KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Research Monograph KOR Macroeconomic Impact of AI Diffusion

This report examines how artificial intelligence (AI), particularly modern, data-driven, and increasingly generative systems, is likely to affect Korea’s productivity, growth, employment, and wages over the next decade or two. Three layers of evidence are integrated within a unified task-based framework: (i) micro-level measures of AI exposure and economic viability at the task and occupation levels, (ii) firm-level panel evidence on AI adoption and productivity, and (iii) a macroeconomic general-equilibrium model that aggregates task-level shocks into total factor productivity (TFP) and long-run labor market outcomes. The study defines AI as software systems that replicate human capabilities in learning, prediction, pattern recognition, perception, and natural language processing―a definition consistent with that used in the underlying firm survey and broad enough to encompass both earlier, narrow algorithms and more recent foundation models and AI agents.

Chapter 2 offers an accessible overview of the technological evolution of AI from traditional machine learning to transformer-based large language models and emerging agent-like systems. It emphasizes two features of particular macroeconomic relevance. First, advances in general-purpose and multimodal models have greatly expanded the range of tasks technically exposed to AI. Second, effective deployment requires complementary investments in data, organizational capacity, and human capital, suggesting that technical feasibility alone is a poor predictor of short-run economic impact.

Chapter 3 develops a task-based measure of AI automation potential tailored to the Korean labor market. Using detailed work descriptions from the Korean Employment Classification of Occupations (KECO) and Workpedia, the study decomposes 537 occupations into 6,824 unit tasks and scores each task along five dimensions: measurability of outcomes, data availability and quality, context dependence, required human judgment necessity, and agentability (the ease with which an AI agent can execute a given task). These components are combined into a task-level AI score that captures effective automation potential rather than mere technical exposure. A cost-benefit framework inspired by recent work on computer vision and AI costs is then applied to identify tasks and task·firm combinations for which automation is economically viable, given realistic assumptions about data, development, inference, integration, and maintenance costs relative to labor savings. The findings are conservative by design. Under a naive exposure-only criterion, AI could potentially affect roughly 8-12% of current employment and 10-11% of current sales, concentrated in finance, insurance, R&D, ICT, and certain transport and business services. Narrowing the focus to tasks that are both technically automatable and economically viable reduces these shares to about 1-3% of employment and 1-2% of sales. This suggests that, in the near term, AI will likely induce selective and partial automation in specific occupations and industries, rather than a broad-based, immediate displacement of labor.

Chapter 4 analyzes firm-level evidence using the nationally representative Korean Survey of Business Activities for 2017-2023, which asks firms whether they use AI―defined in the questionnaire as software that replicates human learning, reasoning, perception, and natural language understanding―and other fourth industrial revolution (IR4) technologies. To address the endogenous timing of AI adoption, the analysis employs panel IV (2SLS) models with firm and year fixed effects, instrumenting AI adoption with industry-level economic viability measures from Chapter 3. In the preferred specifications, firms that adopt AI and related IR4 technologies exhibit statistically significant increases in log sales per employee on the order of 5-20%, driven primarily by higher sales rather than systematic employment cuts. Pure “AI only” effects, net of broader digitalization, are estimated with less precision, consistent with AI operating as a general-purpose technology that must be embedded in a broader digital and organizational transformation. As a robustness check, propensity-score matching and difference-in-differences estimates for AI first movers suggest modest but positive short-run effects on labor productivity, with limited evidence of strong dynamic effects within the short observation window.

