In recent years Korea has stepped up efforts to reduce inequalities in recognition that a fairer economic model is also the most sustainable one. In order to support this new policy direction, the OECD has carried out novel analysis of inclusive growth building on its Framework for Policy Action, developed by the OECD to improve the prospects of the groups left behind. The Inclusive Growth Review of Korea applies, for the first time, the Framework at the national level. Using a dashboard of indicators, the Framework presents policy recommendations to sustain and more equitably share the gains of economic growth by investing in people left behind, supporting business dynamism and inclusive labour markets, and building efficient and responsive governments. In addition, the Inclusive Growth Review of Korea finds that digitalisation risks to compound the disparities of Korean labour markets, and calls for renewed efforts to reduce the lack of opportunities for up- and re-skilling of the working-age population (Chapter 2). To improve the business environment, Korea should address the unbalanced growth across sectors and firm size and unequal distribution of productivity gains across population groups (Chapter 3).
Inclusive Growth Review of Korea

Abstract
Executive Summary
Korea’s balanced response to the Covid-19 pandemic has addressed the health emergency, while limiting the damage to the economy and people’s livelihoods
Copy link to Korea’s balanced response to the Covid-19 pandemic has addressed the health emergency, while limiting the damage to the economy and people’s livelihoodsGovernments, policy-makers, scientists and medical professionals worldwide are confronting the severe health crisis of the Covid-19 pandemic, as well as addressing its social and economic ramifications. While the prospects for developing an effective remedy are on the horizon at the time of writing, lessons are emerging from country approaches to managing the crisis.
Korea stands out as a success, with early and decisive action in simultaneously keeping the disease at bay with innovative digital solutions for testing and symptom tracking, while avoiding a total lock-down of the economy. The government has introduced unprecedented measures to mitigate the pandemic’s impact, with supplementary budgets (voted or proposed) totalling about 3.5% of annual GDP, of which about 70% envisioned for being debt-financed, with the remainder funded through savings on government expenditure (OECD, 2020[7]). The supplementary budgets provide resources for the health sector, loans to SMEs, emergency support to households, assistance for severely hit industries and employment support.
Korea has played an important role as a leading exporter of medical test kits, having quickly built a successful export industry (20% rise in April alone). GVCs helped drive this innovation, although the crisis also highlighted the fragility of global health supply chains. A permanent slump in world trade is a downside risk. As an export-oriented economy, Korea is vulnerable to further weakness in foreign demand and to lasting disruptions in global value chains.
Strong and rapidly implemented fiscal and monetary policy measures to support households and businesses helped Korean economy to contract much less than other OECD economies in 2020. The projected contraction in GDP in 2020 is considerably milder than in other OECD countries. Real GDP in Korea is projected to decline by 1.0% in 2020 and to grow by 3.1% in 2021 (OECD, 2020[7]) compared to a projected fall in global GDP by 4.5% in 2020 and 5.0% in 2021.
Labour markets were disrupted by reductions in working hours, job losses and the enforced shutdown of businesses. The pandemic compounds pre-existing challenges, many of which are shared to various degrees by most OECD countries. Better mobilising labour resources, especially from women, older workers and youth, can partly counteract this trend, as well as help build a more inclusive economy and society. The rise in Korea’s unemployment rate has been modest at the onset of crisis, from 3.3% in February to 4.5% in May 2020; however, partly linked to low participation of women in the labour force. As in other OECD countries, the labour market recovery in Korea will be gradual until the end of 2021 (OECD, 2020[8]).
As in many OECD countries, the unemployment increase has also disproportionately affected non-regular workers. As shown in the OECD Employment Outlook (2020[8]), self-employed, temporary and part-time workers – for example – account for up to 40% of employment in the most affected sectors. The young are once again at risk of becoming the biggest casualties of the crisis: youth unemployment in the OECD jumped from 11.3% in February, to 16.7% in June. The COVID-19 outbreak has hit temporary and daily workers hard, with the number of temporary workers plunging by 501 000 in May 2020 (OECD, 2020[8]).
The uneven labour market impact of COVID-19 crisis may exacerbate already large income disparities in Korea. In the first quarter of 2020, the average monthly income of the lowest quintile households remained the same as the first quarter of 2019 while that of the highest quintile increased by 6.3% (OECD, 2020[1]). In response, the Korean government has introduced a range of measures to support employment, including an emergency employment security subsidy, relief checks (emergency disaster relief payments) to all households, emergency employment security subsidy for vulnerable workers, and increased subsidies for job retention scheme (OECD, 2020[8]). Going forward, Korean government’s efforts to strengthen social protection along with easing labour market regulations once the COVID-19 crisis is overcome would promote the reallocation of workers towards their most productive use and reduce labour market duality.
