lead to household debt growth, underscoring the need to recalibrate guarantee ratios and fees and examine the overall policy financing system.

Summary

Research Monograph KOR Study on the Efficient Utilization of Human Resources in the Era of Population Decline

As South Korea experiences a demographic decline, the labor market must swiftly adapt to mitigate its economic impact. Expanding the participation of underutilized groups―such as older workers, people with disabilities, women, and immigrants―can help address its shrinking labor force. However, their underutilization stems from a complex interplay of multiple factors, and poorly designed policies for their economic engagement may lead to unintended consequences. A thorough, nuanced understanding of each group's unique challenges and circumstances is essential for setting realistic priorities for effective policy intervention.

For older workers, effective labor market integration demands both targeted support and phased, comprehensive labor market reforms. In an aging society, maintaining workforce participation or facilitating reintegration is increasingly important, even if individuals experience disabilities over their lifetime. Additionally, addressing the underutilization of women requires not only tackling work-family balance challenges during childbearing and childcare but also gender segregation across industries and occupations. Meanwhile, the growing presence of foreign-born workers, particularly long-term residents, should be carefully paced to minimize potential sociocultural disruptions.

Short-term policies (within five years) should prioritize productivity growth and attracting foreign talent. Mid-term initiatives (five to ten years) should focus on structural labor market reforms. Long-term investments (over ten years) should strengthen education and skills development while fostering gender inclusivity and social integration.

Summary

Policy Study KOR Commuting and Fertility: Analysis and Policy Implications

While most studies on low fertility have focused on various constraints increasingly putting more pressure on individual households, including childrearing costs, this study highlights urbanization as a major driver of rising childrearing expenses. The concentration of population in large cities can trigger broader structural changes beyond merely increasing childrearing expenses at the household level. Specifically, large-scale urbanization, by increasing housing costs and commuting duration, can affect housing and marriage markets, thereby influencing young people’s decisions on housing, marriage, and childbirth. This study explores these mechanisms to shed light on the causes of South Korea’s extremely low fertility and inform policy responses.

A panel data analysis on total fertility rates (TFR) and urban population shares across countries confirms a negative correlation between urbanization and fertility, regardless of development level or institutional structure like federalism. This relationship is also not associated with extramarital births, as no pronounced effects are observed in East Asian Confucian societies. These findings support the view that large-scale urbanization is one of the root causes of low fertility. For decades, nearly all countries have expanded existing cities into metropolises and megacities, concentrating jobs vertically and spreading residential areas horizontally. The resulting congestion has increased commuting distances and times, likely contributing to declines in marriage and fertility rates.

Korea’s urban structure undermines intergenerational and intragenerational equity through fluctuations in housing asset values. Human capital across and within generations is prone to inefficient allocation, while long commutes constrain productivity potential. Thus, urban restructuring is necessary to create an environment where workers can operate at peak efficiency, leading to higher national income. Without such reform, overcoming low fertility remains elusive, as reproductive-age populations may forgo marriage or childbirth under current urban conditions.

Advanced economies have promoted family-friendly policies such as maternity and parental leave, childcare support, and early childhood education to boost fertility. However, when urbanization and per capita income―factors not accounted for in the original analysis―are controlled for using data from Olivetti and Petrongolo (2017), the effects of these policies either disappear or run counter to expectations. While these policies may be effective in government agencies, public enterprises, and large corporations, they are less so in small and medium-sized enterprises (SMEs), which account for most employment. Because SMEs tend to hire easily replaceable labor, employees requesting parental leave may face dismissal, and employers may avoid hiring unmarried women or childless married women. These dynamics are not easy to address through policy redesign alone. Moreover, as family-friendly policies target married couples, they favor wealthier ones whose marriage prospects are more strongly tied to inherited assets like housing, which raises concerns about inequity.

As effective family-friendly policies depend on a supportive environment for families to form, addressing the barriers created by large-scale urbanization should be a top policy priority. Foremost, the factors driving people into large cities must be dispersed to other regions, notably higher education and employment for reproductive-age populations. Accordingly, universities and businesses should be relocated away from large cities. Additionally, urban development and structural innovations should decentralize job clusters currently vertically concentrated in city centers to facilitate household formation through marriage and childbirth.

Theoretically, urban expansion, marriage, and fertility are interconnected as follows. As population inflows driven by employment and higher education accumulate and the children of existing urban residents enter the workforce, city centers become overcrowded and housing prices rise, prompting the development of suburban new towns. When female labor force participation is low, unmarried women generally lack the economic independence to choose singlehood, so marriage rates have little impact on urban expansion. However, following suburban development, as women’s labor force participation and incomes increase, more high-income unmarried women prefer singlehood due to commuting burdens and concerns over career interruptions associated with marriage, which lead to lower marriage rates and, in turn, lower fertility. These trends were observed in the Seoul Metropolitan Area (SMA) during the development of Seoul’s Gangnam area and the first and second phases of new town development.

To verify the relationship between urban expansion and declining marriage and fertility rates, this study empirically analyzes commuting volume data by travel time across the SMA, encompassing Seoul, Gyeonggi, and Incheon, from 2017 to 2022. The results show that higher volumes of short-distance commuting (one-way commutes of 60 minutes or less) are linked to higher fertility rates. In contrast, higher volumes of long-distance commuting (over 60 minutes) are linked to lower fertility rates. Marriage rates exhibit the opposite pattern: higher volumes of short-distance commuting are linked to lower marriage rates while higher volumes of long-distance commuting to higher marriage rates. Although it was hypothesized that the share of one-person households would increase with higher short-distance commuting volumes and decrease with higher long-distance commuting volumes, regression results showed a different pattern.