Chapter 5 incorporates these micro-level estimates into a task-based general-equilibrium model following the approach of Acemoglu and Restrepo to simulate AI-induced TFP paths over the next 10-15 years. Hulten’s theorem implies that, under certain assumptions, aggregate TFP change can be approximated by a Domar-weighted sum of task-level cost savings. The model therefore combines (i) the economically viable task shares by industry, (ii) firm-level productivity effects of AI, and (iii) alternative adoption scenarios―baseline, optimistic, and pessimistic―to trace out possible TFP trajectories. Under baseline assumptions, AI contributes a cumulative TFP gain of about 2.3% over a decade, nontrivial but below some of the more optimistic global projections. These simulations focus on the task automation channel and treat parameters as exogenous. They abstract from structural transformation, intangible capital accumulation, idea-generation effects, and potential discontinuities in AI capabilities. Then the analysis turns to long-run employment and wage effects across occupations. Using a cross-section of Korean 2-digit occupational categories over 2014-2024, the analysis estimates reduced-form relationships between changes in employment and real hourly wages and measures of routine and structured task content, while instrumenting for endogenous employment changes with leave-one-out labor-demand shocks. Occupations with higher routine task shares experience lower employment growth and somewhat lower wage growth over the decade, consistent with international evidence that automation pressure exerts downward pressure on labor demand and wage growth in exposed jobs. Combined with the AI exposure metrics presented earlier, these estimates imply that, under realistic adoption scenarios, the annual displacement and wage-drag effects attributable to AI are likely modest relative to existing demographic and structural trends, but non-negligible for specific groups.

Chapter 6 synthesizes these findings and discusses their implications for policy and business. For policymakers, the central message is that AI is unlikely to trigger an immediate, economy-wide employment collapse, but will require active management of selective automation, task restructuring, and skill upgrading in exposed sectors. The study argues for a market-friendly policy mix: clarifying AI-related regulation and liability, investing in data and compute infrastructure, strengthening education, training, and retraining systems, and fostering complementary innovations and organizational change. For firms, the key insight is that productivity gains derive less from AI in isolation and more from integrating AI into workflows, data pipelines, and human capital strategies.

Summary

Policy Study KOR A Study on the Economic Impact of Foreign Worker Inflows and Determinants of Migration Decisions

Korea’s declining potential growth due to demographic change has elevated immigration policy as a central economic strategy, yet effective design is hindered by limited evidence on labor-market impacts and growing reliance on non-employment residence statuses that still permit work.

Traditional employment-visa-based forecasting no longer captures the true scale or composition of foreign labor.

This study addresses this gap by providing rigorous evidence on how foreign worker inflows affect labor-market outcomes and by identifying key determinants of migrants’ decisions to move to Korea.

Using a causal framework with shift-share instruments for 229 municipalities (2016-2023), the study shows that an increase in employment-visa foreign inflows raises natives’ days worked slightly but substantially reduces foreign workers’ days worked and incomes.

Income effects on natives are, on average, statistically insignificant, while foreign workers’ incomes decline markedly, indicating strong substitution and competition among foreign workers and more pronounced adverse effects for foreigners than for natives.

The effects vary by period and visa type.

In the post-COVID-19 period, inflows under employment visas reduced native incomes, and the adverse income effects become more pronounced when non-employment visa holders (e.g., overseas Koreans, international students, and permanent residents) are included.

These findings underscore that mismeasurement of labor inflows ― particularly the exclusion of non-employment statuses ― can bias impact estimates and lead to misguided policy conclusions.

Beyond labor outcomes, the analysis documents migration determinants ― income, finance, and migration costs ― showing a consistent native income premium, limited financial inclusion for foreigners reliant on high-interest loans, and high migration costs relative to expected income, especially under short-term stay regimes.

Taken together, the findings indicate that immigration policy in Korea should move away from a narrow, employment-visa-centered approach and toward an integrated framework that explicitly accounts for all labor-supplying residence statuses and their heterogeneous effects over time and space.

These patterns underscore the necessity of evidence-based visa quota setting, careful monitoring of regional and sectoral impacts, and policy instruments that prevent unintended harm to vulnerable groups.

By grounding immigration policy in precise measurement and causal analysis rather than aggregate labor-shortage narratives, Korea can better align foreign labor utilization with sustainable growth and labor-market stability.