Korea’s economic performance in the last decades has been impressive, but the growth model has left many behind
Copy link to Korea’s economic performance in the last decades has been impressive, but the growth model has left many behindOver the past decades, Korea has made impressive leaps on material well-being and has made significant progress on some dimensions of non-economic well-being. Per capita income has increased from 6% of the OECD average in 1970 to 97% in 2019 (OECD, 2019[9]) while life expectancy has increased by a significant 20 years in this period. Capitalising on the increasingly well-educated population, Korean exporters have climbed the value-added ladder and many have become respected global household names.
The previous export-driven growth strategy, by favouring and supporting a narrow range of sectors and businesses, has contributed to a number of challenges related to inclusiveness and sustainability for the Korean economy with growing productivity divides among firms, industries and workers, and in absence of strong redistribution and vibrant social dialogue. For instance, Korea’s relative poverty rate is well above the OECD average, reaching 45.7% of those older than 65 years. Along with Estonia and Latvia, Korea is among the OECD countries with the largest gender poverty gap (OECD, 2019[10]). Similar to a number of other OECD economies, income and wealth concentration at the top of the income distribution increased in the previous decade. Between 2007 and 2014, the income share of the richest 1% rose from 7.5% to 11.2%. Workers in the bottom 10% of the income distribution saw virtually no wage growth over the past two decades. As in many other OECD countries, social mobility represents a challenge in Korea – currently it would take a child born into a low-income family about five generations (or up to 150 years) to reach the average level of income in Korea, compared to the OECD average of 4.5 generations (OECD, 2018[11]) To enhance social mobility and promote equal opportunities, Korea has stepped up investments in Early Childhood Education and Care (ECEC) and education, yet annual average tuition fees from primary to tertiary education are still above the OECD average in Korea, which puts children of lower socio-economic background in a disadvantaged position.
Labour market dualism remains a key challenge, despite recent progress in extension of the social safety net, regularisation of workers and support to groups underrepresented in the labour market (youth, women, older workers)
Copy link to Labour market dualism remains a key challenge, despite recent progress in extension of the social safety net, regularisation of workers and support to groups underrepresented in the labour market (youth, women, older workers)Over the past few years, the government has significantly stepped up efforts to deliver on job creation and to regularise public sector workers, thus providing better pay, working conditions and social guarantees. Going forward, measures have been announced to facilitate the employment of groups currently underrepresented in the job market namely women, youth and older workers. They will also expand the basic social insurance and develop personalised accident insurance including for platform workers.1 Korea has also extended the coverage of the Unemployment Benefit Guarantee, and introduced support for training and upskilling of workers transitioning between workplaces.
Despite these efforts, labour market dualism, large wage disparities and limited opportunities for some societal groups remain a concern. Labour market dualism is clearly indicated by the high proportion of non-regular workers, who account for about one-third of all employees and whose pay and other terms of employment are considerably less attractive than those of regular workers. For example, only 70.8% of non-regular workers are covered by employment insurance. Temporary workers earn less than 60% of the hourly wage of a standard worker (OECD, 2015[12]). Both men and women in temporary employment have lower probabilities of moving into standard employment than the unemployed (OECD, 2015[12]).
Wage dispersion was one of the highest in the OECD and more than 20% of full-time workers earned less than two-thirds of the median wage in 2017. Women, youth and the elderly tend to be employed in smaller, less productive firms. For example, in 2017, older workers accounted for 37% of the economically active population, with 21 percentage points corresponding to employment in small service firms and only 1 percentage point in large manufacturing firms. The gender wage gap at 32.5% was among the highest among the OECD countries in 2019. It was also mirrored in the labour participation gap, with only 52.9% of women participating in the labour market in 2018, compared to the participation rate of 73.7% among men.
Finally, in Korea, like in a number of OECD countries, labour productivity growth and median wage growth have decoupled, reflecting a decline of labour share in national income. Dualisms and disparities across labour markets go hand in hand with dualisms and disparities in firms.
Wide productivity gaps persist across firms and workers
Copy link to Wide productivity gaps persist across firms and workersOECD research on the Productivity-Inclusiveness Nexus (2018[13]) has shown that the composition and quality of growth has a direct bearing on equality of outcomes. In Korea, labour productivity gaps between large and small companies are holding back aggregate productivity growth. In Korea, labour productivity is 40% lower in service SMEs than in large manufacturing firms, as compared to 20% in other countries. Productivity in SMEs in manufacturing has fallen to less than one-third of that in large firms. Overall, labour productivity is significantly below the OECD average (USD 37 of GDP per hour worked in Korea, compared to USD 54.7 in the OECD).
