OECD Economic Surveys: Korea 2020
Summary
OECD Economic Surveys: Korea 2020, published August 2020 as Volume 2020/9 (DOI 10.1787/2dde9480-en; ISBN 978-92-64-73384-8 print, 978-92-64-49619-4 pdf). The survey says economic activity contracted less in Korea than in other OECD countries thanks to the authorities' prompt reaction to the virus and wide-ranging support to households and businesses, while exports face huge uncertainty and the crisis compounds rapid population ageing and low productivity in parts of the economy. Chapter 1, key policy insights, covers the gradual recovery, inflation below the 2% target and strong public finances that allow stimulus, with annexes on government measures to address the COVID-19 crisis and economic co-operation with North Korea. Chapter 2 addresses employment and job quality under rapid ageing; Chapter 3 the diffusion of digital technology to boost productivity.
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OECD Economic Surveys
KOREA
AUGUST 2020
OECD Economic Surveys:
Korea
2020
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Please cite this publication as:
OECD (2020), OECD Economic Surveys: Korea 2020, OECD Publishing, Paris,
https://doi.org/10.1787/2dde9480-en.
ISBN 978-92-64-73384-8 (print)
ISBN 978-92-64-49619-4 (pdf)
OECD Economic Surveys
ISSN 0376-6438 (print)
ISSN 1609-7513 (online)
OECD Economic Surveys: Korea
ISSN 1995-364X (print)
ISSN 1999-0707 (online)
Photo credits: Cover: Drone flash mob, Seoul, July 2020 © MOLIT (Ministry of Land, Infrastructure and Transport) and KIAST
(Korea Institute of Aviation Safety Technology).
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Table of contents
Executive summary 9
1 Key policy insights 14
The economy will recover gradually from the COVID-19 crisis 14
The recovery will probably be slow and uncertainty is exceptionally high 17
Monetary policy is accommodative but inflation remains below the 2% target 21
Strong public finances allow stimulating the economy 22
The financial system remains solid, but the COVID-19 crisis raises vulnerability 24
The fruits of Korea’s past economic performance have not been equally distributed 27
Korea’s economic achievements have not fully translated into well-being 31
Better use of labour resources and innovation can support growth 31
The fight against corruption has been stepped up but challenges remain 41
Environmental quality remains low by OECD standards 43
References 47
Annex 1.A. Progress in other structural reform areas 50
Annex 1.B. Government measures to address the COVID-19 crisis 51
Annex 1.C. Economic co-operation with North Korea 54
References 58
2 Raising employment and enhancing job quality in the face of rapid ageing 59
Scarcer labour resources need to be better mobilised 63
A more flexible labour market should be combined with stronger social protection 83
References 90
3 Promoting the diffusion of technology to boost productivity and well-being 92
Digital opportunities to raise productivity are not used to their full potential 98
The diffusion of digital technologies among firms and workers is slow 103
Policies supporting digital adoption and productivity need strengthening 108
Ensuring digital trust is key to digital development and well-being 117
References 123
FIGURES
Figure 1. GDP falls less than in the OECD 10
Figure 2. Inflation is set to remain very low 11
Figure 3. Inequality is relatively high 11
Figure 4. The old age dependency ratio will soar 12
Figure 5. Service sector productivity is lagging 12
Figure 1.1. Mobility for retail and recreation has remained relatively high 14
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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Figure 1.2. The COVID-19 crisis has hit employment hard, albeit less than in most other countries 17
Figure 1.3. Employment drops in services and among non-regular workers 18
Figure 1.4. Exports are fairly concentrated in terms of countries and product types (%), 2018 19
Figure 1.5. The outlook for global semi-conductors remains uncertain 20
Figure 1.6. Inflation is well below the 2% target 21
Figure 1.7. Monetary policy has been eased and the won has depreciated somewhat 22
Figure 1.8. Sound public finances leave room for fiscal stimulus 23
Figure 1.9. Potential impact of the COVID-19 crisis on gross government debt 23
Figure 1.10. The unweighted leverage ratio is close to the OECD average 24
Figure 1.11. Aggregate corporate debt is moderate but rising and household debt is high 25
Figure 1.12. At the national level, housing prices have been stable 26
Figure 1.13. Income inequality is relatively high 28
Figure 1.14. The minimum wage is high relative to the median wage, 2018 29
Figure 1.15. Permanent workers’ employment protection is relatively strong 30
Figure 1.16. Well-being scores remain relatively low in many dimensions 31
Figure 1.17. Korea has scope to raise both employment and productivity 32
Figure 1.18. Fewer individuals work very long hours as time limits were tightened towards OECD norms 35
Figure 1.19. Low-productivity sectors account for a high share of total employment 37
Figure 1.20. Digital gaps between large and small firms remain high 39
Figure 1.21. Product market regulations are stringent 40
Figure 1.22. Corruption is perceived as relatively high 41
Figure 1.23. Korea is compliant on tax transparency 42
Figure 1.24. Environmental performance remains weak 44
Figure 2.1. Employment falls sharply in services and among non-regular workers 60
Figure 2.2. The old-age dependency ratio is set to be the highest in the OECD in 2060 62
Figure 2.3. Korea faces important challenges with inclusiveness and some aspects of job quality 64
Figure 2.4. Disadvantaged groups face large employment gaps 65
Figure 2.5. There are multiple worker-related barriers to employment 65
Figure 2.6. Groups facing different combinations of employment barriers 66
Figure 2.7. Many workers earn low wages and work very long hours 67
Figure 2.8. Women’s employment rate is relatively low between ages 30 and 60 68
Figure 2.9. The gender wage gap is the widest in the OECD 69
Figure 2.10. The employment rate falls more slowly with age than in other OECD countries 71
Figure 2.11. Many older workers are excluded from the social safety net 72
Figure 2.12. The share of the elderly in relative poverty is the highest in the OECD 72
Figure 2.13. Net pension replacement rates are relatively low 73
Figure 2.14. Wages reflect seniority more than in most other OECD countries 76
Figure 2.15. Many older Korean workers would like to get education and training 77
Figure 2.16. Youth and elderly employment rates are positively correlated 82
Figure 2.17. The share of non-regular employment is high 84
Figure 2.18. Permanent workers’ employment protection is relatively strong 85
Figure 2.19. Active labour market programmes focus most on direct job creation 87
Figure 2.20. Employment service resources are among the lowest in the OECD 88
Figure 3.1. Korea is one of the top players in emerging digital technologies 93
Figure 3.2. Corona Map App plots locations with confirmed cases of COVID-19 94
Figure 3.3. Households turned to e-commerce during the COVID-19 outbreak 95
Figure 3.4. High-speed broadband is widespread in Korea 96
Figure 3.5. Low-productivity sectors account for a high share of total employment 97
Figure 3.6. Economy-wide productivity in Korea is far below the OECD average 97
Figure 3.7. The contribution of domestic services to Korean manufacturing exports is low 101
Figure 3.8. Korean exports of predominantly digitally deliverable services are weak 102
Figure 3.9. Use of websites for online ordering or reservation has increased rapidly in Korea 103
Figure 3.10. Korea is below the OECD average in sophisticated digital technologies adoption 104
Figure 3.11. Digital gaps between large and small firms remain high 105
Figure 3.12. The age gap in online purchasing is the highest among OECD countries 106
Figure 3.13. The digital skills gap between generations is the highest among OECD countries 107
Figure 3.14. The share of teachers with high digital skills is relatively low in Korea 109
Figure 3.15. Teachers can further improve their use of ICT for teaching 109
Figure 3.16. The share of tertiary graduates in science, engineering and ICT is high 110
Figure 3.17. Korea can further increase the share of workers receiving firm-based training 111
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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Figure 3.18. The participation in online courses is the third highest in Korea 112
Figure 3.19. Korea has high regulatory barriers to competition 115
Figure 3.20. Korea should be more open to foreign entry and competition 116
Figure 3.21. Korea is a leader in e-government 118
Figure 3.22. Korea has the highest score in open-useful-reusable government data 118
Figure 3.23. Online security incidents are relatively frequent in Korea 119
Figure 3.24. Privacy violations are second highest in Korea 119
Figure 3.25. The share of Korean youth at risk of addiction to Internet and smartphones is high 121
Annex Figure 1.C.1. North Korea’s recorded foreign trade 55
Annex Figure 1.C.2. Estimated GDP level and growth rate 56
TABLES
Table 1. The recovery will be slow 10
Table 1.1. Policies to support the Korean economy 16
Table 1.2. Macroeconomic indicators and projections under two epidemiological scenarios 19
Table 1.3. Events that could lead to major changes in the outlook 20
Table 1.4. Past recommendations on fiscal policy 24
Table 1.5. Past recommendations on financial policy 26
Table 1.6. Past recommendations on the labour market and inclusiveness 30
Table 1.7. Past recommendations on promoting female employment 33
Table 1.8. Overview of the Korean New Deal projects 38
Table 1.9. Past recommendations on regulation and support for SMEs and innovation 40
Table 1.10. Past recommendations on corruption 42
Table 1.11. Past recommendations on environmental policy 45
Table 2.1. Long-term scenarios: GDP growth and employment 79
Table 2.2. Long-term scenarios: Government expenditure and revenue 80
Table 3.1. The five levels of smart manufacturing 98
Table 3.2. Main innovation vouchers currently available to SMEs in the European Union 113
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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This Survey is published on the responsibility of the Economic and
Development Review Committee of the OECD, which is charged with the
examination of the economic situation of member countries.
The economic situation and policies of Korea were reviewed by the
Committee on 23 June 2020. The draft report was then revised in light of
the discussions and given final approval as the agreed report of the whole
Committee on 27 July 2020.
The Secretariat’s draft report was prepared for the Committee by
Christophe André, Jinwoan Beom and Mathilde Pak, under the supervision
of Vincent Koen. Alexander Hijzen and Stefan Thewissen, from the
Directorate for Employment, Labour and Social Affairs (ELS), provided
sections on the labour market and the OECD’s new Jobs Strategy. Yvan
Guillemette and Andrés Fuentes Hutfilter also contributed to the report.
Research assistance was provided by Lutécia Daniel, Natia Mosiashvili and
Agnès Puymoyen, and editorial support by Sisse Nielsen and Michelle
Ortiz.
The previous Survey of Korea was issued in June 2018.
Information about the latest as well as previous Surveys and more details
about how Surveys are prepared is available at www.oecd.org/eco/surveys.
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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BASIC STATISTICS OF KOREA, 2018
(Numbers in parentheses refer to the OECD average) 1, 2
LAND, PEOPLE AND ELECTORAL CYCLE
Population (million) 51.6 Population density per km² 529.7 (37.8)
Under 15 (%) 13.0 (17.8) Life expectancy at birth (years, 2017) 82.6 (80.1)
Over 65 (%) 14.4 (17.1) Men (2017) 79.7 (77.5)
International migrant stock (% of
2.6 (10.1) Women (2017) 85.7 (82.9)
population, 2015)
Latest 5-year average growth (%) 0.5 (0.6) Latest general election April 2020
ECONOMY
Gross domestic product (GDP) Value added shares (%)
In current prices (billion USD) 1 725.2 Agriculture, forestry and fishing 1.9 (2.5)
In current prices (trillion KRW) 1 898.2 Industry including construction 37.2 (26.6)
Latest 5-year average real growth (2014-
3.0 (2.3) Services 60.9 (70.9)
18,%)
Per capita (thousand USD PPP) 42.1 (47.3)
GENERAL GOVERNMENT
Per cent of GDP
Expenditure 30.3 (40.3) Gross financial debt (2017) 40.8 (109.5)
Revenue 33.4 (37.4)
EXTERNAL ACCOUNTS
Exchange rate (KRW per USD) 1099.6 Main exports (% of total merchandise exports)
PPP exchange rate (USA = 1) 870.8 Machinery and transport equipment 57.4
In per cent of GDP Chemicals and related products, n.e.s. 13.4
Exports of goods and services 41.6 (55.5) Manufactured goods 12.3
Imports of goods and services 37.0 (51.3) Main imports (% of total merchandise imports)
Current account balance 4.5 (0.3) Machinery and transport equipment 31.2
Net international investment position 24.0 Mineral fuels, lubricants and related materials 27.2
Chemicals and related products, n.e.s. 10.3
LABOUR MARKET, SKILLS AND INNOVATION
Unemployment rate, Labour Force Survey (aged 15 and
Employment rate (aged 15 and over, %) 60.7 (57.3) 3.8 (5.3)
over, %)
Men 70.8 (65.5) Youth (aged 15-24, %) 10.5 (11.1)
Women 50.9 (49.6) Long-term unemployed (1 year and over, %) 0.1 (1.5)
Participation rate (aged 15 and over, %) 63.1 (60.5) Tertiary educational attainment (aged 25-64, %) 49.0 (36.9)
Average hours worked per year 1 993 (1734) Gross domestic expenditure on R&D (% of GDP, 2017) 4.6 (2.6)
ENVIRONMENT
Total primary energy supply per capita (toe) 5.6 (4.1) CO2 emissions from fuel combustion per capita (tonnes) 12.1 ( 8.9)
Renewables (%) 1.9 (10.5) Water abstractions per capita (1 000 m³, 2016) 0.5
Exposure to air pollution (more than 10 g/m³ of
99.2 (58.7) Municipal waste per capita (tonnes, 2016, OECD: 2017) 0.4 (0.5)
PM2.5, % of population, 2017)
SOCIETY
Income inequality (Gini coefficient, 2017,
0.355 (0.310) Education outcomes (PISA score)
OECD: 2016)
Relative poverty rate (%, 2017, OECD: 2016) 17.4 (11.6) Reading 514 (489)
Median disposable household income
27.5 (23.6) Mathematics 526 (492)
(thousand USD PPP, 2017, OECD: 2016)
Public and private spending (% of GDP) Science 519 (491)
Health care 8.1 (8.8) Share of women in parliament (%) 17.0 (29.7)
Pensions (2017, OECD: 2015) 3.1 (8.5) Net official development assistance (% of GNI, 2017) 0.1 (0.4)
Education (public, 2017) 4.6 (4.5)
1. The year is indicated in parenthesis if it deviates from the year in the main title of this table.
2. Where the OECD aggregate is not provided in the source database, a simple OECD average of latest available data is calculated where data
exist for at least 80% member countries.
Source: Calculations based on data extracted from databases of the following organisations: OECD, International Energy Agency, International
Labour Organisation, International Monetary Fund, World Bank.
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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Executive summary
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
10
and exports, further depress investment and push
COVID-19 triggered a deep recession up unemployment (Table 1).
Economic activity has fallen sharply. The A permanent slump in world trade is a
Korean authorities have reacted promptly to downside risk. As an export-oriented economy,
contain the spread of the virus and to support the Korea is vulnerable to further weakness in foreign
economy. Even so, GDP is contracting, albeit demand and to lasting disruptions in global value
markedly less than in other OECD countries chains.
(Figure 1). Table 1. The recovery will be slow
Travel and leisure-related sectors have been hit Single-hit Double-hit
particularly hard and are recovering only 2019 2020 2021 2020 2021
Gross domestic product 2.0 -0.8 3.1 -2.0 1.4
gradually. Manufacturing is affected by the global
Private consumption 1.7 -3.6 3.7 -5.0 1.7
collapse in demand, notably for petrochemicals and
Gross fixed capital -2.8 2.9 1.4 2.3 1.0
cars. The crisis will leave durable scars and will formation
heighten the need to tackle challenges associated Exports 1.7 -5.7 4.4 -7.6 0.7
with population ageing and low productivity to boost Imports -0.6 -3.3 5.0 -4.3 2.9
growth. Unemployment rate 3.8 4.3 4.3 4.4 4.5
Consumer price index 0.4 0.3 0.3 0.3 0.1
Employment is shrinking. The recession is
Current account balance
driving down employment, particularly for non- 3.6 2.2 2.1 1.9 1.1
(% of GDP)
regular workers. The government will need to General government
invest further in active labour market policies to budget balance (% of 0.9 -2.8 -2.8 -3.1 -3.6
ensure an employment-rich and high-productivity GDP)
recovery. Source: OECD Economic Outlook 107 projections updated to take
into account incoming data through 23 July 2020.