Summary

KDI FOCUS Declining Cognitive Skills among Korean Workers: Drivers and Improvement Measures

Strengthening workforce competencies and labor productivity has become increasingly important amid rapid advances in automation and industrial transformation. However, international comparative findings show that the cognitive skills of Korean workers decline steeply with age, raising concerns about labor productivity. While multiple factors contribute to this decline, the primary driver appears to be a wage structure that provides insufficient incentives for skills development. To promote labor productivity growth, wage systems based on skills and performance need to be expanded, alongside the provision of broader opportunities for upskilling and reskilling.

- Adapting to advances in AI and evolving job tasks requires raising labor productivity through broad-based improvements in workers’ cognitive skills.

- The cognitive skills of Korean workers have not only declined over the past decade but also exhibit an unusually rapid depreciation with age, raising concerns regarding both labor productivity and the effective utilization of older workers.

- Skill depreciation among Korean workers is marked by (1) an early onset in young adulthood and (2) an exceptionally rapid decline with age.

- Factors contributing to the rapid age-related decline in cognitive skills appear to include limited opportunities for skill development in adulthood: long and rigid working hours, ineffective learning and training programs, and workplace environments that prevent workers from developing skills.

- The absence of wage systems that incentivize voluntary skill development is suggested as a key factor behind Korea’s rapid skill decline.

- For Korean workers, the expected wage return to cognitive skills is roughly half the level observed in OECD peers such as Germany, Japan, and the United States, leaving weak incentives for voluntary upskilling.

- Korea’s wage structure (1) places substantially greater weight on tenure than on competencies and (2) exhibits large wage differentials by firm size.

- This wage structure weakens incentives for post-entry skill development while intensifying inefficient credential competition for early-career entry into large firms.

- Broader adoption of skill- and job-based pay systems is needed to strengthen incentives for workers to develop their skills.

- Workers should be given meaningful opportunities to build their skills through greater autonomy over working hours, more effective learning and training programs, and workplace environments that enable full use of their competencies.

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

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

KDI FOCUS OECD Average Annual Hours Worked: Comparative Analysis and Implications

The OECD statistics on annual hours worked per person are often cited as evidence for Korea’s long working hours, but this in fact tends to be the result of the nation’s high proportion of self-employed workers and low proportion of part-time workers. When this distinct employment composition is taken into account, the difference between Korea’s hours worked and those of other OECD countries turns out to be much less significant compared to previous estimates. However, Korea’s hours worked do remain relatively longer even after such an adjustment. Therefore, it is important to figure out and thereby address underlying institutional factors of unproductive long working hours. Furthermore, flexible and choice-based working arrangements should be promoted for improving labor market efficiency.

- Since the proportion of self-employed and parttime workers differs from country to country, inappropriate to make direct comparisons of the average hours worked per person across different countries without considering such factors.

- Korea’s annual hours worked per worker are rapidly declining, primarily due to improvements in productivity resulting from economic growth and institutional efforts to reform long working practices.

- Annual hours worked per person tend to increase when the proportion of self-employed individuals among total employment rises, and decrease when the proportion of part-time workers increases.

- Compared to other countries, Korea shows longer annual hours worked per person due to a higher proportion of self-employed and a lower proportion of part-time workers. Controlling for these differences in employment composition, the gap in annual hours worked between Korea and other OECD countries falls by approximately 31%.

- However, even when accounting for the impact of the proportion of selfemployed and part-time workers, Korea remains among the nations with extended hours worked.

- Approximately 33% of the reduction in Korea’s annual hours worked per worker during 2010-2021 is attributable to the decrease in the proportion of self-employed workers and the increase in the proportion of part-time workers.

- Comprehensive and concerted policy efforts are necessary to facilitate a more inclusive labor market that accommodates diverse workforce groups, endorsing flexible working hours options and choice-based working arrangements.

Summary

KDI Policy Forum Wage Inequality: How and Why it has Changed over the Decades

■ From 1980 to 2016, Korea exhibited ups and downs in wage inequality and a slowdown in wage
growth.