Korea is also characterised by low survival and scale-up rates amongst the many small start-ups and young firms despite the large number of schemes supporting SMEs (more than 1 300). In the market services sector, only 2.5% of entrants with less than 10 employees achieve growth, compared to 6% in other OECD countries on average. Assessing, evaluating and streamlining existing SME support programs could help addressing the low survival and scale-up rates.
Technology diffusion has also been uneven. Although virtually all Korean companies have broadband access, and many of them use basic ICT tools such as website and enterprise resource planning (ERP) software, they tend to lag behind in terms of other key tools, such as consumer relationship management (CRM) support, cloud computing, e-sales or big data.
OECD research (presented in this review) shows that a focus on pro-growth policies that target efficiency in isolation has brought about unintended adverse social and economic consequences. Indeed, past Korean winner-picking and specialisation policies may have weakened competition and protected incumbents, contributing to productivity gaps across firms and sectors, hence hindering aggregate productivity growth.
To establish itself as a global front-runner of the fourth Industrial revolution, the current administration has taken a number of pro-innovation measures. For instance, Korea has introduced regulatory sandboxes and Regulation-Free Special Zones to encourage innovation and has boosted investment in industries that will fuel the digital economy (e.g. blockchain autonomous driving, artificial intelligence, data networks and biotech). Some of these measures that are part of the government’s push to boost innovation and Korea’s international competitiveness may have the same unintended consequences that similar policies had in the past. Namely, some measures favour large incumbent companies while making it challenging for SMEs to compete on equal footing. In 2019, the government announced provisions to level the playing field between the manufacturing and services sectors, but additional measures may be needed to prevent large firms from capturing the productivity gains of smaller firms (e.g. through competition policy, trade and investment reforms and measures aimed at preserving the intellectual property rights of SMEs) and to streamline the support available to SMEs. Diversifying exports and encouraging the services sector to integrate in Global Value Chains (GVCs) can also allow a broader set of firms to benefit from gains from trade and can improve the resilience of the Korean economy to external shocks. All these measures can be key to unlocking the virtuous circle between productivity and inclusiveness (Figure 1and Chapter 3).
Figure 1. Virtuous circle between growth and inclusiveness
Copy link to Figure 1. Virtuous circle between growth and inclusiveness
Korea can position itself to gain from the megatrends of digitalisation, ageing and reorganisation of GVCs, but proactive policies are needed to avoid the deepening of socio-economic divides
Copy link to Korea can position itself to gain from the megatrends of digitalisation, ageing and reorganisation of GVCs, but proactive policies are needed to avoid the deepening of socio-economic dividesThe megatrends of digitalisation, ageing and reorganisation of global trade networks will have a profound impact on the Korean economy, as in many other OECD countries. Korea is investing significantly in the innovative capacity of the economy and is a frontrunner in terms of R&D investment among OECD countries. Korea’s central position in a number of GVCs for high value-added industries can help Korea position itself in cutting edge manufacturing sectors and introduce services in its export mix (which are less vulnerable to barriers and external shocks). And while population ageing will bring its share of challenges, it will also mean more demand for new goods and services that cater to older demographics.
Comprehensive policy packages with inclusiveness in design will be needed to ensure that Korea harnesses the benefits of the megatrends, while mitigating their possible adverse effects on inclusion and sustainability. For instance, digitalisation will lead to the automation of around 10% jobs in Korea and significantly affect a further 33%. Moreover, intergenerational, urban-rural and gender divides are already emerging when it comes to access to and use of new technologies. Finally, digitalisation and reorganisation of GVCs could exacerbate the productivity disparities between frontier firms and the rest. Population ageing brings and exacerbates a range of challenges, such as a shrinking working-age population, pressures on public finances, social exclusion and isolation and old age poverty.
Going forward, it is important to promote inclusive policy-making by effectively engaging with citizens, while looking at ways to make social spending and redistribution more effectively targeted to low-income groups
Copy link to Going forward, it is important to promote inclusive policy-making by effectively engaging with citizens, while looking at ways to make social spending and redistribution more effectively targeted to low-income groupsTo capitalise on the measures promoted under both pillars of the current administration’s vision for an Inclusive and Innovative Nation, and to achieve a growth model that puts people in the centre of all policy making, it is crucial to implement in a coherent and balanced manner both innovation and inclusiveness pillars. This process should be underpinned by a measurement and evaluation framework that tracks progress on policy objectives and regularly assesses the impact of measures undertaken on the intended distributional outcomes. It will be important to ensure that the measurement framework is populated with timely and internationally comparable statistics on the distribution of economic and non-economic well-being across the population, including granular data for the top income distribution (top 1%, 5% and 10% income earners).