Figure 1. GDP falls less than in the OECD
Index,
Fiscal policy is very expansionary. The
2019=100 government is appropriately using the fiscal space
104
Korea, Single-hit Korea, Double-hit offered by strong public finances, with general
102 OECD, Single-hit OECD, Double-hit government gross debt at around 40% of GDP, to
damp the impact of the crisis. The budget balance
100
is projected to move from a surplus in 2019 to a
98 deficit of more than 3% of GDP in 2020 in the
96
double-hit scenario and 2.8% of GDP in the single-
hit scenario. Fiscal policy needs to continue
94
supporting the economy. Additional stimulus
92 through growth-enhancing investments could
strengthen the recovery.
90
88
Monetary policy is accommodative. The Bank of
2019 2020 2021 Korea cut its policy rate by 50 basis points in March
Source: OECD Economic Outlook Database. 2020 and by another 25 basis points in May, to
0.50%, and implemented a range of measures to
StatLink 2 https://doi.org/10.1787/888934156485
increase liquidity in response to the crisis. With
The global recession will slow the recovery. inflation projected to remain very low (Figure 2),
While domestic-oriented activity will normalise monetary policy should remain accommodative. As
gradually, the global recession will hold back there is limited room left for significant policy rate
exports and investment, even assuming no cuts, the Bank of Korea should be prepared to
resurgence of the pandemic (single-hit scenario). A consider unconventional monetary policy
second global wave of infections (double-hit measures, going beyond liquidity support.
scenario) would delay the recovery in consumption
The crisis raises financial vulnerability. The
magnitude of the COVID-19 crisis creates risks for
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
11
financial stability, especially corporate debt, as disproportionately those with the weakest labour
some businesses, notably SMEs, are heavily market positions.
indebted. Some households will also struggle to
Old-age poverty is still high. More than 40% of
repay their debt. Nevertheless, Korea’s financial
people aged 65 or over live in relative poverty, the
system is protected by a number of buffers. The
highest rate in the OECD, albeit on a declining
financial authorities have taken determined action
trend. Old-age poverty is driven by limited pension
to address financial risks and now appear to have
income, partly due to the immature pension
stabilised financial markets.
system, and low earnings for many of those still
Figure 2. Inflation is set to remain very low working, despite often long working hours.
% Figure 3. Inequality is relatively high
0.8
CPI, Single-hit 0.5
0.7 CPI, Double-hit
Core inflation¹, Single hit 0.4
0.6 Core inflation¹ , Double-hit
0.3
0.5
0.2
0.4
0.1
0.3
0
SVK DNK FRA OECD KOR GBR USA CHL
0.2
Note: The Gini coefficient ranges from 0 (no inequality) to 1
0.1 (maximum inequality). For the OECD, unweighted average.
0
Source: OECD, Income Distribution Database.
2019 2020 2021
StatLink 2 https://doi.org/10.1787/888934156523
1. Excluding food and energy.
Source: OECD Economic Outlook Database. Air pollution is a major issue. Most of the
StatLink 2 https://doi.org/10.1787/888934156504 population is exposed to high levels of small
particle air pollution, with detrimental impacts on
health and well-being. Although the government
Well-being and inclusiveness need has taken significant steps to curb air pollution,
strengthening more is needed.
Renewable energy investments will help green
Korea scores poorly in some well-being the recovery. Energy generation is still
dimensions. The country’s outstanding income overwhelmingly reliant on fossil fuels, and low oil
growth over the past decades has yet to fully prices risk delaying the transition to cleaner energy
translate into high well-being, notably in terms of sources. The government has set ambitious
perceived health, environmental quality and work- targets for the share of renewables in electricity
life balance. generation, which should rise from about 8.3% in
Income inequality is relatively high, due to 2018 to 20% by 2030 and 30-35% by 2040.
wage dispersion and limited redistribution Boosting investment in renewable energy and
(Figure 3). A dual labour market and partly related clean technologies would help achieve a
large differences in productivity between large firms sustainable recovery.
and SMEs, and between industry and services,
generate strong wage inequality. Redistribution Ageing and digitalisation create
through taxes and benefits is weaker than in most challenges and opportunities
other OECD countries. Female employment is
relatively low and the gender wage gap is the Korea’s population is ageing rapidly, but
highest in the OECD. Inequalities are exacerbated digitalisation could raise productivity. The old-
by the COVID-19 crisis, which affects age dependency ratio will be the highest in the
OECD by 2060 (Figure 4). Korea has potential to
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
12
build on its advanced IT technology to foster reallocation of workers towards their most
innovation and raise productivity. The recently productive use and reduce labour market duality.
announced Korean New Deal, which will boost While social protection schemes have been
digital, green and skills investments, has the gradually extended, compliance remains a
potential to support a green and inclusive recovery. challenge.
Figure 4. The old age dependency ratio will Shifting the focus of active labour market policy
soar from direct job creation, which accounted for about
% 2020 2060 half of spending before the crisis, to training and job
90
counselling, along with enhanced adult education,
80
70
would enhance job quality. The crisis-time public
60 job creations need to be complemented by further
50 investments in human capital.
40
30
Productivity varies widely across economic
20 sectors. Productivity is outstanding in IT
10 manufacturing and strong in other manufacturing,
0 but lagging in services, including IT services
MEX KOR OECD SWE JPN
(Figure 5). The gap is also wide between big firms
Note: Ratio of population aged 65 and over to population aged 15-64. and SMEs. Narrowing those gaps is key to raising
Unweighted average for the OECD. aggregate productivity.
Source: United Nations and OECD calculations.
Technology diffusion is uneven. Use of
StatLink 2 https://doi.org/10.1787/888934156542 advanced IT technologies like cloud computing and
big data is lagging in SMEs, which face difficulties
The shrinking labour supply tends to lower the in recruiting skilled workers and managers and
economy’s growth potential. According to the training their workforce. Scale-up success is
OECD long-term model, Korea’s annual GDP per limited, despite extensive government R&D
capita growth was set to slow to a pace similar to support.
that of other OECD countries. The COVID-19 crisis
is likely to pull down Korean and global growth Product market regulations remain stringent,
further. However, there is scope for raising holding back competition and productivity growth.
employment rates and productivity to lift GDP per The government has introduced a programme to
capita growth by one to almost two percentage shift the burden of proof from the regulated to the
points. regulator and regulatory sandboxes to allow firms
in new technologies and new industries to test their
The new OECD Jobs Strategy suggests ways to products and business models without being
boost employment and foster inclusive growth. subject to all existing legal requirements.
Raising the employment rate and quality of jobs of
Korean women, who are on average highly skilled, Figure 5. Service sector productivity is lagging
should be a priority. Moreover, there is a need to %
350
enhance the quality of jobs for older workers, who OECD Korea
300
tend to retire late but often end their working lives
250
in low-quality jobs, and to facilitate youth’s access
200
to employment, especially through enhanced
150
vocational training and career guidance.
100
Social protection should be strengthened. The 50
COVID-19 crisis illustrates the vulnerability of non- 0
ICT manufacturing Other manufacturing ICT services Other business
regular workers to economic shocks, despite services
emergency measures to support households and Note: Sectors' productivity relative to total productivity.
businesses. Along with stronger social protection, Source: OECD STAN Database.
easing labour market regulations once the COVID-
19 crisis is overcome would promote the StatLink 2 https://doi.org/10.1787/888934156561
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
13
MAIN FINDINGS KEY RECOMMENDATIONS
Policies to mitigate the impact of the COVID-19 pandemic
The government has taken a wide range of measures to support households and Continue to provide support to households and businesses until the economy is
businesses during the crisis. Prolonging some current temporary measures and/or recovering, targeting any additional income support towards low-income
providing additional support may be necessary if the crisis lingers. households.
Ensure that fiscal plans preserve long-term fiscal sustainability.
Sound public finances allow further stimulus to strengthen the recovery. Support growth-enhancing investments, notably in digital fields, such as 5G
infrastructure and artificial intelligence.
Perform cost-benefit analysis of investments.
Inflation is set to remain very low over the coming years, the economic recovery Maintain accommodative monetary policy and consider unconventional measures
is likely to be slow and macro-prudential tools are in place to ensure financial going beyond liquidity support.
stability.
Raising employment and enhancing job quality in the face of COVID-19 and rapid ageing
Social protection for non-regular workers and workers in small companies remains Strengthen protection and coverage for non-regular workers and workers in new
weak, exposing them more to the COVID-19 shock, and significant coverage gaps forms of employment (e.g. platform workers) and increase compliance with social
in Employment Insurance remain. insurance through more effective enforcement.
About half of spending on active labour market policy is for direct job creation. Adjust resources for the public employment service and training programmes to
Public employment service resources are limited. Funding for training maintain effective support for jobseekers.
programmes has increased in response to the COVID-19 crisis.
Korea has no statutory (or coherent privately-regulated) cash sickness benefit, Match the introduction of a cash sickness benefit planned in the New Deal with a
causing hardship and complicating return to work. However, crisis measures were strong focus on rehabilitation and return to work.
taken in the context of COVID-19. The New Deal includes a sickness benefit
implementation study in 2021 and a pilot project for households, including low-
income families, in 2022.
Workers are often forced to retire from their career job in their fifties for various Expand incentives for workers and employers to ensure that workers stay longer
reasons, leading to a waste of human resources and worsening old-age poverty. in their career jobs, including through more flexibility in wages, with the view to
The mandatory retirement age was increased to 60 in 2016-17. raising the minimum mandatory retirement age further over time.
Increasing inclusiveness during the COVID-19 crisis and after
The old-age poverty rate is the highest in the OECD, partly due to the immature Further increase the Basic Pension and focus it on the elderly in absolute
pension system, but also to low and restricted means-tested support, despite poverty.
recent improvements. As planned under the New Deal, phase out the family support obligation from the
Basic Livelihood Security Programme.
The gender wage gap is the largest in the OECD. Regularly publish a national-level analysis of wage difference determinants to
promote fairer wages across genders.
Promoting the diffusion of technology to tackle the COVID-19 shock and to boost productivity and well-being
Product market regulations remain tight. However, the government has introduced Use regulatory sandboxes to identify excessive regulation and revise or abolish it.
a programme to shift the burden of proof from the regulated to the regulator and Facilitate telemedicine, as long as it is compatible with preserving patient safety
regulatory sandboxes are allowing firms in new technologies and new industries and quality of care.
to test their products and business models without being subject to all existing
legal requirements. The temporary lifting of the ban on telemedicine during the
COVID-19 outbreak illustrates the potential benefits of a timely review of
regulations.
Subsidies to SMEs have limited effects on promoting growth and boosting Subsidies to SMEs should focus more on promoting growth and boosting
innovation and productivity. Despite the efforts of the Korean government to better innovation and productivity. Provide SMEs in manufacturing and services with
target subsidies, the latter still allow the survival of low-productivity companies. innovation vouchers that can be used to commission R&D and studies on potential
for new technology introduction.
SMEs face a lack of skilled workers, notably in digital fields, and their employees Provide more basic ICT courses to SME employees and older persons, reduce
have limited access to training. Managers’ awareness of the potential of digital training costs for SMEs and provide targeted adult learning programmes to SME
technologies is insufficient. The digital skills gap between youth and older managers.
generations is the highest in the OECD.
Environmental policies post-COVID-19
Notwithstanding an ephemeral improvement as the COVID-19 crisis depressed Tighten caps for air pollutant emissions and strengthen vehicle emission
activity, air pollution is a major challenge, with detrimental impacts on health and standards.
well-being.
Effective carbon prices are low and vary across sectors and fuels. Price CO2 emissions evenly across sectors and fuels and raise pricing according
to a predictable schedule.
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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1 Key policy insights
The economy will recover gradually from the COVID-19 crisis
Korea was among the first countries hit by the COVID-19 pandemic, but a swift and effective policy
response allowed to contain the spread of the virus (Box 1.1). Korea was able to avoid the extensive
lockdowns of many other countries (Figure 1.1). Along with a range of government measures to protect
households and businesses, this limited the damage to the domestic economy and output is shrinking less
than in any other OECD country.
Figure 1.1. Mobility for retail and recreation has remained relatively high
% deviation from baseline
0
-10
-20
-30
-40
-50
-60
-70
Low point 25 July 2020
-80
-90
-100
KOR JPN USA CAN DEU GBR FRA ITA
Note: Mobility trends for places like restaurants, cafes, shopping centres, theme parks, museums, libraries, and movie theatres.
Source: Google COVID-19 Community Mobility Report (27 July 2020).
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Box 1.1. COVID-19 Korea’s strategy to contain the spread of the virus1
Korea was one of the first countries hit by COVID-19, with its first case confirmed on 20 January.
Infections surged in the Daegu region in mid-February. However, a prompt reaction and an effective
containment strategy allowed to limit the spread of the disease, with the number of new cases declining
sharply from early March and the number of daily deaths falling since 24 March to around zero by late
April. As of 3 August, 14 389 cases had been confirmed, and 301 deaths. Even though numbers are
difficult to compare across countries due to differences in data collection and the varying timing of the
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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epidemic, and notwithstanding the resurgence of some local clusters in recent weeks, Korea has been
among the most successful countries in the world in limiting the spread of the disease and the number
of deaths. Moreover, this was achieved without locking down any city or region, which minimised the
economic impact of the outbreak.
The containment strategy has been based on foreign entry controls, testing, tracing and treating:
Entry ban and quarantine: ban on the entry of travellers coming from the Hubei province in
China from early February 2020. As from 1 April, all persons arriving in Korea are subject to a
14-day self-quarantine and, as from 11 May, all persons arriving in Korea, regardless of
nationality, undergo a mandatory COVID-19 test.
Testing: innovative methods, such as drive-through and walk-through testing facilities, along
with the rapid development of tests, allowed extensive testing. As of 3 August, close to 1.6
million persons had been tested, among which 0.9% proved positive.
Tracing: rigorous epidemiological investigations are conducted, using credit card transactions,
CCTV recordings and GPS data on mobile phones when necessary. Anonymised information
on contacts is disclosed to the public and close contacts of positive cases are put under self-
quarantine, with their health condition monitored remotely.
Treatment: patients are classified according to severity and directed towards appropriate
treatment paths at hospitals for severe cases and residential treatment centres for milder cases.
Health care resources and organisation were adjusted in response to the pandemic.
Digital tools, notably mobile apps, artificial intelligence and devices allowing remote work and service
provision (including telemedicine) have played a key role in the strategy to contain the spread of COVID-
19 (Chapter 3).
1. For further details, see Annex 1.B.
Source: Ministry of Health and Welfare, Government of the Republic of Korea (2020).
