Korea should build on its strong economy and well-educated workforce to meet the challenges of a fast-ageing population and to tackle rising income inequality, according to a new OECD report.
Strengthening Social Cohesion in Korea, presented today in Seoul by OECD Secretary-General Angel Gurría, recognises the impressive progress made by Korea over the past 40 years. The country is increasingly integrated in the global economy and its per capita income is converging rapidly to the OECD average.
Income inequality, however, has risen, together with poverty, especially among older people. Korea’s birth rate is the lowest among OECD countries and, on current trends, the country’s population profile will shift from being one of the youngest in the OECD today to the second oldest by 2050.
“Korea must combine structural reforms to maintain its strong economy with improved social policies to generate more inclusive and sustainable growth,” said OECD Secretary-General Angel Gurría at the launch. “Giving more children access to quality education and more family-friendly policies would boost social cohesion and equity so that all Koreans can share the benefits of growth. We are pleased that social cohesion is a priority for the new administration.”
The OECD identifies four priority areas for action:
- Reduce income inequality and poverty. This will require strengthening social safety nets and targeted social programmes, which will call for further increases in social spending beyond the current level of 9.6% of GDP (OECD average: 22.1%), says the report. This increase in spending could be financed by widening the tax base and raising consumption taxes, which impose fewer distortions than direct taxes. The negative implications of higher consumption taxes on equity could be addressed through targeted policies, such as by expanding the earned income tax credit.
- Cut labour market dualism. Promoting a shift of workers from non-regular to regular jobs - by relaxing employment protection for regular workers and narrowing the gap in labour costs between regular and non-regular workers - would boost long-term growth. This would lead to a better trained and motivated workforce, and improve equity by cutting disparities in wages and working conditions. Today, one in four Korean workers is on a temporary contract, double the OECD average.
- Raise education standards for all. Investing in high-quality, affordable early childhood education and care would free up more time for mothers to work, with the likely knock-on effect of raising fertility. Because tuition fees at tertiary level in Korea are the third highest in the OECD, student loans should be expanded to help more young people from low-income families attain tertiary education. Raising standards in vocational training to make it a more attractive alternative to university would also help reduce the overemphasis on tertiary education.
- Improve health care. Moving from a hospital-centred health system to one where primary care plays a bigger role would help low-income households that currently struggle to pay high medical bills, while reducing overall health costs in the long run.
A shift towards more family-friendly policies that promote higher female labour force participation while bringing working hours down to 40 per week by 2030 would generate huge gains, estimated at 15% of GDP by 2030, according to the report.
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A Policy Toolkit for Growth and Social Cohesion in Korea