KDI - Korea Development Institute - RESEARCH - Research Areas

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.

Summary

Policy Study KOR A Study of Efficient Utilization of Aging Workers

South Korea is expected to face a deceleration in its economic growth, mainly due to a significant reduction in its labor force, resulting from an exceptionally low fertility rate and a rapidly aging population. In response, some have proposed bolstering the country’s labor market by encouraging the participation of older individuals to mitigate the labor shortage. The effectiveness of this strategy depends on the extent to which the labor provided by older workers can substitute for the diminishing younger workforce. Despite numerous studies on this subject, there is still no clear consensus on the degree of substitutability between the two age groups. Furthermore, the mechanism determining whether different age groups are substitutes or complements in the labor market has not been extensively explored.

This study investigates the contributions of older workers to production and their substitutability with younger workers by analyzing the tasks performed in their jobs. These tasks provide rich information on the nature of work across various occupations, classified into five categories in this study: analytical, social, service, routine, and manual. This study assesses the intensity with which these tasks in each occupation and calculates a task-age profile to observe how task composition shifts as workers age. The findings reveal that older workers are more likely to engage in occupations with a lower intensity of analytical and social tasks but a higher intensity of routine and manual tasks. Interestingly, the shift in task composition with age is less pronounced among female workers, particularly in social and service tasks.

The study also examines age-related task heterogeneity that emerges when workers switch jobs following a period of unemployment. An event study demonstrates that the impact of unemployment significantly varies with age. Workers who became unemployed before the age of 50 did not show marked changes in the intensity of analytical and social tasks in their subsequent jobs. In fact, early-career unemployment actually increased the intensity of these tasks. Conversely, individuals employed after 50 tended to move jobs with a substantially lower intensity of analytical and social tasks compared to their previous jobs. Such trends suggest that later-career unemployment increases the likelihood of obtaining a job with a significantly different task composition, often lower on the occupational ladder. The event study also reveals a gender disparity: post-50 unemployment did not reduce the intensity of social tasks among female workers.

This study reveals significant task segregation in the South Korean labor market, showing the substitutability between older and younger workers heavily depends on the task composition of various occupations. The key findings suggest that it may be challenging for older workers to replace younger ones in occupations requiring intensive analytical and social tasks. Additionally, the analysis indicates that age-related task segregation often results from significant shifts in task requirements when older workers transition to new jobs. Therefore, mitigating task segregation and enhancing the substitutability between different age groups necessitates strategies to prevent premature retirement and expand employment opportunities for older job seekers.

Summary

Research Monograph KOR Green Transition Strategy and Implementation

It is imperative for the Republic of Korea to prioritize the development of elaborate green transition strategies and implementation plans. In light of this urgency, this study offers ten chapters addressing select issues on green transition, which provide policy recommendations drawn from identification of problems, assessment of current policies, and empirical analysis.

Chapter 2 (Dr. Yong Hyeon Yang) assesses the national greenhouse gas emission reduction plan the Korean government announced in Oct. 2021. It finds the sectoral strategies to be insufficient for the stated targets and suggests that an energy transition ambition has to be increased as either targets have to be decreased in other sectors or there could be a need for more extensive electrification. Chapter 3 (Prof. Wonhyuk Lim) offers insights on energy transition strategies and their implication for the electricity industry. Periodical simulations should be conducted for multiple scenarios, and the overall cost of transition, including the expenses for networks and standby facilities as well as the levelized cost of energy, should be minimized. Accordingly, transition and phase-out of fossil fuel plants should be systematically planned in stages.

Chapter 4 (Dr. Yeochang Yoon) points out the limitations of the Korean emission trading system (ETS) and presents potential solutions. The current restrictions on banking need to be relaxed to keep the ETS allowance prices from dropping, but such adjustments should be introduced gradually to prevent a sudden decline in supply. Chapter 5 (Prof. Hyungna Oh) raises a possibility of insufficient investment in decarbonization technologies due to first-mover disadvantages. It advocates introduction of carbon contracts for difference to incentivize R&D in green technologies, especially when carbon prices are low or uncertain. Chapter 6 (Dr. Karam Jo) presents the empirical result that patents in some digital transformation technologies can increase patents in climate technologies by an average of 17.3% and underscores the need to promote such digital transformation technologies.

Chapter 7 (Dr. Junghyun Kwon and Dr. Joseph Han) reveals that elevated outdoor temperatures decrease working hours in an inequitable manner and deteriorate workers’ health. These observations imply that climate change could magnify income inequality. As such, protective measures for outdoor workers against high temperatures and support for their job transitions are crucial. Chapter 8 (Dr. Hyunseok Kim) proposes selective subsidies for regions heavily impacted by climate change and green transition, and highlights the necessity of assessing those impacts objectively. Most importantly, local governments should formulate transition plans in line with central government guidelines.

Chapter 9 (Prof. WooRam Park) indicates that a large portion of greenhouse gas comes from establishments with more than 300 workers, and in such industries as petrochemical and steel. It also shows higher carbon productivity in industries with lower greenhouse gas emissions and establishments using less energy. Chapter 10 (Dr. Joseph Han) reveals the empirical result that firms who entered in the first stage of ETS had significantly lower greenhouse gas emissions, energy usage, annual turnover, and employment than those who did in the second stage. The performance of these firms was influenced by the design of the ETS, for example, on what basis the allowances were assigned free of charge or for a fee. Hence, policy design for green transition should pay particular attention to its effects on businesses and employment. Lastly, Chapter 11 (Dr. Sora Chon) observes that the global green transition might trigger both green and energy inflation. Analyzing the effect of inflation factors on the Korean economy finds that such impacts vary based on whether inflation arises from a demand or a supply shock. Consequently, the Korean government's responses should differentiate between inflation factors that are demand-side and supply-side.

Summary

Policy Study KOR Changes in the employment structure and income gap before and after COVID-19 : Analysis using Quarterly Data of KLIPS

COVID-19 first appeared in Korea in January 2020, reshaping our daily lives over nearly three years. The pandemic exerted a substantial influence on the labor market, resulting in a decline of 200,000 to 400,000 jobs in March 2020 compared to the same month the previous year. By January 2021, when the pandemic peaked in Korea, job losses approximated 1 million. Nevertheless, from March 2021 onward, employment trajectories showed a rapid ascent, and by September 2022, indicators seemed to have returned to pre-COVID levels.

Against this backdrop, this report poses three research inquiries. First, has the employment structure of our labor market undergone any transformation before and after the COVID-19 disruption? Second, while the quantitative recovery of employment is observed, has its quality, i.e., wage (income), been adequately restored to its preceding state? The purpose of these two questions is to determine if the employment shock caused by the pandemic disproportionately affected certain worker cohorts. The third query endeavors to identify factors external to the pandemic that might have exerted influence on the labor market, specifically exploring potential reasons for the observed deviation in recent employment patterns from historical trends.

This study sourced datasets spanning the 18th (2015) to the 24th (2021) series of the Korean Labor & Income Panel Study (KLIPS). The annual data was restructured into a quarterly format, thereby facilitating an analysis of employment dynamics across pre- and post-COVID intervals. Quarterly employment figures were derived from individual employment records curated by KLIPS to examine labor state transitions and associated income fluctuations within the quarterly timeframe. This quarterly analytical paradigm offered an advantage in capturing more short-term job transitions than annual data might have.

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