The government has taken appropriate and prompt measures to support the economy and alleviate
hardship (Table 1.1). In the first phase of the recovery, temporary support for households and businesses
will need to be adjusted gradually according to the pace of the recovery, taking into account the relatively
low level and incomplete coverage of unemployment insurance, as well as sectoral specificities. If the crisis
lingers, some temporary tax and social security deferrals and reductions will need to be prolonged and
additional support for SMEs and firm restructuring may be necessary. Further investment in training and
upskilling, along with increased support for the transition towards renewable energy and clean technologies
would strengthen the second phase of the recovery, in which fiscal multipliers will be higher. Against this
background, the main messages of this Survey are:
Government support should be provided to households and businesses until the economy is
recovering. Low government debt allows for public growth-enhancing investments to spur the
recovery and raise productivity. Monetary policy should remain accommodative, and if necessary,
unconventional monetary policy measures should be considered to expand the degree of monetary
accommodation.
The government should continue supporting workers after the crisis, especially with help to reskill,
so as to facilitate the reallocation across sectors. Lifting labour participation and improving job
quality for women and older workers will also remain crucial to mitigate the impact of ageing on
labour inputs, and to reduce gender inequality and old age poverty.
Regulatory reforms to enhance competition and encourage innovation, especially by young firms,
and further investments in training and upskilling, notably in digital fields, would facilitate the
diffusion of technology and lift productivity.
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Table 1.1. Policies to support the Korean economy
Date Measure Amount Main items
Total support of more Three supplementary budgets: KRW 59.2 trillion (3.1% of GDP)
than KRW 277 trillion Financing support (loans and guarantees): over KRW 200 trillion
(14.4 % of GDP) (10.6% of GDP)
Other: tax reduction, deferral of social security contributions
5-20 Support for the quarantine KRW 4.3 trillion KRW 0.1 trillion for preemptive quarantine (budget)
February system, affected families (Budget KRW 0.3 trillion, KRW 2.0 trillion for SMEs (loans and guarantees)
and businesses financing KRW 4.0 KRW 0.3 trillion for low cost carriers (fee reduction)
trillion) Policy preparation for worse-hit sectors, such as automobile, aviation,
shipping, tourism and export industries
28 February Support for households and KRW 16 trillion KRW 2.8 trillion for consumption coupons and support for family care
reinforcing the financial (Budget KRW 2.8 trillion, leave
sector financing KRW 11.7 KRW 2.5 trillion for low interest rates loans and guarantees to SMEs.
trillion, tax benefit KRW KRW 0.5 trillion for support to local credit guarantee funds
1.7 trillion) (guarantees)
KRW 8.2 trillion for liquidity support to the financial sector (liquidity)
KRW 1.7 trillion for tax credit for reduction of rents and cut in
individual consumption tax on cars (tax benefits)
16 March Bank of Korea policy rate cut 50 basis point policy rate cut to 0.75%
Interest rate cut on the Bank Intermediated Lending Support Facility
to 0.25%
Passed 17 First supplementary budget KRW 11.7 trillion (0.6% KRW 2.1 trillion for virus prevention, diagnosis and treatment
March of GDP) KRW 4.1 trillion for loans to SMEs and small merchants
-Expansion expenditure KRW 3.5 trillion for emergency livelihood support including gift
of KRW 10.9 trillion vouchers and deduction in national health insurance
-Revenue adjustment of KRW 1.2 trillion for aid to employees and severely affected provinces,
KRW 0.8 trillion including expanded employment retention subsidy and financial
support
Support of epidemic prevention and treatment for designated
coronavirus disaster areas
19 March Plan to provide financing to Initially KRW 50 trillion KRW 22.5 trillion for lending to SMEs, small merchants and self-
24 March companies and stabilise Raised to KRW 100 employed (loans and guarantees)
financial markets (bonds and trillion (5.1% of GDP)1 KRW 29.1 trillion to support large and mid-sized companies (loans
securities) and guarantees)
KRW 17.8 trillion to avoid a credit crunch (loans and guarantees)
KRW 20.0 trillion: Bond Market Stabilisation Fund to perform financial
functions (liquidity provision funded by financial institutions)
KRW 10.7 trillion: Securities Market Stabilisation Fund (liquidity
provision funded by financial institutions)
Expansion of foreign currency liquidity by raising ceilings on the
foreign-exchange derivatives positions of banks and easing foreign-
exchange market stability rules (26 and 28 March)
19 March Currency swap agreement USD 60 billion Bilateral currency swap agreement between the Bank of Korea and
with the US the US Federal reserve for 6 months (dollar liquidity)
20 March, Purchase of treasury bonds KRW 4.5 trillion KRW 4.5 trillion (KRW 1.5 trillion on 20 March, 10 April and 2 July,
10 April, 2 by the Bank of Korea respectively) purchases of treasury bonds for market stabilisation.
July
8 April Support for exports and KRW 10.4 trillion KRW 10.4 trillion for financial support to export companies and start-
start-ups ups and ventures (loans and guarantees)
16 April Support for non-bank KRW 10 trillion KRW 10 trillion: loans to bank and non-bank financial institutions such
financial institutions as securities and insurance companies for 3 months
22 April Plan to support key KRW 85.1 trillion KRW 40 trillion: Key Industry Relief Fund guaranteed by government
industries and additional to purchase corporate debt and equity
financing to SMEs and KRW 35 trillion for additional financing to SMEs (loans and
households guarantees)
KRW 10.1 trillion for special employment security measures
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Passed 30 Second supplementary KRW 12.2 trillion (0.6% Emergency relief grants of up to KRW 1 million (USD 814) to all 21
April budget of GDP) million households
* KRW 3.4 trillion - 2.7 million lower income households can receive grants in cash
financed by debt - The remaining 19 million households receive grants in voucher or
issuance (the remaining credit card points for incentive to consumption
by spending cuts) A total of KRW 14.3 trillion, including a KRW 2.1 trillion of local
government funds, is allocated for the relief programme
28 May Bank of Korea policy rate cut 25 basis point policy rate cut to 0.50%
3 July Third supplementary budget KRW 35.1 trillion - Creation of about 550 000 jobs in publicly-initiated programmes and
strengthening social safety nets (KRW 10.0 trillion)
- Emergency loans to struggling small merchants, SMEs and large
businesses (KRW 5 trillion)
- New Deal projects investments (KRW 4.8 trillion)
1. More detailed information can be found in Annex 1.B.
The recovery will probably be slow and uncertainty is exceptionally high
The COVID-19 crisis has led to falls in GDP of respectively 1.3% and 3.3% in the first and second quarters
of 2020 (quarter on quarter, seasonally adjusted). The upswing in employment was abruptly interrupted in
March (Figure 1.2, Panel A). The contraction is much smaller than in Canada and the United States, and
comparable to the decline in Japan – in Europe, short-time work schemes damped the impact of lockdowns
on employment (Panel B). The fall in employment in Korea affects most economic sectors, but is
particularly severe in wholesale and retail trade, accommodation and food. Employment falls most among
temporary and daily workers, as well as small business owners (Figure 1.3).
Figure 1.2. The COVID-19 crisis has hit employment hard, albeit less than in most other countries
A. Net job creations in Korea (thousands, y-o-y) B. Employment in June 2020
(Y-o-y percentage change)
800 0
-1
600
-2
400 -3
-4
200
-5
0 -6
-7
-200 -8
-400 -9
-10
-600 Japan Korea Germany United Italy Canada United
2017M01 2017M04 2017M07 2017M10 2018M01 2018M04 2018M07 2018M10 2019M01 2019M04 2019M07 2019M10 2020M01 2020M04
Kingdom States
Note: For the United Kingdom, Office for National Statistics experimental monthly estimates of paid employees; For the United States, nonfarm
employment.
Source: National statistical offices.
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For an export-dependent economy like Korea, further disruptions in world trade and global value chains
would be particularly harmful (Table 1.3). Exports are fairly concentrated both geographically and in terms
of products (Figure 1.4). China and the United States combined account for nearly 40% of exports and
Korea is deeply integrated in global value chains (GVCs), particularly for electronic goods. The outlook for
semiconductor exports remains uncertain despite encouraging developments before the outbreak of the
COVID-19 crisis (Figure 1.5). The increasing diversification of Korea’s trade relations will increase its
resilience over time. Several bilateral free trade agreements (FTAs) have been signed, most recently with
Indonesia, Israel and the United Kingdom (to preserve bilateral trade relations after Brexit). Korea aims at
pursuing FTAs with more partners and is also part of the Regional Comprehensive Economic Partnership
(RCEP) under negotiation with the ten ASEAN countries, China, Japan, Australia and New Zealand.
Figure 1.3. Employment drops in services and among non-regular workers
Year-on-year percentage change (unless otherwise specified), June 2020
Employment rate* -1.3
Unemployment rate* 0.3
Participation rate* -1.0
Total Employment -1.3
Agriculture, forestry & fishing 3.4
Manufacturing -1.5
Construction -3.0
Wholesale & retail trade, accommodation & food -6.0
Electricity, transport, communication & finance 0.6
Business, personal, public service & others 0.6
Temporary employees -8.3
Daily workers -5.8
Employers -11.3
Own account workers 0.4
Unpaid family workers -4.6
-20 -15 -10 -5 0 5
* Percentage points.
Note: The self-employed are divided between employers and own-account workers.
Source: Statistics Korea.
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The projected contraction in GDP in 2020 is considerably milder than in other OECD countries, both in the
single-hit scenario, which assumes no resurgence of the pandemic and in the double-hit scenario, which
posits a global second wave of infections (OECD, 2019a). Private consumption will pick up as distancing
recommendations are eased, albeit at a moderate pace as households exercise caution and suffer from
income losses and relatively high unemployment. Industrial production will also normalise, but global
supply chains will continue to experience disruptions for some time. The global recession is bound to have
a durable impact on Korean exports and investment, especially in the double-hit scenario (Table 1.2).
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Table 1.2. Macroeconomic indicators and projections under two epidemiological scenarios
Single-hit scenario Double-hit scenario
2019 2020 2021 2020 2021
Percentage changes, volume
GDP at market prices 2.0 -0.8 3.1 -2.0 1.4
Private consumption 1.7 -3.6 3.7 -5.0 1.7
Government consumption 6.6 7.1 5.9 7.3 6.0
Gross fixed capital formation -2.8 2.9 1.4 2.3 1.0
Final domestic demand 1.1 0.4 3.4 -0.5 2.3
Stockbuilding1 0.1 0.0 0.1 0.0 0.1
Total domestic demand 1.1 0.3 3.4 -0.5 2.4
Exports of goods and services 1.7 -5.7 4.4 -7.6 0.7
Imports of goods and services -0.6 -3.3 5.0 -4.3 2.9
Net exports1 1.0 -1.1 -0.1 -1.5 -0.8
Consumer price index 0.4 0.3 0.3 0.3 0.1
Unemployment rate (% of labour force) 3.8 4.3 4.3 4.4 4.5
General government financial balance (% of GDP) 2 0.9 -2.8 -2.8 -3.1 -3.6
Current account balance (% of GDP) 3.6 2.2 2.1 1.9 1.1
1. Contributions to changes in real GDP.
2. The structural general government financial balance has not been estimated in OECD Economic Outlook 107.
Source: OECD Economic Outlook 107 projections updated to take into account incoming data through 23 July 2020.
Figure 1.4. Exports are fairly concentrated in terms of countries and product types (%), 2018
By destination By product type
14.2
26.8 3.9
31.6
39.5 6.3
9.3
12.1
10.9 23.8
5.0 9.0
1.5
1.6 2.6
1.9
China United States European Union Electronics Chemicals Motor vehicles
Japan India Mexico Metals Electrical Other transport
Other
Australia Indonesia Other
Source: OECD Quarterly International Trade Statistics; OECD Bilateral Trade in Goods by Industry and End-use (BTDIxE).
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Figure 1.5. The outlook for global semi-conductors remains uncertain
Index, Jan 2013=100
300
Global semiconductor sales (value)
Korean semiconductor exports value
250
Korean semiconductor exports volume
200
150
100
50
0
2013 2014 2015 2016 2017 2018 2019 2020
Source: World Semi-Conductors Statistics and Korea Customs Service.
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Even though the economic downturn is milder than in other OECD countries and the government has taken
extensive measures to support households and businesses (Table 1.1), the COVID-19 crisis creates new
vulnerabilities. Household debt is relatively high and losses in income and rising unemployment will make
reimbursement more difficult, although low interest rates help and further forbearance and debt deferral
measures can be introduced if needed. Some households, notably self-employed, as well as some heavily
indebted SMEs, already faced higher risks than ordinary homebuyers before the crisis (Bank of Korea,
2019a). The persistent concentration of economic power in the large business groups – the chaebols –
may reduce the ability of the economy to adapt to an increasingly volatile global environment (2018 OECD
Economic Survey of Korea).
Table 1.3. Events that could lead to major changes in the outlook
Vulnerability Possible outcomes
A more protracted global depression than expected. A very sluggish recovery from the COVID-19 crisis in trading
partners would drag exports and investment down, with a major
impact on Korean GDP growth.
The COVID-19 crisis could trigger further disruptions in global value Disruptions and related uncertainty in global value chains would
chains and an intensification of global trade tensions. Korea is deeply affect both exports and investment. They could trigger a fall in the
integrated in global value chains. value of the won and capital outflows.
The deterioration in economic conditions associated with the COVID- The financial system is resilient, but some institutions may be
19 crisis weakens the ability to repay of some heavily indebted vulnerable to large shocks, which could lead to credit contraction
households, notably self-employed and SMEs, despite broad-based during the recession. Household distress would amplify the
government support. downturn, notably through a further reduction in consumption and
employment.
Geo-political tension in the Korean peninsula intensifies further. Although financial markets and capital flows have not been affected
by the recent incidents, further escalation of tensions could create
financial turbulence and weigh on economic growth and stability.
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Monetary policy is accommodative but inflation remains below the 2% target
Inflation is undershooting its medium-term target (Figure 1.6), which prompted the Bank of Korea to cut its
policy rate by 25 basis points already twice in 2019, in July and October to 1.25% (Figure 1.7, Panel A).
The COVID-19 crisis brings further disinflationary pressures, to which the Bank of Korea responded swiftly
by cutting its policy rate by 50 basis points and introducing a range of measures to provide liquidity and
support financial markets in March 2020. The policy rate was cut further by 25 basis points to 0.5% in May
2020 (Table 1.1). The Won depreciated somewhat (Figure 1.7, Panel B). If low inflation and sluggish
activity persist longer than expected, further monetary policy accommodation needs to be considered.
Because little space is left for further policy rate cuts, the Bank of Korea should stand ready to adopt
unconventional monetary policy measures going beyond liquidity support, like the purchase of government
bonds to lower long-term interest rates.
Figure 1.6. Inflation is well below the 2% target
5.0
CPI CPI excluding food and energy
4.5
4.0
3.5
3.0 3 +/- 1% 2.5 -3.5%
2.5 2%
2.0
1.5
1.0
0.5
0.0
2010 11 12 13 14 15 16 17 18 19 20
-0.5
Note: In boxes, the medium-term consumer price inflation target.
Source: OECD, Economic Outlook Database.
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The Bank of Korea Act stipulates that “the Bank shall contribute to the sound development of the national
economy through ensuring price stability, while giving due consideration to financial stability in carrying out
its monetary policy” (Bank of Korea, 2019b). The inclusion of financial stability considerations in the central
bank’s mandate has merits, since monetary and macro-prudential policies can be complementary (Bruno
et al., 2017). At the current juncture, economic growth is expected to be sluggish and inflationary pressures
on the demand-side are forecast to remain weak due to the COVID-19 pandemic. Therefore, the Bank of
Korea should maintain its accommodative monetary policy stance. Meanwhile, concerns about financial
imbalance risks are intensifying as housing prices have been rising in an increasing number of areas, and
lending to households has accelerated again recently under the accommodative financial conditions. The
Bank of Korea should continue to pay close attention to changes in macroeconomic conditions and
developments of the COVID-19 pandemic and financial stability risks, such as an over-concentration of
capital in the real-estate market, while maintaining its accommodative policy stance to support the
economy.