Special consideration should be given to embed distributional considerations into budgeting and more widely into policy evaluation and design, following the example of countries such as New Zealand, Ireland and to some extent Italy.
To promote trust in institutions and to raise support for policy reforms, it is important to move to an effective engagement of Korean citizens in the decision- and policy-making process. Equally crucial is to demonstrate a commitment to addressing perceptions of undue advantages, for example vested interests in business, education and other spheres of life.
In an ageing population enjoying a sustained increase in living standards, pressures for more and better public services might need to be addressed in the near future. At the same time, there is a need to pay close attention to the perceptions and attitudes of the population towards acceptability of possible tax increases in the context of low trust in government, which is a challenge faced by a number of OECD countries. Despite more than tripling since 1990, social spending remains low by OECD standards, 11.1% of GDP in 2018 as compared to 20.1% on average in the OECD (2019[14]), and taxes and transfers can be used more effectively to address inclusiveness challenges. The progressiveness of the tax system has recently been strengthened (e.g. higher personal income tax rate on higher incomes introduced in 2017 and 2018) but remains weak (Causa and Hermansen, 2017[15]).
In the context of low public spending, ineffective redistribution and the electoral dynamics of an ageing society, there is a growing intergenerational divide between the young and the elderly. The young are unhappy with the welfare system, which requires them to take responsibility for the elderly, while simultaneously having to compete with older people for jobs. The intergenerational tension is representative of a broader societal trend, i.e. a lack of social cohesion and the erosion of societal ties. These have not traditionally been areas targeted by public policy, and present a missed opportunity. A strong social network, or community, can provide emotional support during both good and bad times as well as provide access to jobs, services and other material opportunities. In Korea, 78% of people believe that they know someone they could rely on in a time of need, the lowest rate in the OECD, where the average is 89% (OECD, 2017[16]). Recent local level policies in Korea have looked at some aspects of the isolation and exclusion of the elderly who live alone. For example, the Seoul Metropolitan Government has established a Comprehensive Plan for 50+ Assistance, which provides life training, emotional support, cultural experiences and retraining for continued social opportunities among the newly retired (OECD, 2018[17]). Successful initiatives of this kind that foster inclusive communities could be scaled up at the national level, linking into related policy areas such as education, skills, housing, gender or connectivity policies.
The following table summarises the key findings of the Inclusive Growth Review of Korea as well as possible actions that could leverage and complement government’s current efforts towards inclusive growth.
Main Findings |
Priorities for policy action on inclusive growth |
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First Pillar of the OECD Inclusive Growth Framework – Investing in people and places left behind |
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In 2017, 18.4% were NEET in Korea, compared to 13.2% on average in the OECD. Korea has reintroduced apprenticeships, Meister schools and incentives for more labour-relevant degrees and competency-based recruitment practices. |
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Despite dedicated policy action over the previous years, female participation in public life is low by OECD standards. Gender gaps also persist in employment, pay, and poverty. |
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The relative poverty rate of those over age 65 is 45.7%, far above the 12.9% OECD average (OECD, 2018[18]). The Basic Pension is continuously increased with the latest change in April 2019. National Pension Service Act expanded the coverage by allowing deferred payment of pension premiums for career breaks due to childbirth, etc. In addition, a subsidy for NPS contribution paid by the unemployed and a subsidy for employees at small firms was introduced. |
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Second Pillar of the OECD Inclusive Growth Framework – Supporting business dynamism and inclusive labour markets |
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Labour market inclusiveness |
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Regular workers are highly protected in Korea, particularly in large firms, as a result of labour laws, court decisions, business practices, social customs and labour unions. Non-regular workers have significantly lower pay, conditions and guarantees than regular workers, e.g. only 70.8% of non-regular workers are covered by employment insurance. The government aims to transform the contracts of 205 000 non-regular workers in the public sector to regular status by 2020. In 2018, the subsidy to firms that convert non-regular workers to regular status was increased. |
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The government has announced plans to expand basic social insurance by revising asset and income evaluation, and to develop personalised accident insurance including for platform workers. |
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Older workers tend to be retired in their early fifties and then continue in employment with inferior status, pay and benefits. |
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Training participation is 47.6% higher among high-skilled than low-skilled adults. The government plans to expand job training to all employees (including the self-employed), covering 60-70% of costs incurred. The 2018 law reducing maximum working hours from 68 to 52 per week will be extended to all businesses with five or more employees by July 2021. |