- Wage inequality fell in the 1st phase (1980-1994), rose in the 2nd (1995-2007), and fell again in the 3rd (2008-2016).

- The annual growth rate of the real median wage plummeted from 9.2% in the 1st phase to 4.0% in the 2nd and then to 1.1% in the 3rd.

■ So far as wages are a form of compensation for the skills provided, wage inequality is affected by the changes in the supply of and demand for skills.

- An important indicator of skill is the educational attainment of workers. The demand for high-school graduates rapidly increased in the 1st phase, weakening the wage premium of college graduates and reducing wage inequality. The situation reversed in the 2nd phase with a sharp upturn in the demand for college graduates, in their wage premium, and in wage inequality. In the 3rd phase, the wage premium of the latter dipped again as their supply continued amid the subdued demand for them.

- The large demand for high-school graduates observed in the 1st phase may derive from the rising demand for mid-skilled workers by the heavy and chemical industry while the growing demand for college graduates observed in the 2nd phase may be the result of an increasing demand for high-skilled workers driven by technological progress.

■ To accelerate the wage growth while keeping wage inequality in check, technological progress should be encouraged and the quality of higher education upgraded.

Summary

Research Monograph KOR A Decade after the Global Financial Crisis and a New Growth Agenda for the Korean Economy

1. Shift in the Economic Policy Paradigm

Most notable among the changes in major economies in the wake of the 2008 global financial crisis is the shift in the economic policy paradigm in regards to the expansion of the government's role in the market. Consequently, growth agendas are seeking to enhance growth potential and a policy combination that could resolve structural problems to improve growth sustainability.

In Korea, although have been studies that linked the decline in the growth rate to problems in the social structure such as income inequality, the majority were unable to go beyond the trade-off between growth and distribution. After the global financial crisis, however, debates have grown over the fact that actively responding to social problems can contribute to sustainable growth. There is growing recognition that growth and distribution are no longer a target of contradicting policies and can be pursued in a complementary manner.

Thus, even if growth policies can satisfy the demands from an era of a paradigm shift to a universally strengthened policy, and presents the explicit goal of actively responding to concerns that the economy will be stuck with slow growth, the validity and effectiveness of the policies need to be constantly checked and supplemented. This study intends to analyze the post-crisis progress made on addressing Korea’s socioeconomic issues and to provide a basis to explore whether social structural phenomena, now being the target of policy correction due to their role in current problems, will be actually and empirically identifiable beyond some logic. This study analyzed the structural changes in major sectors that are considered as an important premise in planning and executing policies for sustainable growth but require a more thorough review. It also aims to ascertain how these changes are related to the key growth factors such as productivity.

2. Analysis of the Factors of the Recent Growth in the KoreanEconomy

This study first looks into slowing economic growth, the most obvious macroeconomic change faced by Korea since the global financial crisis. In particular, by analyzing the changes in growth factors using the growth accounting method, this study rechecked whether the fall in the growth rate was due to cyclical factors or was driven more by long-term structural characteristics.

According to the authors, the decline in economic growth in 2011-2017 can be explained by the drop in the contribution of physical capital and total factor productivity (TFP). Based on the finding that the decreased growth in TFP led to the reduced growth in marginal capital productivity and thus, diminished the contribution of material capital, the authors consider it too early to conclude that investment in physical capital has been stagnant since the global financial crisis. In addition, considering that Korea’s growth capacity is slowing on rapidly aging demographics, the future will be dependent on how well the productivity growth can buffer the pace of slowing growth. Even with continuous efforts to enhance productivity, Korea’s economic growth in the 2020s is expected to slow down to about an annual 2% on average. This result implies that the slowing growth of the Korean economy can be seen as a long-term structural phenomenon, and that a clearer understanding of the structural economic changes is needed when designing responsive policies.