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Figure 1.7. Monetary policy has been eased and the won has depreciated somewhat
A. Policy rates Index 2010 = 100
B. Exchange rates
%
3.5 Korea United States 120
Japan Euro Area Real effective exchange rate Dollar per KRW
3.0
115
2.5
110
2.0
1.5 105
1.0
100
0.5
95
0.0
-0.5 90
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: OECD, Economic Outlook Database.
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Strong public finances allow stimulating the economy
The government has appropriately responded to the COVID-19 crisis by providing additional fiscal support
to the economy. The budget balance will move from a surplus of 0.9% of GDP in 2019 to a deficit of around
3% of GDP in 2020 (Figure 1.8, Panel A), reflecting in particular a fiscal stimulus of 3.1% of GDP.
Government debt was less than 40% in 2019, lower than in all G7 countries and far below the OECD
average of over 100% (Panel B). Sound public finances provide room to increase spending in the current
downturn, even though the medium-term implications should be monitored carefully, especially when
permanent spending measures are implemented. Temporary fiscal support should remain in place in the
first phase of the recovery, before shifting towards more investment spending in the second phase. In the
longer run, public spending is set to increase due to population ageing, which will require government
revenue increases to ensure fiscal sustainability. Total tax revenue amounted to 28.4% of GDP in 2018,
compared to an OECD average of 34.3% (OECD, 2019b), despite defence spending of over 2% of GDP,
a share only surpassed in the OECD by Israel and the United States.
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Figure 1.8. Sound public finances leave room for fiscal stimulus
A. Government fiscal balance B. Gross government debt (National
% of GDP
Accounts definition) 2019
Single-hit scenario Double-hit scenario % of GDP
5.0 250
4.0
3.0 200
2.0
150
1.0
0.0
100
-1.0
-2.0 50
-3.0
-4.0 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 KOR DEU CAN USA OECD GBR FRA ITA JPN
Source: OECD, Economic Outlook Database.
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The decline in government revenue and massive fiscal support to the economy will push up government
debt. At the current juncture, uncertainty is extremely high and any longer-term extrapolation is purely
illustrative. Here, gross government debt is posited to increase through 2021 in line with the budget deficit,
as projected in the event of a double-COVID-19 hit, with the deficit then assumed to be reduced gradually
and to revert to its pre-crisis path by 2025. In that case, debt jumps to more than 48% of GDP in 2023
(Figure 1.9). Thereafter debt grows in parallel to its pre-crisis path, where the increase in spending due to
ageing and increased demand for public services is derived from the OECD long-term model estimates
(Guillemette et al., 2017).
Figure 1.9. Potential impact of the COVID-19 crisis on gross government debt
% of GDP
58
Pre-crisis Post-crisis
53
48
43
38
33
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040
Note: This figure is based on the Economic Outlook 107 double-hit scenario updated to take into account incoming data through 23 July 2020.
The increase in debt after 2021 in the pre-crisis scenario is driven by rising spending due to ageing and rising demand for public services, as
derived from the OECD long-term model estimates (Guillemette et al., 2017).
Source: OECD calculations.
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Table 1.4. Past recommendations on fiscal policy
Main recent OECD recommendations Action taken since the 2018 Survey or planned
Control spending in line with the Fiscal Management Plan to help The government set fiscal balance and government debt targets,
ensure a sustainable fiscal balance in the long run. and makes sure that total expenditure lies close to the target set
out in the five-year National Fiscal Management Plan.
Allow public spending as a share of GDP to increase in the face of Government spending has been increasing much faster than
population ageing in the long run. nominal GDP since 2018.
Use taxes that are relatively less harmful to economic growth, VAT is applied on cloud services provided by multinational
notably the VAT, to finance rising social spending. companies in Korea since December 2018.
Reallocate public spending to social welfare as planned. Public spending for health, welfare, and employment sector
increased significantly (+11.3% in the 2019 budget).
The financial system remains solid, but the COVID-19 crisis raises vulnerability
The COVID-19 crisis generates liquidity risks, which are mitigated by the measures taken by the
government and the Bank of Korea (Table 1.1). Some businesses in the sectors most affected by the
pandemic are likely to suffer persistently low activity, which increases solvency risks, all the more as the
crisis lingers. Regulatory Tier 1 capital is well above mandatory requirements albeit in the lower part of the
OECD distribution (Figure 1.10, Panel A). Delinquency rates are low, even though they edged up for some
regional banks already in the pre-crisis period for the self-employed, as business conditions deteriorated.
The overall leverage ratio is close to the OECD average (Panel B). Corporate credit growth has been
relatively strong (Figure 1.11, Panel A) and corporate debt relative to GDP is slightly higher than the G7
average, although somewhat lower than in Japan and the European Union (Panel B). Household credit
growth slowed following the introduction of a debt service ratio limit in 2018 and a tightening of regulations
for non-bank financial institutions since 2017, but remains higher than household income growth (Panel
C). The ratio of household debt to disposable income is above the OECD average, but below levels
reached in Northern Europe (Panel D).
Figure 1.10. The unweighted leverage ratio is close to the OECD average
A. Regulatory Tier 1 capital to risk-weighted assets B. Total capital relative to unweighted assets
2018 or latest year available 2018 or latest year available %
%
30 16
14
25
12
20 10
15 8
6
10
4
5 2
0 CHL
AUS
KOR
CAN
ESP
USA DNK
CAN
FRA
SWE
GBR
NLD 0
ITA
PRT
GRC
FRA
AUT
POL AUS
ESP
ITA
BEL
CZE
AUT
BEL
DEU
HUN
OECD
GBR
CZE PRT
SVK
ISR
KOR
OECD
LUX
CHE
SWE
NLD
NOR
FIN
DNK CHL
CHE
MEX
USA
POL
GRC
LVA
ISL
IRL
LUX
EST TUR
EST
IRL
ISL
Source: OECD, Resilience database.
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Real housing prices have been stable at the national level over the past decade (Figure 1.12, Panel A),
thanks to more responsive supply than in most OECD countries and prudent financial policy. The price-to-
rent ratio is also close to its historical average (Panel B). Self-employed borrowers, however, are facing
higher risks, notably in wholesale and retail trade, and in accommodation and restaurants, where the
COVID-19 crisis has curtailed activity (Bank of Korea, 2019a). Moreover, housing prices in some parts of
the Seoul metropolitan area and the provinces have increased. The government has recently announced
additional measures to curb housing price increases, including tighter mortgage lending rules, higher
capital gains tax rates, property tax increases for homeowners holding several dwellings, and regulatory
revision to boost housing supply.
Korean finance has made efforts to become greener, for example through the issuance of green bonds
and the commitment of several Korean companies to follow the Task Force on Climate-related Financial
Disclosures (TCFD) recommendations. However, disclosure remains limited in Korea despite requirements
from the 2012 Greenhouse Gas and Energy Target Management Scheme and the 2014 National Pension
Act (Cambridge Centre for Sustainable Finance, 2018).
Figure 1.11. Aggregate corporate debt is moderate but rising and household debt is high
A. Corporate credit growth B. Non-financial corporation debt1
Y-o-y % change % of GDP
12 160
140
10
120
8
100
6 80
60
4
40
2
20
0 0
2010 11 12 13 14 15 16 17 18 19 DEU ITA USA GBR G7 KOR JPN EA19 CAN FRA
C. Household credit growth D. Household debt, % of household disposable income1
Y-o-y % change
12 300
10 250
8 200
6 150
4 100
2 50
0 0
2010 11 12 13 14 15 16 17 18 19
HUN
SVN
CZE
ITA
EST
SVK
AUT
DEU
USA
GRC
ESP
JPN
BEL
FRA
PRT
OECD
FIN
IRL
GBR
CAN
KOR
SWE
CHE
AUS
NLD
NOR
DNK
1. 2018 or latest year available.
Source: Bank of Korea, Bank for International Settlements and OECD, Economic Outlook Database.
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26
Figure 1.12. At the national level, housing prices have been stable
A. Real housing prices (1986Q1=100) B. Price-to-rent ratio (1986-2019 average=100)
180 130
160
120
Korea OECD
140
110
120
100 100
80 90
Korea OECD
60
80
40
70
20
0 60
1986 1990 1994 1998 2002 2006 2010 2014 2018 1986 1990 1994 1998 2002 2006 2010 2014 2018
Note: In Panel A, real housing prices are deflated using the private consumption deflator.
Source: OECD, House Price database.
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Financial authorities need to consider taking into account climate-related risks in financial markets, as done
for instance by the Bank of England (Carney, 2015). Climate events, such as droughts, generate aggregate
supply shocks and depreciate assets. Decarbonisation has impacts on the asset prices of long-lived
energy-related infrastructure. Because of market imperfections, financial markets will not on their own
respond adequately to these risks (Krogstrup and Oman, 2019).
Table 1.5. Past recommendations on financial policy
Main recent OECD recommendations Action taken since the 2018 Survey or planned
Consider further tightening loan-to-value (LTV) and debt-to-income The cap on LTV was tightened to 0-40% for homebuyers to buy a
(DTI) regulations on mortgage lending depending on the impact of the house in “overheated” or “bubble-prone” areas, depending on the
recent changes. housing price. The cap was also tightened to 30-50% in the
adjustment-targeted areas. Further regulations are imposed on a
homeowner holding multiple houses in the regulated areas. The
DSR (debt service ratio) regulation in the “overheated” or “bubble-
prone” areas was tightened as well.
The Bank of Korea joined the Network for Greening the Financial System, a voluntary network of central
banks promoting sustainable growth and joint management of climate change-related financial risks, in
November 2019. The Network’s recommendations are non-binding, but will help incorporate climate-
related risks into financial stability monitoring and supervision (NGFS, 2019). Korea could consider
following the United Kingdom, where the financial supervisor requires financial intermediaries to report
their climate-related exposures since April 2019, or France, where the Law for the Energy Transition and
Green Growth requires listed companies to disclose financial risks and institutional investors to report how
investment policies align with the national energy and ecological transition.
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
27
The fruits of Korea’s past economic performance have not been equally
distributed
The COVID-19 crisis increases inequality, despite income support, job retention measures and the creation
of public jobs for the elderly and other low-income groups. The duality of the Korean labour market – the
large gap in wages, working conditions and social coverage between regular and non-regular workers –
implies that non-regular workers, with insecure jobs and in many cases insufficient social insurance, are
most vulnerable to shocks like the COVID-19 pandemic. Many older workers work in small businesses in
the service sector particularly affected by the virus outbreak. In addition, physical distancing measures
have tended to isolate them from work and social activities. Korea’s relative poverty rate is the third highest
OECD-wide, driven by the worst old-age relative poverty rate in the OECD, even though the country
achieved one of the world’s most impressive economic performances over the past half century,
sometimes referred to as the “Miracle on the Han River” (Koen, 2019). While early phases of
industrialisation generated strong income growth for most of the population, growth has become less
inclusive since the 1997 financial crisis (Kim, 2011). Income inequality, as measured by the Gini coefficient
after taxes and transfers, is the seventh highest in the OECD (Figure 1.13, Panel A), reflecting wide wage
dispersion (Panel B) and limited redistribution, compared with most other OECD countries. Population
ageing and skill-biased technological change threaten to increase inequality further unless labour market
duality is reduced, skills are upgraded, older workers get access to better jobs, pension adequacy improves
and the social safety net is strengthened.
The government has taken several measures in recent years to tackle income inequality. The minimum
wage was raised by 16.4% in 2018, bringing it to a relatively high level in relation to the median wage
(Figure 1.14). In 2019, the minimum wage was raised by 10.9%, the third highest increase in the OECD,
behind Lithuania (38.8%) and Spain (22.3%). While the rapid increase contributed to reducing wage
inequality, it may have affected the employment of low-skilled workers, as suggested by weakness in
employment developments in labour-intensive sectors, even before the COVID-19 crisis, although weak
demand has also contributed. SMEs are affected by higher labour costs, despite subsidies to help them
adjust (Choi, 2018). Accordingly, the minimum wage was raised by 2.9% for 2020 and, in the context of
the COVID-19 crisis, by 1.5% for 2021. The government has more than tripled the amount spent on the
earned income tax credit (EITC) in 2019 and doubled the number of recipients, through lower qualification
requirements and higher asset and income ceilings, allowing nearly one household in five to receive an
EITC, with a total cost of around 0.2% of GDP. The EITC is an efficient tool to increase low-paid workers’
income, especially in countries with high wage disparities (OECD, 2018a; Immervoll et al., 2007).
As shown above, non-regular workers have suffered much larger job losses than regular employees since
the outbreak of the COVID-19 crisis, highlighting the need to strengthen the social safety net, both in crisis
time, as is being done during the COVID-19 crisis (Table 1.1), and on a more permanent basis. Social
protection remains weaker than in most other OECD countries, despite the gradual extension of
Employment Insurance to most workers, as compliance remains insufficient, notably for non-regular and
small company workers. Their rights should be better enforced. Employers that employ workers eligible for
Employment Insurance, but fail to report their employees’ insured status are subject to a fine for
negligence. In 2018, a fine for failure to report workers eligible for the insurance was imposed in about
85 000 cases. Introducing a degree of statutory employer liability for all workers and a cash sickness
benefit should also be considered, building on the crisis measures taken in the context of COVID-19.
Employees who are (self-) quarantined or hospitalised due to COVID-19 are entitled to paid leave from the
employer or living allowance from the government (Chapter 2). The New Deal includes a sickness benefit
implementation study in 2021 and a pilot project for households, including low-income families, in 2022.
Strong focus should be on rehabilitation and return to work, including clear protocols defining the rights
and duties of workers, employers, doctors and insurance authorities, and regular work capacity
assessments (OECD, 2018b).
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
28
Figure 1.13. Income inequality is relatively high
2017 or latest
A. Gini after taxes and transfers
0.50
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00 SVK
SVN
CZE
DNK
NORISL
BEL
FIN
HUN
SWE
AUT
POL
NLD
FRA
DEU
CHE
LUX
IRL
CAN
EST
OECD
ITA
AUS
PRT
GRC
JPN
ESP
ISR
LVA
NZL
KOR
GBR
LTU
USA
TUR
MEX
CHL
B. Dispersion of gross earnings of full-time dependent employees
6
5
4
3
2
1
0
SWE ITA BEL NOR DNK FIN CHE NZL FRA JPN ISL NLD ESP AUS LUX GRC AUT SVN DEU MEX CZE GBR SVK TUR CAN HUN LTU EST POL PRT CHL LVA IRL KOR ISR USA
OECD
Note: Whole population. The Gini coefficient ranges from 0 (no inequality) to 1 (maximum inequality). The dispersion of gross earnings refers to
the ratio of the top to the bottom decile of the wage distribution.
Source: OECD, Income Distribution Database and Decile ratios of gross earnings dataset.
StatLink 2 https://doi.org/10.1787/888934156808
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
29
Figure 1.14. The minimum wage is high relative to the median wage, 2018
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Note: Refers to gross wages.
Source: OECD, Minimum relative to average wages of full-time workers dataset.