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The minimum wage increased by 29% between 2017 and 2019, with a planned further increase of 2.9% in 2019. In 2018, the minimum wage had increased to 59% of the median wage (for full-time workers), one of the highest proportions in the OECD. |
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Collective bargaining coverage is low by OECD standards (12% in Korea, as compared to the OECD average of 32% in 2016), with coverage concentrated in manufacturing, construction and large firms. |
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Business dynamism |
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Productivity in SMEs in manufacturing has fallen to less than one-third of that in large firms. Productivity in the service sector is 43% of that in manufacturing. The productivity gaps mirror wage disparities; issues of labour market duality and productivity are closely intertwined. |
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Korea has a very developed set of policies aimed at helping SMEs and young firms and the administration has recently reinforced support in 2019-20 through loans, extension of the Growth Support Fund, guarantees, a new “Scale-up Fund”, a New Capital Market Innovation Plan, and new rules for financial institutions providing loans and credit guarantees. Nevertheless, Korea’s business environment is characterised by low survival rates of entrants and scale-up challenges. |
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Korea has introduced a number of innovative policies to support innovation and boost business dynamism, including regulatory sandboxes and Regulation-Free Special Zones. |
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By OECD comparison, Korea has relatively high trade and investment barriers that can partly explain productivity gaps between industries. These barriers typically reduce competitive pressures and hinder the creative destruction process that forces inefficient businesses to exit the market. |
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In the last three decades, Korea has increased its productivity and income through greater participation in Global Value Chains (GVCs) and currently has the highest index of participation among the G20 economies. While Korea ranked 7th among the top 10 manufacturing hubs in GVCs, it ranked only 21st among services. |
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Third Pillar of the OECD Inclusive Growth Framework – Building efficient and responsive government |
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Korea has developed a wide range of well-functioning public institutions to ensure effective public service delivery. Like a number of OECD countries, however, Korea is experiencing a low level of trust in public institutions. |
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Complex long-term strategies need to be underpinned by a monitoring framework that tracks progress over time and informs about needed adjustments in policy and budget indicators. Existing frameworks, such as the key performance indicators (KPI) used in the budgeting process and the indicator framework of the Special Committee on Income-led Growth should be consolidated to track developments over time in a comprehensive manner. |
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The progressiveness of the tax system has recently been strengthened (e.g. higher personal income tax rate on higher incomes introduced in 2017 and 2018, establishment of the refundable child tax credit in 2015), but remains weak as a relatively large share of benefits go to middle- and high-income households. Redistribution through taxes and transfers has been ineffective in addressing the inclusiveness challenges as the bottom 40% of households pay more in taxes than they receive in transfers (Causa and Hermansen, 2017[15]). In addition, social spending remains low by OECD standards (11.1% of GDP in 2018 as compared to 20.1% on average in the OECD) despite more than tripling since 1990. |
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References
[15] Causa, O. and M. Hermansen (2017), Income redistribution through taxes and transfers across OECD countries, OECD Publishing, Paris, https://doi.org/10.1787/bc7569c6-en.
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[14] OECD (2019), OECD Social Expenditure Database, https://www.oecd.org/social/expenditure.htm.
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[10] OECD (2019), Society at a Glance 2019: OECD Social Indicators, OECD Publishing, Paris, https://doi.org/10.1787/soc_glance-2019-en.
[11] OECD (2018), A broken social elevator? How to promote social mobility, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264301085-en.
[18] OECD (2018), OECD Economic Surveys: Korea 2018, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-kor-2018-en.
[17] OECD (2018), Opportunities for All: A Framework for Policy Action on Inclusive Growth, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264301665-en.
[13] OECD (2018), The Productivity-Inclusiveness Nexus, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264292932-en.
[2] OECD (2018), Towards Better Social and Employment Security in Korea, Connecting People with Jobs, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264288256-en.
[3] OECD (2018), Working Better with Age: Korea, Ageing and Employment Policies, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264208261-en.
[16] OECD (2017), How’s Life? 2017: Measuring Well-being, OECD Publishing, Paris, https://doi.org/10.1787/how_life-2017-en.
[12] OECD (2015), In It Together: Why Less Inequality Benefits All, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264235120-en.
Note
Copy link to Note← 1. Individuals who use an app (such as Uber) or a website (such as Amazon) to match themselves with customers, in order to provide a service in return for money.
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