3. Corporate Labor Share of Income and Market Dominance

This study found that contrary to domestic studies stating that labor share has continued to descend since the foreign exchange crisis in the late 1990s, large enterprises—subject to the external audit system—exhibited a rebound since the 2000s following a decline from the early 1990s. The study focuses on 'market changes' such as technological progress, growing trade represented by globalization, and the increase in monopoly profit as factors driving the change in the labor share of income. This point is where this study distinguishes itself from previous studies, concentrating on labor market flexibility, including rising non-regular workers, in the post-crisis period, and the ensuing relative sluggishness of labor and household income growth. In particular, this study found a close correlation between the markup—that represents the market concentration of Korean firms—and labor income share, and the fact that the markup has declined since the 2000s while labor income share has risen suggests that there have probably been positive welfare effects on the Korean economy.

This study reviews various adjustment measures and provides alternatives for measuring labor income share. Taking into account their problems, the author reexamined the trend of labor income share and analyzed the relationship between markup and labor income share—as a variable related to corporate decisions and market structural changes. In doing so. this study intends to suggest an important reference point in understanding the causes and backgrounds of social structural problems such as income inequality in our economy, and seeking solutions.

4. Causes of Increased Corporate Savings and the Ripple Effects onGrowth and the Distribution Structure

This analysis targets the problem of increased corporate savings. The mounting savings by corporations implies that firms are relatively indifferent about developing production capabilities for the future, indicating that the economy will slow as the growth of total factor productivity (TFP), including technology input and progress, decelerates. Some view this as a sign that the economy will face low growth as TFP growth—including capital input required for growth as well as technological progress—slows down. Others argue that rising cash holdings is the optimal choice for firms coping with increasing uncertainties, and most of the savings are used for the formation of fixed assets and hence, there is no need to view it only negatively.

Between these two opposing views, this study begins with checking the validity of the latter. In the Korean economy, the increase in corporate savings is usually due to a rise in fixed capital consumption and savings-investment gap. Particularly after the 2000s, firms may have chosen to increase their corporate savings to deal with the increase in fixed capital consumption resulting from technological changes. This could lead to a widening productivity gap between firms actively adapting to the technological changes and those that do not. This study found that corporate savings have a significant positive correlation with productivity growth―instead of the possibility that firms accumulating cash will exhibit inefficiency. These findings suggest that a policy curtailing corporate savings could undermine the efficiency of the market as it could distort the optimized corporate decision-making and reduce incentives to push for technological change.

5. Household Debt and Private Consumption

This study analyzes the macroeconomic risks inherent in rising household debt and draws on the implications for growth policy. The problem of mounting household debt has been recognized as the most characteristic risk factor for the Korean economy over the past several years. On the other hand, unlike most advanced economies who have expanded their debt to avoid a plunge in growth after the global financial crisis, Korea has put fiscal soundness before others in pursuit of growth at the expense of the financial soundness of the household sector.

This study can be of great importance for discussions on future growth policies as it examines the role of household debt in relation to sluggish private consumption after the crisis and draws on the implications of slow growth. It empirically showed that Korea’s household debt could amplify the instability and thus, weaken the growth of consumption, resulting in sluggish growth. Debt will have a bigger negative impact on consumption during the phase of aggravating recession, possibly leading to a longer slump and delayed recovery.

Based on these discussions, this study calls for a more active solution to the excessive household debt, as it will weigh heavily on the economy and entail enormous losses for social welfare. The author suggests that in normal situations, macroprudential policy should be strengthened by, for example limiting the proportion of overly indebted people in order to induce a soft landing. But, in a recessionary phase with shrinking domestic demand, monetary and fiscal policies should be managed through an expansionary stance. This is because macroprudential policy alone cannot restrain the downward pressure of aggregate demand from becoming prolonged particularly for heavily debted households. This study also stressed consistent efforts to rectify the financial weakness in the household sector as a full-fledged recovery of consumption cannot be expected unless financial soundness improves.

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