StatLink 2 https://doi.org/10.1787/888934156827
Several other measures are being implemented to reduce inequalities, including extensions of social and
health insurance coverage, the creation of public sector jobs, in particular for older workers, investments
in vocational education, and increases in basic pensions. The pension system has yet to mature and
means-tested support is low. The Basic Pension should be raised further and more focussed on the elderly
in absolute poverty, access to the Basic Livelihood Security Programme should be facilitated and National
Pension Scheme contributions and future replacement rates should be raised (Chapter 2). Late retirement
is not preventing old-age poverty, as older workers tend to be employed in low-paid and insecure jobs (see
below).
Lowering wage inequality will also require enhancing competition in product markets, as concentration and
economic rents generally widen earning gaps between firms (Furman and Orszag, 2018). Employees in
big business groups (chaebols) benefit from much higher wages and social protection than in SMEs (2018
OECD Economic Survey of Korea). Hence, reinforcing social protection should go hand in hand with
loosening barriers to competition in product markets and labour mobility. Employment protection legislation
is flexible regarding collective dismissals, but is relatively strict compared to other OECD countries
regarding individual dismissals of regular workers (Figure 1.15). This contributes to labour market duality
and hampers labour reallocation towards the most productive uses.
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30
Table 1.6. Past recommendations on the labour market and inclusiveness
Main recent OECD recommendations Action taken since the 2018 Survey or planned
Break down dualism by relaxing employment protection for regular The coverage of industrial accident compensation insurance is
workers and making it more transparent, while expanding social extended to apprentices from universities from September 2018,
insurance coverage and training for non-regular workers. construction equipment operators (about 110 000 persons) from
January 2019 and to visiting service workers and cargo truck
drivers (about 199 000 persons) from July 2020. The government
plans to expand the coverage of employment insurance to
dependent self-employed and freelance artists.
In 2020, the government will introduce the National Learning Card
to integrate learning account systems for the unemployed and the
employed.
Assess the impact of the 16.4% hike in the minimum wage in 2018 Some studies show that raising the minimum wage has reduced
before raising it further. wage inequality. Further studies on the impact on the employment
are needed. The Minimum Wage Commission is studying ways to
improve analyses and research on the effects of the minimum
wage. The minimum wage increase was set to 2.9% in 2020 and
1.5% in 2021, taking into account prevailing economic conditions.
Increase the quality and availability of vocational education to reduce The number of specialised high schools participating in industry-
labour market mismatch and labour shortages in SMEs. academia apprenticeship partnerships has increased markedly
and the government plans to develop training in Fourth Industrial
Revolution sectors. Since 2014, 15 369 businesses and 91 195
workers have participated in the “(work-study) dual system”.
Further increase the Basic Pension and focus it on the elderly in The government increased the Basic Pension for all beneficiaries
absolute poverty. (around 5 million) to up to KRW 250 thousand per month from
KRW 200 thousand in September 2018. From April 2019, low-
income elderlies (bottom 20%) receive an increased monthly basic
pension of up to KRW 300 thousand.
Figure 1.15. Permanent workers’ employment protection is relatively strong
Index of protection of permanent workers against individual dismissals, 2013
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
USA CAN GBR NZL HUN CHE IRL AUS JPN EST SVK MEX ESP SVN ISL GRC DNK AUT BEL POL TUR NOR LUX KOR ISR FIN SWE CHL DEU ITA LVA FRA NLD CZE PRT
Note: The index ranges from 0 (no regulation) to 6 (detailed regulation).
Source: OECD, Employment Protection Database.
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31
Korea’s economic achievements have not fully translated into well-being
Korea’s income per capita has risen spectacularly over the past decades and is now close to the European
Union average. However, looking at the well-being dimensions monitored by the OECD, Korea is among
the top 20% OECD performers only on housing, although scores on education and skills, and civic
engagement, are also fairly high (Figure 1.16). Korea ranks particularly low on social connections,
perceived health status, environmental quality and work-life balance, highlighting the need to foster a more
inclusive society. Meanwhile, the government submitted again the revision package of labour-related laws
based on the recommendations of public interest members of the Economic, Social and Labour Council,
together with the ratification proposal of the three International Labour Organization fundamental
Conventions No. 87 on freedom of association, No. 98 on the right to organise and collective bargaining,
and No. 29 on the prohibition of forced labour to the National Assembly. The approval by the National
Assembly of the revision package and the ratification proposal would significantly improve Korea’s worker
fundamental rights.
Figure 1.16. Well-being scores remain relatively low in many dimensions
Better Life Index, country rankings from 1 (best) to 35 (worst), 2017
20% top performers 60% middle performers 20% bottom performers Korea
5
10 10
19
25 23
27
35 34 32
34
Social Health status Environmental Work-life Subjective Personal Income and Jobs and Civic Education and Housing
connections quality balance well-being security wealth earnings engagement skills
Note: Each well-being dimension is measured by one to four indicators from the OECD Better Life Index set. Normalised indicators are averaged
with equal weights.
Source: OECD Better Life Index, www.oecdbetterlifeindex.org.
StatLink 2 https://doi.org/10.1787/888934156865
Better use of labour resources and innovation can support growth
Korea’s employment rate is relatively low, even before the COVID-19 crisis (Figure 1.17, Panel A), largely
reflecting low female employment, although delayed labour market entry of youth also contributes.
Employment of older workers is high, but often concentrated in low-paid, low productivity jobs. Working
time is among the highest in the OECD, but labour productivity is low (Panel B), whether measured per
employee or per hour worked, mostly reflecting weak performance in SMEs and services. Hence, policies
should aim at raising employment and productivity, while promoting better work-life balance (Fernandez et
al., 2020).
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
32
Figure 1.17. Korea has scope to raise both employment and productivity
2018 or latest
A. Employment rate, population aged 15-64 (%)
90
85
80
75
70
65
60
55
50
45
40
B. Labour productivity (OECD=100)
200
GDP per person employed GDP per hour worked
180
160
140
120
100
80
60
40
20
0
Source: OECD (2019c), OECD Compendium of Productivity Indicators 2019, OECD Publishing, Paris, https://doi.org/10.1787/b2774f97-en.
StatLink 2 https://doi.org/10.1787/888934156884
Boosting female and youth employment, prolonging careers and enhancing adult skills
is essential
The gender employment gap for people aged 15-64 is nearly 18 percentage points, the fourth largest in
the OECD. Relatively low wages and weak career prospects discourage many women from working. Even
when working, many women are in non-regular employment, which prevents them from making the most
of their generally high level of qualification. This may contribute to the gender wage gap, which is the widest
in the OECD, at about 34% in 2018, as against an OECD average of about 13%. A number of recent
measures, in particular to enhance childcare quality, improve work-life balance and facilitate return to work
after career breaks could help reduce the gender gap. More broadly, a culture of gender equality needs to
be promoted in the workplace and at home. The take-up of parental leave is still low, especially for fathers
(OECD, 2019d). Recent measures to extend paid maternity leave to groups of workers not previously
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
33
covered (self-employed and atypical workers) are welcome, but Korea should consider applying similar
extensions to its paternity and parental leave entitlements. Introducing options to take parental leave for
shorter periods at higher payment rates, as in Germany, could also help encourage take-up, especially by
fathers. The gender wage gap should be addressed, for instance, by regularly publishing a national-level
analysis of wage difference determinants to promote fairer wages. Gender-friendly policies could also have
a positive impact on the fertility rate, which has fallen to around one, the lowest level in the OECD
(Chapter 2).
Table 1.7. Past recommendations on promoting female employment
Main recent OECD recommendations Action taken since the 2018 Survey or planned
Upgrade accreditation standards in early childhood education and From June 2019, the Assessment and Accreditation system is
care and make them mandatory. mandatory and applied to all day-care centres. To achieve a 40%
share of public childcare by 2021, the government is expanding
the number of public day care centres (574 in 2018 and 654 in
2019). From September 2019, residential compounds with 500 or
more households are required to establish a public day care
centre.
Raise qualification standards for teachers. From March 2020, teachers at day-care centres with a long-term
employment gap (two years or more) are required to receive
preliminary job training. The government plans to introduce a
system to enhance teachers’ expertise.
Relax fee ceilings on private childcare institutions and entry barriers. The government pays for the tuition for all children including in
private childcare centres. A price ceiling applies for certain
expenses such as field trips. The accreditation of public day-care
centres, highly preferred by parents, is not restricted. The
government implements policies to turn private daycare centres
into public centres by signing lease agreements.
The elderly in Korea tend to work longer than in most other OECD countries for several reasons, including
a still immature National Pension Scheme. After being forced to leave their career job at a relatively early
age for various reasons, including poor business performance, business suspension and family care,
Koreans tend to move to jobs with lower pay. This generates old-age poverty, lowers well-being and
productivity, and encourages working long hours (Hijzen and Thewissen, 2020). Expanding incentives for
workers and employers to ensure that workers stay longer in their career jobs, promoting more flexibility in
wages, better work-life balance and lifelong learning could boost the level and quality of employment of
older workers. The mandatory retirement age was raised to 60 in 2016-17 and should be reviewed to
increase it further over time, as companies move away from the seniority-based wage system. This needs
to be complemented by further investments in adult education and enhancing its governance, notably
through better coordination between ministries and with regional authorities and other stakeholders
(OECD, 2020a, b). More broadly, a gradual rebalancing of active labour market policy from direct job
creation, which currently accounts for about half of spending, to training and job counselling will be
necessary to enhance job quality and employability. Public employment service resources need to be
increased, along with second-career guidance for mid-career and older workers. The contributions of youth
and immigrants to the Korean economy could also be enhanced by speeding labour market entry through
further developing vocational training and career guidance, and gradually adapting the job mobility system
for foreign workers, while continuing to shield local workers from undue competition (Chapter 2).
Less than half of youth aged 15-29 were employed before the COVID-19 crisis, the fifth lowest share in
the OECD, reflecting long studies, as more than two-thirds of youth obtain tertiary degrees, but also slow
transition from education to employment. The crisis is exacerbating this problem, with youth employment
having declined rapidly since February 2020, particularly in the service sector, and further contraction
expected over the coming months (Han, 2020). Labour market duality encourages young people to extend
formal or informal education in the hope of joining large firms or the public sector, rather than SMEs, which
often suffer from a shortage of skilled workers. To address skills mismatches, the government has stepped
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
34
up career counselling, developed apprenticeships and vocational education (notably Meister schools) and
introduced incentives for tertiary education institutions to propose more market-relevant degrees.
Nevertheless, career guidance and counselling will need to be developed further, in particular through
increased resources for the public employment service and stronger involvement of employers (Chapter 2).
Changing Korea’s long working-hour culture requires more than lower legal working
time limits
The current government is seeking to reduce the high incidence of very long working hours in an effort to
improve job quality, health and productivity. Korean workers work a total of 1 967 hours per year, the third
highest in the OECD and 300 hours longer than the OECD average (as of 2018). About 12% of workers
work longer than 52 hours per week. Working very long hours increases the risk of burnout and work
accidents, a major concern in Korea, promotes unhealthy lifestyles and undermines labour productivity
(Saint-Martin et al., 2018).
A preliminary assessment of the ongoing working time reform to decrease the limit from 68 to 52 weekly
working hours shows that this reduced the incidence of working more than 52 weekly hours by five
percentage points or about a fifth of its pre-reform level among employees working overtime in large firms
(Figure 1.18 Panel A). With the reform, Korea’s statutory working time limits have become in line with
dominant OECD practice (Figure 1.18 Panel B, Box 1.2). The current reform builds on a previous reform
implemented between 2004 and 2011 that reduced the regular working week from 44 to 40 hours. While it
is too early to tell whether the ongoing reform will improve labour market outcomes beyond actual hours
worked, worker health, productivity and wellbeing, several evaluations credit the previous reform with
positive outcomes like fewer work accidents, healthier lifestyles and enhanced labour productivity (Lee and
Lee, 2016; Ahn, 2016; Park and Park, 2019). Strikingly, labour productivity not only increased in hourly
terms but also on a per person basis, meaning that hourly productivity improved sufficiently to offset the
decrease in the number of working hours.
Box 1.2. Working-time reforms in Korea
The current government is gradually implementing a working time reform with the following elements:
The maximum number of total weekly working hours has been reduced from 68 to 52 by
lowering the cap on overtime from 28 to 12. The new maximum applies to firms with 300 or
more employees as of July 2018 and to firms with 50 or more employees as of January 2020
and will be extended to firms with five or more employees in July 2021, to give smaller firms
more time to adjust. Firms with 5 to 29 employees are temporarily allowed an additional eight
hours of overtime until December 2022, provided there is a written agreement with an employee
representative.
The number of sectors exempt from total hours limits has been reduced from 26 to 5 as of July
2018. Sectors such as consumer goods sales, hotels and restaurants and finance now have to
abide by the maximum limit. Exemptions still apply to certain types of transportation services
and healthcare.
Firms will be obliged to offer the 15 public holidays as paid days off, or offer an alternative day
off in agreement with an employee representative. Previously, firms were not obliged to provide
(paid) leave on public holidays, although most larger firms did. This reform is also being
implemented in a staggered fashion by firm size between 2020 and 2022.
A tripartite agreement was signed on a plan to extend the reference period of the flexible working hours
system from three to six months, and a reform bill reflecting the agreement is currently pending at the
National Assembly.
Source: Hijzen and Thewissen (2020).
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
35
Figure 1.18. Fewer individuals work very long hours as time limits were tightened towards OECD
norms
A. Effect of the working time reform on the share of employees working overtime who work more
than 52 weekly hours among firms with more than 300 employees
0.12
Implementation of the 52-hour
0.08 limit for large firms
0.04
0.00
-0.04
-0.08
-0.12
Q3 before Q2 before Q1 before Implementation Q2 after Q3 after Q4 after Q5 after Remaining
(Oct-Dec '17) (Jan-Mar '18) (Apr-Jun '18) (Jul-Sep '18) (Oct-Dec '18) (Jan-Mar '19) (Apr-Jun '19) (Jul-Sep '19) months
(Oct-Nov '19)
Time relative to the implementation of the reform
B. Legal maximum weekly working hours
90
80
Normal hours Overtime hours Total hours 2018-2021 reform
70
60
50
40
30
20
10
0 FRA
AUT
BEL
CAN
CZE
DNK
EST
FIN
DEU
GRC
HUN
ISL*
IRL
ITA
LVA
LTU
LUX
NLD
NOR
POL
PRT
SVK
SVN
ESP
SWE
GBR
OECD
KOR since '18
CHL*
MEX*
CHE*
KOR before
JPN
AUS
NZL
TUR
USA
Note: Panel A illustrates the effect of the reform, by showing the difference in the difference in the incidence of working more than 52 hours
between large firms affected by the reform (with 300 or more employees) and slightly smaller firms not yet affected (with 100-299 employees),
relative to the quarter before the reform (April-June 2018). Vertical bands indicate the 95% confidence intervals of each point estimate. It shows
that the probability to work more than 52 hours decreased by about five percentage points in affected firms since the implementation relative to
the quarter before the implementation, compared to the change in probability over the same period in slightly smaller firms. The sample consists
of employees aged 18 and older working overtime in a non-exempt private sector and non-exempt occupation on a permanent contract.
Panel B: Normal working hours are those not subject to overtime regulation. Overtime working hours are those where overtime regulation
applies. Total working hours are the sum of normal and overtime working hours. Data refer to 2018 (2019 for Japan) or 2011-12 for the countries
with an asterisk (2010 for Israel). Dashed bars and grey diamonds indicate that no legislative maximum exists. Korea before 2018 refers to the
situation just before the reform, while after refers to the situation in 2021 when the reform will be fully implemented. In European countries with
only maximum total (and not normal) working hours, common collectively agreed maxima are used for maximum normal working hours
(Denmark, Germany, Iceland, Ireland, United Kingdom).
