KDI - Korea Development Institute - RESEARCH - Research Areas

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 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

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 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.

Summary

Policy Study KOR A Study on Job Displacement of Middle-Aged Male Workers During Economic Crisis in Korea

This study explores long-term consequences of unexpected job displacement among middle-aged male workers during the 1997 Asian Financial Crisis in Korea. Utilizing datasets from the Korean Labor and Income Panel Study (KLIPS) and Korean Longitudinal Study of Aging (KLoSA), the research examines this cohort's work trajectories, socioeconomic status, and health implications. The study further investigates the intergenerational impacts of job displacement, with a spotlight on education expenditure, education attainment, and labor market outcomes of the children of the affected workers.

The findings reveal that these workers could not regain their pre-crisis employment levels, and their job quality declined due to repeated cycles of unemployment and reemployment. This trend shortened their active years in the workforce, leading to decreased pension contributions and reduced income levels in their later years. Moreover, job displacement adversely influenced their mental well-being, with a marked increase in depression rates within this group. Lastly, children of displaced fathers are observed to spend less on education. They display lower enrollment rates in higher educational institutions and often lean towards majors with more direct employment prospects. Economically, these children's annual earnings are roughly 9.4% beneath those of their peers whose fathers remained insulated from job displacement during the crisis.

Summary

KDI FOCUS Women’s Career Interruptions and the Declining Fertility Rate in South Korea

In South Korea, more women are postponing or forgoing childbirth due to concerns about career interruption. Their conscious decision to refrain from motherhood is estimated to be responsible for about 40% of the decrease in the fertility rate. In the face of the world’s lowest fertility rate, Korea needs to overhaul its policies to better support work-life balance, enabling parents to maintain their careers while raising children.

- Traditional economic theory explains the decline in fertility rates as a result of the increase in women’s opportunity costs.

- Since the 2000s, a positive correlation between women’s labor force participation rates, income, and fertility rates has been commonly observed in high-income countries, which appears to be closely associated with the extent to which women (mothers) can balance work and family life.

- South Korea’s low fertility rate may have stemmed from the disproportionate burden of childcare on women, combined with the persistent difficulty in balancing work and family life, leading women to postpone or forgo childbirth.

- If the presence of children significantly affects women’s probability of career interruption, the number of women who forgo childbirth while maintaining their careers due to these concerns may increase.

- If young women choose to have children, their probability of career interruption increases by about 14%p, leading to a higher likelihood of experiencing a substantial level of economic loss throughout their lifetime.

- Since the mid-2010s, Korea’s total fertility rate has rapidly decreased, as the gap in career interruptions based on parenthood status has widened.

- Recently (2013~19), the gender employment gap has narrowed. Still, this converging trend has been limited to the young without children, ironically increasing the women’s opportunity costs for choosing to give birth. This increased child penalty is estimated to account for about 40% of the overall decline in the fertility rate.

- Policies aimed at preventing career interruptions for women with children are expected to contribute to raising the fertility rate by reducing the number of women who delay or forgo childbirth.

- Policies that mitigate career interruptions for women with children can increase labor supply and prevent the erosion of irrecoverable human capital, thereby not only helping to raise the fertility rate but also promoting macroeconomic growth.

Summary

KDI FOCUS Restoring Labor Market Functions to Address Job Insecurity among Middle-Aged and Older Workers

In the Republic of Korea, middle-aged and older workers experience unusually high job insecurity due to limited labor demand for them. To address this issue, labor market policies and practices must be reformed to make it easier for firms to hire these workers as regular employees. Instead of imposing regulatory mandates, it is crucial to enhance the functioning of labor markets to reduce involuntary early retirements among older workers and prevent career disruptions for middle-aged women. These reforms will also facilitate the gradual extension of the mandatory retirement age, a necessary step in light of Korea’s rapidly aging population.

- Compared to the U.S., where employment protection is minimal, Korea exhibits greater employment instability among older workers and middle-aged women.

- On the surface, the cause of job insecurity among middle-aged and older workers appears to be the increasing share of nonregular employment.

- However, the more fundamental cause lies in the insufficient demand for middle-aged and older workers in regular employment.

- In Korea, wage increase based on seniority is steep, employment protection is strong, and retirement occurs comparatively early.

- Given the current structure of the labor market, additionally increasing the retirement age threshold is not only unjustified but also unlikely to achieve the intended outcomes.

- Today’s labor market framework hampers reentry into the job market, serving as one of the primary causes of prolonged career interruptions for women, thereby contributing to low birth rates.

- Korea’s labor market urgently needs structural reforms that enhance stability through market forces rather than legal mandates to increase the proportion of individuals with ongoing employment until retirement. Implementing such changes could facilitate further extensions of the mandatory retirement age.

- Specifically, key tasks involve lowering the reliance on seniority-based wages for regular employment, reducing uncertainty in the dismissal process, and enhancing protection and the employment safety net for non-regular workers.

Summary

Research Monograph KOR Providing Social Protection for Self-Employed Workers

This study examines whether expanding the pool of beneficiaries for unemployment insurance (UI) to the self-employed is a way to ensure better social protection. First, we document the self-employed’s income variability, job security, and job transition paths after a business closedown, also comparing these factors to wage earners. Second, we use model simulations to analyze the effects of mandatory UI for the self-employed on labor market tightness, fiscal soundness, and self-employment rate.