Findings suggest that many young adults, especially unmarried women, move closer to their workplaces but delay or forgo marriage due to high housing costs. When they choose to marry, they are compelled to relocate to areas with longer commutes to reduce housing expenses. Taken together, even as the short-distance commuting population increases in the SMA, only a few individuals who can afford high housing costs can marry and have children. Most others postpone marriage or move to more distant areas, where time constraints reduce the likelihood of childbirth.

Analysis of the impact of commuting duration on fertility rates in Seoul shows that economic activity, as proxied by changes in commuting volumes, has little effect on fertility, suggesting that the entire city functions as a business district. In contrast, in Gyeonggi and Incheon, fertility rates rise when the long-distance commuting population decreases or the short-distance commuting population increases. As for marriage rates, an increase in short-distance commuting volume within Seoul’s districts correlates with lower marriage rates and a rise in the share of one-person households. This suggests that high-income, professional unmarried women who choose to live in Seoul to be near their workplaces may delay or forgo marriage due to concerns about long commutes or career interruptions associated with marriage. Overall, in Seoul, more short-distance commuters correspond with a higher share of one-person households and lower marriage rates, without a meaningful correlation with fertility rates. In contrast, in Gyeonggi and Incheon, more short-distance commuters are linked to higher fertility rates, while an increase in long-distance commuting corresponds to a higher share of one-person households and lower fertility rates.

Based on these findings and the broader Korean context, this study proposes relocating universities and businesses outside the SMA, rather than expanding remote work, housing supply, or immigration. Relocating universities could lead to new university hospitals in non-capital regions, helping to reduce regional disparities in healthcare access. Also, the prospect of obtaining permission to establish medical schools can incentivize universities to relocate and help address the shortage of healthcare professionals. Furthermore, relocated universities would face direct competition with local universities, necessitating a stronger focus on industry-academic collaboration to enhance student employment and secure research funding. Government funding traditionally allocated to universities for various purposes could be redirected toward national scholarships and research and development grants.

Lastly, to build self-sustaining cities, the relocation of businesses must accompany university relocation. A sufficient number of businesses should move outside the SMA to absorb the local labor supply and foster confidence that individuals educated in non-capital regions can find employment, secure housing, get married, raise children, and lead stable lives, all within the same area. In this regard, businesses should relocate not only production and warehouse facilities but also their headquarters. While inheritance or corporate tax reductions could be considered as incentives for business relocation, industrial policy strategies should also be taken into account to ensure sustained economic growth.

Summary

Policy Study KOR Demographics and Inflation in Korea

This study empirically analyzes Korean data focusing on the impact of the demographic change on the inflation. The analysis indicates that the ongoing aging of the population does not statistically significantly induce inflation in terms of the aggregate price index. However, an analysis of the sub-items of the price index shows that changes in the age composition of the population are associated with sector-specific inflation. Particularly in the service sector, the increase in the population of the young and the elderly appears to have an inflationary effect, while a relative increase in the working-age population seems to be deflationary. In conclusion, this study finds that the relationship between population structure and inflation varies by sector, with a more pronounced correlation in the service sector. This is an analytically significant finding that deserves policy attention. It suggests that policy decisions for price stability should carefully evaluate and distinctively respond to the potential impacts of demographic changes on a sector-by-sector basis.

Summary

Research Monograph KOR The Impact of Artificial Intelligence on the Labor Market and Policy Implications

This report provides an overview of the recent advancements in artificial intelligence (AI) and examines its potential to automate jobs in the Korean labor market. Through an analysis that merges expert assessments of AI capabilities with the skill profiles of occupations in Korea, it is found that, as of 2023, 38.8% of current jobs are at risk of having over 70% of their tasks automated. Predictions for 2030 suggest that nearly 90% of tasks across 90% of existing job types might be subject to automation, if the current task structure should remain as it is.

Nevertheless, the technical feasibility of automation does not directly translate to an imminent risk of automation. As of the end of 2021, only 2.7% of private firms with more than ten employees had adopted AI according to official statistics. When considering the differential AI adoption rates by firm size, it is estimated that about 10% of the workforce is exposed to AI.

In pursuit of a more nuanced understanding of the actual risk posed by automation, this research delves into the impact of increased AI exposure within local labor markets. The findings suggest that while AI's introduction does not meaningfully affect total employment, it tends to lower earnings, with women's average earnings disproportionately affected. More granular analyses indicate that an increase in AI exposure, driven by plausibly exogenous factors, has primarily resulted in diminished employment and earnings opportunities for younger workers at the nascent stages of their careers.

Drawing from these findings, this report proposes policy recommendations to navigate the challenges posed by AI in the labor market effectively.

Summary

Policy Study KOR Work Environment for Work-Family Balance

This study investigates the gender-unequal impacts of marriage and having children on labor market outcomes in South Korea, focusing on the associated penalties (termed marriage penalty and child penalty, respectively) and the work environment characteristics that may contribute to these effects. A difference-in-differences event study method finds that marriage and child penalties are substantial and enduring in employment and earnings. Moreover, international comparison with European countries and the US indicates that in Korea, these penalties mostly arise from the extensive margin (i.e., employment) rather than the intensive margin (i.e., hours worked or wage). This study further examines whether these penalties correlate with occupational working hours and time pressure. The results show that the marriage penalty is less severe for women in occupations with shorter working hours and less time pressure. Thus, considering Korea's long, inflexible working hours and underutilized family policies, these findings underscore the need for a work environment that actively encourages adjustable work schedules and family-friendly policies to advance women’s careers and promote healthy work-family balance.

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