Source: Hijzen and Thewissen (2020), using Economically Active Population Survey micro data, Eurofound (2019), ILO Working Conditions
Laws Database (2013) and the OECD Working Time Questionnaire (2010).
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While having more stringent working time limits is an important step in the right direction, more is needed
to effectively change Korea’s long working-hour culture. A first concern is that small firms with fewer than
five employees as well as firms in some sectors (e.g. transportation and storage, health care) remain
exempt from working time regulations. Second, incentives to supply and demand long working hours
should be mitigated. Important supply factors include low skills, low wages and concerns about future
pensions, and demand factors relate to limited flexibility for employers to adjust employment according to
business conditions and productivity (Hijzen and Thewissen, 2020).
The diffusion of technology can boost productivity and well-being
Technology and digital tools offer vast opportunities to boost productivity (Chapter 3). The temporary lifting
of the ban on telemedicine services during the COVID-19 crisis, which allowed patients to consult their
doctors without risking mutual exposure to the virus, illustrates the benefits services based on new
technologies can bring to the population (Box 1.3). Korea is one of the top players in emerging digital
technologies (OECD, 2019e), with a large and growing ICT sector, outstanding digital infrastructure, almost
generalised access to high-speed internet and the first nationwide introduction of 5G worldwide (OECD,
2017a; OECD, 2019f). However, while productivity is outstanding in ICT manufacturing and relatively high
in other manufacturing, it is much weaker in services, including ICT services, which account for a large
share of employment (Figure 1.19).
Box 1.3. Telemedicine: friend or foe?
Telemedicine is increasingly used across OECD countries, delivering health care in a wide range of
specialties like neurology and psychiatry, using diverse techniques from remote monitoring to real-time
video-consultations. Amid the COVID-19 outbreak, Korea has temporarily lifted its ban on telemedicine,
allowing doctors to treat patients with mild symptoms on the phone. Between 24 February and 26 July,
about 566 000 telemedicine bills were issued by 6 830 hospitals. While telemedicine helps limiting risks
of infection between patients and doctors, it also meets high resistance among doctors who question
the reliability of the diagnoses and data security.
Amid the COVID-19 outbreak, telemedicine services were made available in 23 other OECD countries.
In Norway, the share of digital consultations in primary health care increased from 5% before the
outbreak to 60% by March 2020. In the United States, teleconsultations increased from 6% to 50-70%
of total consultations by March 2020 for some providers. In France, they increased from around 40 000
to almost 500 000 in March 2020. Evidence in other OECD countries (Germany, Luxembourg, the
Netherlands and the Nordics) shows that health care can be tele-delivered in a safe and effective way,
and can even lead to better outcomes than conventional face-to-face care, for instance for patients with
diabetes or chronic heart conditions. It can also improve quality, timeliness, coordination and continuity
of care, as well as knowledge sharing and reduced use of costly hospital care. Patients also tend to
report high satisfaction and a sense of reassurance. Policymakers can encourage good practices of
telemedicine through clear regulation and guidance, sustained financing and payment, and sound
governance, in addition to appropriate training of both patients and health care professionals. They
should also ensure telemedicine services are compatible with preserving patient safety and quality of
care.
Source: Health Insurance Review and Assessment Service; OECD (2020c); Oliveira Hashiguchi (2020).
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
37
Figure 1.19. Low-productivity sectors account for a high share of total employment
A. Sectors' productivity relative to total productivity B. Sectors' share of employment
% %
350 45
OECD Korea OECD Korea
40
300
35
250
30
200 25
150 20
15
100
10
50
5
0 0
ICT Other ICT services Other business ICT Other ICT services Other business
manufacturing manufacturing services manufacturing manufacturing services
Note: Data refer to 2015. ‘ICT manufacturing’ includes manufacture of computer, electronic and optical products. ‘ICT services’ include
publishing, telecommunication and IT services. ‘Other business services’ excludes the housing sector.
Source: OECD STAN Database.
StatLink 2 https://doi.org/10.1787/888934156922
The diffusion of advanced digital technology is uneven (Figure 1.20). Korean firms have margins for
improvement in the adoption of sophisticated digital technologies (Chapter 3). The lack of adequate skills
and knowledge is the main barrier to the diffusion of digital technologies, especially in SMEs and among
older workers. People lacking adequate digital skills are particularly disadvantaged as the COVID-19
pandemic has encouraged the “untact”, or contactless, economy, with remote work and many services
provided via on-line platforms to limit physical contact. SME employees have limited access to training
(OECD, 2020c). The digital skills gap between generations is the highest among OECD countries and
exacerbates social inequality. Teachers are key to ensure students develop digital skills, but most teachers
feel they are not sufficiently prepared for the use of ICT for teaching. Improving access to and quality of
training for SME employees, older workers and teachers is necessary to allow them to adapt to more
digitalised production systems and raise managers’ awareness of the potential of digital technologies.
Promoting further collaboration between innovative companies, especially between SMEs and large
enterprises, would facilitate the diffusion of digital technology, for instance through an open collaborative
network to design new products and services, and exchange data (Fourth Industrial Revolution Committee,
2019). Amid the COVID-19 outbreak, Korea contained the spread of the virus, using advanced digital tools
based on artificial intelligence and mobile apps, as well as remote access to daily life services (e.g.
telework, online classes, e-commerce and telemedicine). The Korean authorities recently announced a
Korean New deal to revive the economy, by facilitating the convergence of new and old industries through
enhanced use of digitalisation. The New deal focusses on projects exploiting synergies between the
government and the business sector, including strengthening data infrastructures, expanding data
collection and usage, establishing 5G network infrastructure early and developing artificial intelligence. The
New Deal also includes measures aimed at greening the economy and reinforcing the social safety net
(Table 1.8). Building on the success of Korea’s COVID-19 containment strategy, a “K-quarantine model”
will be systemised and exported.
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
38
Table 1.8. Overview of the Korean New Deal projects
Type Field Project Target Budget Job
(2020-25, creation
KRW trillion)
Digital New Data, 1. Open data systems related to people’s Create data markets worth 6.4 295 000
Deal Network, lives KRW 43 trillion in 2025 14.8 172 000
AI (D.N.A) 2. Diffusion of 5G and AI to all industries Increase the number of AI 9.7 91 000
ecosystem 3. Smart government based on 5G and AI enterprises to 150 in 2025 1.0 9 000
4. Korean-style cyber-security system from 56 in 2020
Digitalisation 5. Extend digital education infrastructure to Increase Wifi coverage to all 0.3 4 000
of education all schools schools by 2022 0.5 5 000
infrastructure 6. Strengthen online education for Build a digital education
universities and vocational training platform using big data
institutions
“Untact” (non- 7. Smart medical and care infrastructure Build 18 smart hospitals 0.4 5 000
face-to-face) 8. Diffusion of remote work culture in equipped with 5G and IoT 0.7 9 000
industries SMEs Increase the share of remote 1.0 120 000
9. Support online business of SMEs work to up to 40%
Digitalisation 10. Establish a digital management system Install intelligent transport 8.5 124 000
of social for core social overhead capital (e.g. systems for major 1.2 14 000
overhead transport and water networks) expressways and railroads 0.3 55 000
capital 11. Digital transformation of urban and Install disaster warning
industrial complex spaces systems in risk areas
12. Establish smart logistics systems
Green New Green 13. Build zero-energy public facilities Eco-friendly remodelling of 6.2 243 000
Deal transformation 14. Restore land, ocean and urban 225 000 public rental units 2.5 105 000
of city, space ecosystems Create 723 hectares of urban 3.4 39 000
and living 15. Establish a clean and safe water forests to reduce fine dust
infrastructure management system levels
Diffusion of 16. Build an energy-efficient intelligent Extend the use of smart grids 2.0 20 000
low carbon smart grid to cover 5 million households 9.2 38 000
and 17. Lay the foundations to support the Raise the number of electric 13.1 151 000
renewable transition towards renewable energy and hydrogen cars to 1 130
energy 18. Expand green mobility such as electric 000 and 200 000,
vehicles and hydrogen fuel cell cars respectively
Innovative 19. Foster leading green companies and Transform 1 750 factories 3.6 47 000
ecosystem of create low-carbon and green industrial into clean factories 2.7 16 000
green complexes Construct 10 smart energy
industries 20. Create green innovation infrastructure platforms
such as R&D and finance
Social safety Employment 21. Extend the employment safety net to Increase the number of 3.2 -
net and social most employees (e.g. employment beneficiaries of Employment 10.4 -
reinforcement safety net insurance, industrial accident Insurance to up to 21 million 7.2 39 000
compensation insurance) Extend Basic Livelihood 1.2 118 000
22. Reinforce the social safety net (Basic Security Programme benefits 0.6 2 000
Livelihood Security Programme, sickness to an additional 1.13 million
benefit) households
23. Strengthen assistance for the
unemployed (e.g. Job search allowance,
vocational training)
24. Strengthen assistance to enter the job
market
25. Strengthen industrial and work
environment safety
Human 26. Foster digital and green talents Internet access in all rural 1.1 25 000
resources 27. Reorganise the vocational training areas 2.3 126 000
system 70% of the elderly aged 70 0.6 29 000
28. Strengthen digital access in rural areas and over will enjoy mobile
and for vulnerable groups internet
Total 114.1 1 901 000
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
39
The government supports R&D through the Korea Small Business Innovation Research (KOSBIR)
programme and R&D grants to SMEs, which have contributed to lift corporate R&D investment, registration
of intellectual property rights and investment in tangible and human capital. Nevertheless, results in terms
of creation of value added and commercialisation have been disappointing (Lee and Jo, 2018; Yang, 2018).
Support programmes should be reviewed and innovation vouchers should be introduced to better direct
R&D subsidies towards innovative SMEs, in manufacturing and in services, and boost their productivity.
Providing SMEs with innovation vouchers would encourage them to engage in innovative projects, for
instance by purchasing studies from universities and research institutions assessing the potential for new
technology introduction to raise their productivity (Kim et al., 2018).
Rapid technological development entails challenges like cyber-security, which is crucial to ensure trust in
economic transactions and well-being. Korea has the second highest share of internet users experiencing
privacy violations in the OECD, after Chile (OECD, 2019e) and youth aged 10-29 are at much higher risk
of internet or smartphone addiction than other age categories. This calls for reinforcing ICT education at
schools and in firms to raise awareness of digital dangers, such as cyberbullying, privacy violation and
addiction to ICT technologies.
Figure 1.20. Digital gaps between large and small firms remain high
Percentage of enterprises with ten or more employees using selected digital tools, 2018 or latest year
100
Large firms Small firms
90
80
70
60
50
40
30
20
10
0
OECD Korea OECD Korea OECD Korea OECD Korea OECD Korea
Cloud computing Big data RFID CRM ERP
Note: RFID stands for Radio frequency identification; CRM for Customer relationship management; ERP for Enterprise resource planning.
Source: OECD (2019f); OECD ICT Access and Usage by Businesses Database.
StatLink 2 https://doi.org/10.1787/888934156941
Product market regulations are among the most stringent in the OECD (Figure 1.21). Reducing these
regulatory barriers to competition and reallocation, as well as providing easier financing for young
innovative firms, can boost the diffusion of digital tools like cloud computing and artificial intelligence and
maximise their impact on productivity (Sorbe et al., 2019). A programme to shift the burden of proof from
the regulated to the regulator established in 2019 has led to the overhaul of around two thousand
regulations. In 2020, the scope of the programme is being expanded, with priority given to areas related to
the response to the COVID-19 and other crises. The administration is to be more proactive in reviewing
regulations to solve the regulatory difficulties faced by the private sector, conflict resolution is to be
improved and the programme is to be expanded to local government and public institutions. Further
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
40
participation of stakeholders in the programme is to be facilitated. The government has also introduced
regulatory sandboxes to allow firms in new technologies and new industries to test their products and
business models without being subject to all existing legal requirements. Follow up on this strategy should
allow identifying regulation breaches and reviewing regulations, notably in the case of telemedicine.
Figure 1.21. Product market regulations are stringent
2.5
2.0
1.5
1.0
0.5
0.0
GBR ESP DNK DEU LTU SWE NOR AUS NLD LVA CZE NZL SVN HUN ITA PRT FIN IRL CHL ISR JPN POL ISL AUT SVK CHE GRC FRA MEX KOR BEL LUX CAN TUR
OECD
Source: OECD 2018 PMR database.
StatLink 2 https://doi.org/10.1787/888934156960
Table 1.9. Past recommendations on regulation and support for SMEs and innovation
Main recent OECD recommendations Action taken since the 2018 Survey or planned
Strengthen product market competition by relaxing barriers to imports The government seeks to incentivise foreign investment by
and inward foreign direct investment and liberalising product market revising the Foreign Investment Promotion Act to expand cash
regulation. grants for high-tech and product investment.
Introduce a comprehensive negative-list regulatory system and allow The government has launched regulatory sandboxes in ICT
firms in new technologies and new industries to test their products convergence, industrial convergence, financial innovation and
and business models without being subject to all existing legal regional innovation since January 2019. In 2019, 195 projects
requirements (i.e. a regulatory sandbox). were approved by the regulatory sandbox system.
Increase lending based on firms’ technology by expanding public Lending based on firms’ technology amounted to KRW 205 trillion
institutions that provide technological analysis to private lending in 2019, up from KRW 163 trillion for 2018 and from KRW 128
institutions. trillion in 2017. The banks plan to improve their capacity to lend
based on firms’ technology by securing experts, developing
assessment models and enhancing credit rating systems.
Ensure that support provided to SMEs improves their productivity by The government is monitoring SME support policies and analysing
carefully monitoring their performance and introducing a graduation their results to improve their effectiveness and financial efficiency.
system.
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
41
The fight against corruption has been stepped up but challenges remain
The Korean government has taken significant steps to fight corruption recently. However, corruption still
remains in Korean society, with relatively low scores both on the Transparency International Corruption
Perception Index and the World Bank Control of corruption indicator, even though both have improved
over the past three years (Figure 1.22). Korea’s rankings on the Index of Public Integrity, developed by the
European Research Centre for Anti-Corruption and State-Building with support of the European Union,
and the TRACE Bribery Risk Matrix, developed by TRACE International in collaboration with the RAND
Corporation, have also improved. Corruption of low-level public officials has been almost eradicated, in
particular thanks to the establishment of the Korean Independent Commission Against Corruption (KICAC)
in 2002, which was integrated in a broader agency, the Anti-Corruption and Civil Rights Commission
(ACRC) in 2008.
Figure 1.22. Corruption is perceived as relatively high
A. Corruption Perceptions Index B. Control of corruption
Scale: 0 (worst) to 100 (best), 2019 Scale: -2.5 (worst) to 2.5 (best), 2018
100 2.5
90
80 1.5
70
60 0.5
50
40 -0.5
30
20 -1.5
10
0 MEX
TUR
HUN
GRC
SVK
ITA
LVA
KOR
ISR
MEX
TUR
GRC
HUN
ITA
LVA
SVK
KOR -2.5
ESP
FRA
USA
JPN
AUS
CAN ESP
ISR
FRA
USA
JPN
AUS
GBR
DEU
CHE
SWE
FIN
NZL GBR
CAN
DEU
CHE
SWE
DNK
DNK NZL
FIN
C. Evolution of "Control of Corruption" D. Corruption by sector, "Control of Corruption"
Scale: -2.5 (higher) to 2.5 (lower corruption), 2018 Scale: 0 (worst) to 1 (best)
1.4
Worst performer OECD KOR
1.2 Best performer OECD OECD
Executive bribery
1.00
1.0
OECD KOR 0.75
0.8 Executive
Judicial corruption 0.50 embezzlement
0.6 0.25
0.4 0.00
0.2
Legislature corruption Public sector bribery
0.0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Public sector
embezzlement
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption”
indicator by the Varieties of Democracy Project.