Our comparison of the self-employed and wage-earning employees, based on the Korean Labor and Income Panel Study (KLIPS) and the Survey of Household Finances and Living Conditions (SHFLC), yields the following findings: (1) the self-employed are constantly exposed to fluctuations in business income, which may lead to business failure; (2) there is no substantial difference between the self-employment duration of the self-employed and the employment duration of full-time employees; and (3) a significant number of self-employed individuals choose to start new businesses after their previous businesses close down.

Such results imply that the government may increase the coverage rate of the self-employed by increasing the unemployment benefit level or decreasing the contribution level without harming fiscal soundness. However, establishing an income verification system for the self-employed should proceed or coincide with expanding insurance coverage for self-employed workers to address pertinent concerns, including adverse selection due to lack of income information and moral hazard due to the difficulty of evaluating involuntary business cessation. Moreover, additional assistance is necessary for the self- employed who re-start businesses after closedown.

This study employs a model-based approach to estimate the impact of UI on entrepreneurs. Building on the standard search and matching framework, it incorporates the decision-making processes of entrepreneurs. A model-based approach offers several advantages, enabling analyses of the direct effects of policy changes on the economy and the indirect effects through entrepreneurs’ adjustment to those changes. Our results suggest that extending UI to self- employed entrepreneurs would lead to increased business closures and reduced hiring, causing a slack labor market and higher unemployment. This, in turn, would put pressure on the UI budget, and social welfare would decrease overall. Longer duration of unemployment and reduced government transfers offset increased welfare for former entrepreneurs from receiving UI benefits. However, the study also finds that social welfare can be improved by the government subsidizing UI contributions for entrepreneurs, especially when targeted financial support is provided to low-income entrepreneurs. In that case, UI for entrepreneurs achieves greater social welfare improvement than other social protection systems, such as unemployment assistance.

Summary

Policy Study KOR The Impact of Increase in Pension Age on Employment, Income and Consumption

Due to population aging and a relatively low contribution rate relative to high pension payments, a pension fund in Korea is financially unstable. To improve financial stability, the Korean government passed a law in 1998 that gradually increased the pension age from age 60 to 65 between 2013 and 2033. The purpose of the reform was to prolong the retirement age and delay the pension payment among the elderly. However, as the statutory retirement age has remained at age 60 since 2016, the gap between the statutory retirement age and pension age has widened. This widening gap has brought the need to explore whether and how people have been supplementing their income and consumption in the time of income crevasse.

This paper uses cohort discontinuity regression to estimate the impact of the increase in the pension age on employment, income, and consumption in Korea by using a discontinuous jump in the pension age from 61 to 62 between the 1956 and 1957 cohorts. It finds that an increase in pension age from 61 to 62 leads to a rise in labor income and does not lead to a drop in disposable income and consumption at age 61, despite the decrease in pension amount. However, a heterogenous effect depends on the family characteristics, such as the rate of medical expense out of total consumption expenditure and the education level of the household head. In particular, the labor income of families with high rates of medical expense out of total consumption did not increase despite the decline in pension amount. Along with the decreased business and property income, they experience a drop in disposable income. Moreover, a family with a household head in high school but without a college degree does not increase the labor income. Along with the decline in business and property income, they experience a drop in disposable income and consumption.

These results suggest that the vulnerable group from the increase in pension age policy might be the family who can-not extends labor participation due to health problems or the care-giver burden of the family member with the health problem. Moreover, the vulnerable group from the increase in pension age in Korea might not be the lowest and highest education group but instead those in the middle.

This paper suggests the following policy implication. First, the government needs to provide an income supplement to those who can not extend their employment in the period of income crevasse due to health problems and provide care-giving service to those who can not participate in work due to the care-giving burden between the statutory and pension age. Secondly, the government might want to implement a partial pension system that allows receiving early pension partially, which gives more flexibility in combining work and pension. Thirdly, to reduce the gap between the statutory age and pension age, the government might want to gradually extend the re-employment system while transforming the seniority-based wage system into one that reflects the productivity and task of the person's job. Fourth, the government might want to enhance the job-training program for the elderly by evaluating the program's effectiveness and grasping the need of both the employer and employee's side.

Summary

KDI Policy Forum How to Save Local Communities Where Young People Are Leaving?

■ As young people are increasingly concentrated in the Seoul Capital Area (SCA), there is growing interest in policies for supporting young people to settle outside of the SCA; however, a better understanding of young people’s location choice is a prerequisite for policy effectiveness.

- The growing presence of young adults in their late 20s and early 30s in the SCA since 2015 requires empirical investigations of the determinants of their location choice.

■ This study empirically analyzes the residential location choice of young people at two distinctive stages---college education and labor market entry---and finds that the policy intervention at the stage of college education is ineffective, while more visible impact is observed for the policy intervention at the stage of labor market entry.

- When high school graduates in the SCA had to out-migrate to a non-SCA region for higher education due to an exogenous demographic shock, most of them eventually returned to the SCA at the later job-search stage. The deterioration of local economic conditions at graduation also resulted in the increased return moves to the SCA.

- Simulations from a two-stage locational choice model that estimated from micro data show that wage subsidies are more cost-effective than educational subsidies for the settlement of young people in the non-SCA areas.

■ Policies for youth require a nationally-coordinated design, considering the impact on location choice, and policies for local higher education should focus on the original goals, not the supplemental goal of mitigating youth outflows.

- Policies for youth need to be better designed in consideration of regional circumstances so as not to encourage youth migration to the SCA. In particular, policy alternatives targeting subsidies and tax benefits for local youth workers are needed.

- The policy for local higher education needs to prioritize improving the quality of education and research functions and strengthening the tie with the local community.

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