Source: World Bank; Transparency International; Varieties of Democracy Institute; University of Gothenburg, and University of Notre Dame.
StatLink 2 https://doi.org/10.1787/888934156979
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
42
High-level corruption involving politicians and top private company executives remains problematic, as
illustrated by a number of high-profile cases in recent years. Also here, significant progress has been made
on some issues. An amendment to the Prevention of Corruption and the Establishment and Management
of the ACRC, which came into force in October 2019, reinforces the protection of whistleblowers, by
severely punishing retaliatory measures (e.g. dismissal). The Public Finance Recovery Act, which came
into force on 1st January 2020 aims at recovering illegitimate profits derived from abusive claims for public
funds (subsidies, compensation and contributions), which amount to an estimated KRW 214 trillion (about
$ 180 billion or 11% of annual GDP). New provisions were added to the Code of Conduct of Public Officials
to prevent conflicts of interest. Recently, a number presidential pardons were denied to politicians,
business executives or public officials involved in corruption. In late December 2019, the National
Assembly passed a bill to set up a special anti-corruption investigation unit tasked with looking into
wrongdoing by high-ranking government officials, which includes senior prosecutors, judges and police
officers.
Korea’s OECD Anti-Bribery Convention enforcement record has declined between the 2011 and 2018
assessments. Coordination mechanisms between Korea’s police and prosecutors’ offices and reporting
requirements of suspected bribery to relevant law enforcement agencies need to be clarified. Nevertheless,
high tax transparency helps fight corruption (Figure 1.23).
Figure 1.23. Korea is compliant on tax transparency
Exchange of Information on Request
Compliant
Largely
Compliant
Partially
Non-
Compliant TUR
AUS
CAN
CHE
DEU
DNK
GBR
GRC
HUN
ISR
JPN
LVA
SVK
USA
ESP
FIN
FRA
ITA
KOR
MEX
NZL
SWE
Note: The graph summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on
Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of
their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard.
The figure shows first-round results; a second round is ongoing.
Source: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for
Tax Purposes, OECD, and Financial Action Task Force (FATF).
StatLink 2 https://doi.org/10.1787/888934156998
Table 1.10. Past recommendations on corruption
Main recent OECD recommendations Action taken since the 2018 Survey or planned
Follow through on the government’s pledge to not grant Under the Moon Administration, group presidential pardons
presidential pardons to business executives convicted of were granted only twice, and did not concern politicians,
corruption. business executives or public officials involved in corruption.
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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Environmental quality remains low by OECD standards
Rapid industrial growth over decades has taken its toll on the environment and a shift towards greener
growth is essential to reduce greenhouse gas emissions (GHG) and improve the population’s living
environment, not least air quality (OECD, 2017b). In recent years, CO2 and energy intensity have fallen
only slightly, and low oil prices in the wake of the COVID-19 crisis may generate further headwinds to the
energy transition. The share of renewables in primary energy supply remains modest
(Figure 1.24, Panels A-C). Renewables contribute 8.3% to the country’s electricity generation, one of the
lowest shares OECD-wide. Fossil fuels account for 80% of primary energy supply, of which coal represents
31%, more than in most other OECD countries (Panel D). Nuclear accounts for 10.5% of primary energy
supply and 23.4% of electricity generation, but is to be phased out by 2083.
Notwithstanding a temporary improvement during the first half of 2020, with the positive effects of the
seasonal fine dust control system, favourable weather conditions, and the COVID-19 crisis that depressed
activity, most of the population is exposed to small particle air pollution well above the critical threshold of
the World Health Organisation (10 µg/m³; Panel E). Small particle concentration in Seoul is about twice
the WHO ceiling (Trnka, 2020), raising premature mortality substantially (Roy and Braathen, 2017) and
affecting children’s health most (World Health Organization, 2018). Education outcomes for young children
attending schools exposed to higher air pollution are substantially and lastingly lower (Heissel et al., 2019).
Moreover, air pollution likely worsens the impact of the pandemic (UBC, 2020). About half of the total level
of fine particles stem from domestic sources, notably industry, power plants and diesel vehicles. The
remainder comes from neighbouring countries. Korea has signed a number of bilateral agreements to
address the fine dust issue with China since 1993, which have led in particular to cooperation on
demonstration projects, research and information sharing (Jung, 2019; OECD, 2019g). One of the main
tasks of Korea’s National Council on Climate and Air Quality (NCCA), an independent body launched in
April 2019, is to reinforce cooperation with neighbouring countries to tackle air pollution and climate
change. In 2019, air pollution was declared a “social disaster”, which allows the release of emergency
funds, and KRW 1.3 trillion (about 0.1% of GDP) extra funding was allocated to anti-pollution measures,
in addition to the KRW 2.0 trillion (about 0.1% of GDP) main budget dedicated to anti-pollution measures.
Measures include subsidies for replacing old diesel cars and buying air purifiers, as well as support for
renewables. Public transport is being developed further, notably in the capital area. The government is
implementing additional measures, including shutting down coal power plants, with the aim of reducing
locally-generated small particle air pollution (PM2.5) by 35% by 2024 relative to 2016, but sustained efforts
will be required to reduce exposure to below the WHO limit.
The government has committed to reducing GHG emissions by 37% relative to business-as-usual by 2030
– equivalent to about 20% relative to the 2010 level. Worldwide, containing global warming will require
moving to net zero GHG emissions in the long run (Intergovernmental Panel on Climate Change, 2018).
An increasing number of high-income countries, have announced net zero GHG production-based
emission targets for 2050 or earlier, including Belgium, Denmark, France, Luxembourg, the Netherlands,
Portugal, Spain, Sweden and the United Kingdom. Research suggests that reaching net zero emissions,
while requiring broad and deep economic transformations, may have modest overall social costs (1-2% of
GDP), which would at least in part be offset by well-being gains, in particular from lasting reductions in air
pollution (UK Committee on Climate Change, 2019; OECD, 2019h).
Reaching Korea’s emission targets will require substantial policy measures (OECD, 2017b). The strategy
will need to tackle a broad range of sectors, including electricity generation, buildings, transport, industry
and agriculture. Investment in energy efficiency is also essential to keep costs low (IEA, 2018).
Decarbonisation of electricity is key, as switching to electricity in energy end-use is a major way to lower
emissions. The government’s pledge not to build new coal power plants is welcome. Four ageing coal
power plants were closed recently and six will be closed soon, and others converted to cleaner resources.
Phasing out coal altogether by 2030 would be in line with the commitments of countries in the Powering
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
44
Past Coal Alliance (2017), which argues that ending unabated coal use by 2030 would be a cost-effective
way to align policies with the Paris Agreement. The government’s goal is raising the share of renewables
in electricity generation from about 8.3% in 2018 to 20% by 2030 and 30-35% by 2040. Part of the fiscal
stimulus in the wake of the COVID-19 crisis ought to be oriented towards speeding up the energy transition.
This is all the more important insofar as digitalisation may increase electricity consumption.
Figure 1.24. Environmental performance remains weak
A. CO2 intensity B. Energy intensity C. Renewable energy share
kg/USD, 2010 PPP Korea (demand-based) ktoe/USD, 2010 PPP %
OECD (demand-based) 0.20 12%
0.50
Korea (production-based) Korea OECD
OECD (production-based) 10%
0.40
0.15
8%
0.30
0.10 6%
0.20
Korea OECD 4%
0.05
0.10 2%
0.00 0.00 0%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
D. Energy supply by source, 2017 1 E. Population exposure to PM2.5
% Coal, peat, oil shale Oil Natural gas Nuclear Renewables Other
100%
Korea (2000)
80%
Korea (2017)
60%
OECD (2000)
40%
OECD (2017)
20%
0% 50% 100%
0% [ 0-10] µg/m³ [10-15] µg/m³ [15-25] µg/m³
[25-35] µg/m³ [>35] µg/m³
F. Environment-related taxes G. CO2 emissions priced above EUR60 H. Environment-related inventions
% of GDP % of total CO2 emissions from energy use, EUR per tCO2, 2018 2014-16 average
% % % of all technologies
4% 60% 12%
Energy, 2014 Average 2000-02
Motor vehicles, 2014 10%
3% Other, 2014
Total, 2000 40% 8%
2% 6%
20% 4%
1%
2%
0% 0% 0%
Korea OECD (median) Norway Italy Switzerland France United Korea Korea OECD
Kingdom
1. Data may include provisional figures and estimates.
Source: OECD Green Growth Indicators database, IEA (2018), World energy balances, IEA World Energy Statistics and Balances database.
StatLink 2 https://doi.org/10.1787/888934157017
Korea could consider reviewing its regulatory policies, which may favour coal over renewables through
high capacity and carbon compensation payments for coal-fired plants (Carbon Tracker Initiative, 2019).
Low regulated electricity prices hamper the entry of renewables, as well as investment in technologies
facilitating flexible demand response, which are key to integrating high intermittent renewable supply,
especially in Korea, where there is no international interconnection of the electricity grid. Hence, electricity
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
45
prices should be gradually raised to reflect costs once the economy is recovering, providing targeted
support decoupled from energy use to vulnerable households affected by price increases. Korea could
also take inspiration from the United Kingdom, where carbon taxes and air pollution standards were major
contributing factors in reducing the coal share in electricity from around 40% in 2012 to close to zero.
Revenue from environmental taxation amounts to a greater share of GDP than the OECD median
(Panel F). However, petrol is taxed more than diesel. Korea introduced the world’s second largest emission
trading scheme (ETS) in 2015, which covers around 70% of national direct GHG emissions and plays a
major role in climate change mitigation. Most emissions are priced below EUR 60 per tonne of CO2, a
midrange estimate of climate costs in 2020 (OECD, 2018c) (Panel G). A commitment to gradually rising
carbon pricing in line with emission reduction targets would minimise adjustment cost. The government
has allocated 3% of ETS permits through auctioning in the second phase of the scheme (2018-20), a
proportion which will increase to at least 10% in the third phase (2021-25). Free allocation harms incentives
to reduce emissions, as permits need to be allocated according to criteria, such as production, which relate
to emissions (Flues and van Dender, 2017), with adverse impacts on government finances and
inclusiveness. Korea could consider following the European Union in fully auctioning permits to electricity
generation, which is not subject to direct international competition.
The Seoul Metropolitan Area management system to cap air pollutant emissions put in place in 2008 has
contributed to a trend reduction in air pollution, and there are plans to extend it to other areas of the country.
Allocations for NOx and SOx have been gradually reduced and could be cut further. Compliance monitoring
of industrial emissions needs to improve through better targeting of inspections, more independent
inspectors and better evaluation of regulation (OECD, 2019g). Provincial and local governments’ capacity
to carry out related tasks also needs strengthening, including more funding.
The NCCA recommends further tax incentives to reduce business emissions and tighter regulations on
coal power plants, diesel cars and machinery. Implementation already started in some areas, for example,
old diesel cars are banned from central Seoul from December 2019. Ministries will submit action plans to
implement the recommendations in 2020. Korea could emulate Chile and Sweden, which tax air pollutants
from large industrial sources nation-wide.
Korea is a world leader in overall R&D and its share of environment-related inventions is slightly over the
OECD average and rising (Panel H), with current priorities including hydrogen, renewable energy and
intelligent power systems. The government has set an ambitious hydrogen agenda for road transport
emissions. Digital-based shared mobility can achieve emissions reductions at low cost, as well as
complement the roll-out of zero-carbon passenger transport, reducing investment needs and other
transport-related externalities. Against the backdrop of increased use of single-use plastic as part of
sanitary precautions in the face of the COVID-19 crisis, the government recently announced an agreement
with the packaging and delivery sectors to cut their plastic use by 20%, by standardising containers, making
them thinner and facilitating reuse and recycling.
Table 1.11. Past recommendations on environmental policy
Main recent OECD recommendations Action taken since the 2018 Survey or planned
Steadily increase the share of permits auctioned and the stringency The government has allocated 3% of the allowance through
of the total emission cap in the emissions trading system. auctioning in 2018-20 and will expand this share to over 10% in
2021-25. To achieve the Nationally Determined Contribution by
2030, the total emission cap will be consistent with annual
emission targets under the Korean emissions trading system.
Raise environmentally-related taxes, in part to close the gap between In November 2019, the government announced the
diesel and petrol taxes, and boost electricity prices. comprehensive fine dust management initiative, including a plan to
review diesel and gasoline prices. The government intends to
review related policies, on the basis of studies from experts. In
order to reduce pollution, the tax on soft coal has increased and
tax benefits for replacing old diesel vehicle have been introduced
in December 2018.
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
46
Key policy insights recommendations
Key recommendations in bold
MAIN FINDINGS RECOMMENDATIONS
Policies to mitigate the impact of the COVID-19 pandemic
The government has taken a wide range of measures to support Continue to provide support to households and businesses until
households and businesses during the crisis. Prolonging some current the economy is recovering, targeting any additional income
temporary measures and/or providing additional support may be support towards low-income households.
necessary if the crisis lingers. Ensure that fiscal plans preserve long-term fiscal sustainability.
Sound public finances allow fiscal stimulus to strengthen the recovery. Support growth-enhancing investments, notably in digital fields,
such as 5G infrastructure and artificial intelligence.
Perform cost-benefit analysis of investments.
Inflation is set to remain very low over the coming years, the economic
Maintain accommodative monetary policy and consider
recovery is likely to be slow and macro-prudential tools are in place to
unconventional measures going beyond liquidity support.
ensure financial stability.
Financial and monetary authorities need to take into account climate- Require financial intermediaries to report their climate-related
related risks in financial markets. exposures to the financial supervisor.
Environmental policies
Notwithstanding an ephemeral improvement as the COVID-19 crisis Tighten caps for air pollutant emissions and strengthen vehicle
depressed activity, air pollution is a major challenge, with detrimental emission standards.
impacts on health and well-being.
Low regulated electricity prices do not reflect production, distribution and Once the economy is recovering, raise electricity prices gradually,
environmental costs and hamper the entry of renewables, as well as providing targeted support decoupled from energy use to vulnerable
investment in technologies facilitating flexible demand response. households. Increase government support for the transition towards
renewable energy.
Only 3% of ETS permits are auctioned, increasing to 10% in 2021-25. Increase the share of permits auctioned and the stringency of the total
emission cap of the emissions trading system.
Effective carbon prices are low and vary across sectors and fuels. Price CO2 emissions evenly across sectors and fuels and raise
pricing according to a predictable schedule.
Petrol is taxed more than diesel and road transport fuel taxation has Raise the excise tax on diesel to at least match that on petrol and index
fallen in real terms. rates to inflation.
Fighting corruption
Coordination between Korea’s police and prosecutors’ offices and Clarify coordination mechanisms between Korea’s police and
reporting requirements of suspected bribery are insufficient. prosecutors’ offices and reporting requirements of suspected bribery to
relevant law enforcement agencies.
Bribery sanctions for natural and legal persons are not dissuasive Increase sanctions for bribery of natural and legal persons in law and in
enough. practice.
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
47
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Annex 1.A. Progress in other structural reform
areas
(Main recommendations from the 2018 OECD Economic Survey not in body of the KPI)
Main recent OECD recommendations Action taken since the 2018 Survey or planned
Reinforce the role of outside directors by enhancing the criteria for The Ministry of Justice amended in January 2020 the Enforcement
independence, reducing the role of management in nominating Rule of the Commercial Act, which requires disclosure of
outside directors and requiring that outside directors comprise more information that allows judging a director or auditor candidate’s
than half of the boards in all listed firms. level of independence and expertise, and includes tighter
disqualification rules for outside directors or auditors.
Phase out existing circular shareholding by firms belonging to the The number of circular shareholdings decreased by 85% to 13 in 3
same business group. business groups in 2019 from 282 in 10 business groups in 2017.
Make cumulative voting (which would allow minority shareholders The relevant draft amendment of the Commercial Act including
to elect directors) and electronic voting (which would help minority electronic voting and multi representative lawsuit, is under
shareholders to vote their shares) mandatory. discussion at the National Assembly.
Meanwhile, to facilitate electronic voting, the draft amendment of
the Enforcement Rule of the Commercial Act, which includes the
diversification of authentication means, among others, has taken
effect since January 2020.
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Annex 1.B. Government measures to address the
COVID-19 crisis
The government has implemented many measures to mitigate the pandemic’s impact on employment,
output and business investment. Korea has imposed quarantine and strong distancing measures to contain
the initial outbreak of the virus and prevent massive infection. The government has so far introduced
measures for a total of KRW 277 trillion (14.4% of GDP). Three supplementary budgets totalling KRW 59.0
trillion were passed by the National Assembly. Loans and guarantees of over KRW 200 trillion have been
supplied to households, SMEs and affected industries.
Border measures and quarantine measures
Early February the government banned the entry of travellers coming from Wuhan city and the Hubei
province in China. Since then, the Korean authorities have strengthened special quarantine measures for
people entering Korea in accordance with the evolution of the pandemic. As of May, all persons arriving in
Korea, regardless of nationality, undergo a mandatory COVID-19 test, paid by the government (USD 120
per person) and are subject to a 14 day self-quarantine at home or government designated facilities.
While the government introduced enhanced physical distancing, so as to prevent diffusion of the virus,
Korea did not introduce a lockdown on any city or region. The authorities recommended to suspend the
operation of religious meetings, indoor sports and entertainment facilities temporarily to avoid community
infections, and also urged citizens to stay at home and work remotely. The new semester for schools,
which was supposed to start on 2 March, was postponed. On 6 May, the government started to lift those
enhanced distancing requirements and shift towards softer distancing measures, so-called “distancing in
daily life”. However, the strong distancing guidelines were reinstated in some local areas in late May
following the emergence of new infection clusters. The schools, which started online class on 9 April, have
opened in phases from 20 May to 8 June. Meanwhile, universities, which opened online class on the
second week of March, are likely to extend their non-face-to-face class periods to the end of spring
semester.
Fiscal policy and financial support
Over the 5-28 February period, when the virus outbreak started to hit the economy, the government
announced emergency support plans of about KRW 20 trillion for households, small companies and
damaged industries, including automobile parts, low-cost carriers, shipping, tourism, and export sectors:
Support for pre-emptive quarantine and treatment (KRW 0.1 trillion)
Guarantees and loans with low interest rates for SMEs and low-cost carriers (KRW 4.8 trillion)
Consumption coupons and support for family care leave (KRW 2.8 trillion)
Support for local credit guarantee funds (KRW 0.5 trillion)
Liquidity provision to the financial sector (KRW 8.2 trillion)
Double the deduction of credit card use and reduction of individual consumption tax on cars to
boost consumption (KRW 1.7 trillion)
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On 17 March, the national Assembly approved a supplementary budget of KRW 11.7 trillion (USD 10
billion, 0.6% of GDP), consisting of KRW 10.9 trillion for new expenditure and KRW 0.8 trillion for revenue
adjustment. New spending includes:
Support to the healthcare sector for virus prevention, diagnosis and treatment (KRW 2.1 trillion)
Loans for small and medium businesses and small merchants (KRW 4.1 trillion)
Emergency livelihood support and day-care vouchers (KRW 3.5 trillion)
Support to severely affected industries and employees in the form of expanded employment
retention subsidy and financial support (KRW 1.2 trillion)
On 19 and 24 March, the government announced an additional financial support package of KRW 100
trillion (5.1% of GDP) to ease the financial burden on small businesses and vulnerable households:
Expansion of financial support for SMEs, small merchants and self-employed (KRW 29.2 trillion)
Support loans and guarantees for mid-sized enterprises – a class of enterprises in between SMEs
and large enterprises (KRW 29.1 trillion)
Stabilisation of the corporate bond and money markets through various policy tools worth KRW
31.1 trillion, including the establishment of a Bond Market Stabilisation Fund (KRW 20 trillion)
Securities Market Stabilisation Fund liquidity provision funded by financial institutions (KRW 10.7
trillion)
On 8 April, the government announced a 10.4 trillion financial support package for export companies, start-
ups and ventures, including:
Loans and guarantees for export companies (KRW 6.0 trillion) and for start-ups and ventures (KRW
2.2 trillion)
Expanded government support for lowering R&D costs (KRW 2.2 trillion)
On 22 April, the government announced a KRW 75 trillion (4.0% of GDP) support plan for strategic
industries and additional financing for SMEs and households:
Establishment of a Key Industry Relief Fund guaranteed by the government to provide liquidity and
purchase corporate debt and equity for the country’s backbone industries – airlines, shipping,
(KRW 40 trillion). Large corporate recipients must retain at least 90% of their employees for six
months and some conditions are imposed on management, such as a ban on dividend payments
and stock buybacks
Additional financing for SMEs and households with low credit ratings (KRW 35 trillion)
Strengthening employment security measures to support those workers who are not enrolled in the
Employment Insurance scheme and to create jobs in the public sector (KRW 10.1 trillion)
On 30 April, the National Assembly passed the second supplementary budget of KRW 12.2 trillion (USD
10 billion) for emergency relief grants. A total of KRW 14.3 trillion (0.6% of GDP) including KRW 2.1 trillion
of local government funds is allocated to the relief programme. The central government will finance KRW
3.4 trillion with debt issuance and the remaining KRW 8.8 trillion from spending restructuring. The
government has distributed the relief grants of up to KRW 1 million (USD 814) in the form of cash or
coupons to all 21 million households in accordance with the size of the family:
About 2.7 million households in the lowest income bracket (13% of the total) will receive the grants
in cash
The remaining 19 million households can apply for the grants in the form of coupon or credit card
points
The coupons or points will have to be spent by 31 August or will be considered a donation to the
state
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The government gives a tax benefit to those who donate their relief handouts
On 3 July, the National Assembly passed the third supplementary budget, of KRW 35.1 trillion (1.8 % of
GDP). The budget will be funded through the issuance of KRW 23.7 trillion won in national bonds and
KRW 11.4 trillion in spending readjustments. It aims at:
Creating about 550 000 jobs in publicly initiated programmes and strengthening social safety nets
(KRW 10 trillion)
Providing emergency loans to struggling small merchants, SMEs and large businesses (KRW 5
trillion)
KRW 4.8 trillion investment in 2020 on big data platforms, artificial intelligence and fifth-generation
telecommunication services, so called New Deal projects
Monetary policy and macro prudential measures
On 27 February, the Bank of Korea (BOK) increased the ceiling of the Bank Intermediated Lending Support
Facility by KRW 5 trillion to KRW 30 trillion (further increased to KRW 35 trillion on 14 May) to support
SMEs and small merchants.
On 13 March, the Financial Services Commission introduced a six-month (from 16 March to 15 September)
ban on short-selling in the stock market to contain volatility.
On 16 March, the Bank of Korea cut the policy rate by 50 basis points to 0.75%. It also lowered the interest
rate on the Bank Intermediated Lending Support Facility from 0.50%-0.75% to 0.25% to encourage bank
lending to SMEs. The BOK broadened the eligible collateral and institutions for open market operations
and the acceptable collateral for lending facilities to inject more liquidity in the financial markets.
On 19 March, the Bank of Korea conducted repo operations to inject KRW 1 trillion (followed by an
additional KRW 2.5 trillion on 24 March) to ensure that financial institutions retain access to short-term
credit.
On 19 March, the BOK announced the establishment of a USD 60 billion bilateral currency swap agreement
with the US Federal Reserve, for 6 months. The Ministry of Economy and Finance, the Financial Services
Commission, the Bank of Korea and the Financial Supervisory Service eased the macroprudential
measures to expand foreign currency liquidity:
Raising ceilings on the foreign exchange derivatives positions of local banks (from 40% to 50% of
their equity capital) and foreign bank branches in Korea (from 200% to 250% of their equity capital)
Temporarily lifting the levy on non-deposit foreign exchange liabilities of financial institutions
Temporarily lowering the foreign exchange liquidity coverage ratio by 10 percentage points to 70%
On 20 March, to ease the stress on the bond market, the Bank of Korea purchased KRW 1.5 trillion (with
further purchases of KRW 1.5 trillion on both 10 April and 2 July) of treasury bonds.
On 26 March, the Bank of Korea introduced an unlimited repo purchase facility for three months starting
in April (further extended for one more month on 25 June) to ensure financial market stability.
On 16 April the BOK decided to provide loans of KRW 10 trillion to bank and non-bank financial institutions,
such as securities companies and insurance companies, for three months.
In order to expand financial institutions’ collateral capacity, the Bank of Korea lowered the ratio of collateral
for guaranteeing net settlements on 10 April and broadened the eligible collateral for the same on 25 May.
On 28 May, the Bank of Korea cut the policy rate by 25 basis points to 0.50%.
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Annex 1.C. Economic co-operation with North
Korea
This annex provides an overview of recent developments with respect to economic co-operation between
the two Koreas, and information on economic developments in North Korea, against the backdrop of an
evolving and highly uncertain geopolitical context. More information is provided in Koen and Beom (2020).
Geopolitical developments
In the face of continued nuclear tests, United Nations and other international sanctions on North Korea
were gradually stepped up in the course of the past decade, especially from 2016. Tighter sanctions have
contributed to a sharp decline in recorded international trade and in estimated domestic activity (see
below).
At the same time, however, a number of steps towards de-escalating tensions and a rapprochement
between the two Koreas were taken:
In July 2017, South Korea launched the Berlin initiative aiming at peaceful coexistence and
common prosperity through dialogue and cooperation but without renouncing sanctions and
pressure, with the following goals: establishing permanent peace through the denuclearisation of
North Korea; developing sustainable inter-Korean relations; and pursuing a new economic initiative
with an East Coast Belt, a West Coast Belt and a DMZ Belt.
In February 2018, North Korea took part in the Winter Olympics held in Pyeongchang, South Korea.
In April 2018, the leaders of South and North Korea held a summit in Panmunjom, the third such
meeting since 2000. They signed a declaration that called for the complete denuclearisation of the
Korean Peninsula, for a peace treaty to replace the armistice in place since the end of the Korean
War, for steps to ease military tensions, for expanded economic co-operation between the two
Koreas and for increased humanitarian exchanges.
In May 2018, the leaders of South and North Korea met again in Panmunjom.
In June 2018, the US President met with the North Korean leader in Singapore, the first-ever such
meeting. They signed a joint statement, agreeing to security guarantees for North Korea, new
peaceful relations, the denuclearisation of the Korean Peninsula, the recovery of soldiers’ remains,
and follow-up negotiations between high-level officials.
In September 2018, the South Korean President visited Pyongyang and Mount Baekdu. The
leaders of South and North Korea signed a Military Agreement and a declaration calling for civilian
exchanges and cooperation in many areas, and conditions to denuclearise North Korea.
In February 2019, the US President met with the North Korean leader in Hanoi but the summit was
cut short without an agreement.
In June 2019, the US President met with the leaders of South and North Korea in the Demilitarised
Zone, and became the first sitting US President to set foot on North Korean soil.
In the course of 2019, however, these negotiations gradually lost momentum even as North Korea stepped
up missile testing and gave signs of reorienting diplomatic efforts towards China and Russia, which
supported a loosening of the international sanctions regime. With no progress in lifting sanctions and in
advancing inter-Korean projects, North Korea blamed South Korea and the United States while escalating
tensions. In June 2020, it blew up the inter-Korean joint liaison office built by South Korea in the Gaeseong
Industrial Complex, ostensibly by way of retaliation against propaganda leaflets which North Korean
defectors had sent toward the North using balloons.
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Economic developments and the COVID-19 crisis
Estimates of external trade and domestic economic activity in North Korea are very crude and unreliable.
The country has published virtually no national account statistics nor any budget information in level terms
in recent decades. Trade data are based on imperfect mirror statistics published by North Korea’s trading
partners (which sometimes confuse North and South Korea), and thus fail to capture a substantial share
of actual trade flows, notably small and large-scale smuggling across land borders and illegal ship-to-ship
oil transfers on the open seas, which routinely circumvent international sanctions (UN Panel of Experts,
2020). Estimates of domestic economic activity in North Korea are produced by the Bank of Korea in Seoul,
based on an eclectic array of information sources.
Keeping those very strong caveats in mind, North Korea’s recorded trade has shrunk dramatically since
2015. Trade between the two Koreas essentially stopped, with only USD 6.7 million worth of goods shipped
from the South to the North in 2019, and USD 0.2 million in the opposite direction. The volume of trade
with China dropped sharply but the share of trade with China has risen and exceeded 95% in 2019
(Figure 1.C.1). The trade squeeze contributed to a large contraction in estimated real GDP in 2017 and
2018 (Figure 1.C.2). Real GDP inched up in 2019 but will likely shrink in 2020 in the context of the COVID-
19 crisis (see below).
Accounting for over a fifth of GDP, agriculture remains a large and poorly performing sector,
notwithstanding the objective to promote the adoption of high-yielding seed varieties and advanced crop
cultivation and management techniques enshrined in the 2016-20 Strategy for National Economic
Development. The sector has suffered considerably in recent years from the combination of droughts and
floods, whose impact is amplified by poor irrigation and drainage systems, and economic sanctions, which
have restricted the imports of fuel, machinery and spare parts (FAO/WFP, 2019).
Annex Figure 1.C.1. North Korea’s recorded foreign trade
Exports plus imports of goods
USD billion
7
China Japan Thailand Russia South Korea
6
5
4
3
2
1
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Note: Based on trading partners’ mirror statistics.
Source: Korea International Trade Association.
StatLink 2 https://doi.org/10.1787/888934157036
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Annex Figure 1.C.2. Estimated GDP level and growth rate
KRW Trillion %
35 Real GDP (left scale) Real GDP growth (right scale) 8.0
30 6.0
4.0
25
2.0
20
0.0
15
-2.0
10
-4.0
5 -6.0
0 -8.0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Note: Estimated at 2010 constant prices (using South Korea relative prices).
Source: Bank of Korea
StatLink 2 https://doi.org/10.1787/888934157055
Among the main sectors of the economy, services stand out as still expanding, albeit at a modest pace.
This likely reflects inter alia the regime’s efforts to spur tourism, in particular from China (Yoon, 2019), but
also vibrant formal wholesale and retail markets, whose number stood around 500 by early 2019 – not
counting the many informal markets (Lee, 2019).
Tourism is one important source of foreign currency in North Korea. Another are the North Korean workers
dispatched abroad. Under the international sanctions, they were required to return to their home country
by late December 2019, but a number of them most probably continue to work abroad, either with a
different visa status or undeclared (Fromer, 2019). A third source are the fast expanding sales of
smartphones and associated call plans, which are payable only in hard currency: around 6 million people,
or close to one quarter of North Korea’s total population, were recently deemed to carry a smartphone
(Park, 2019).
The outbreak of the COVID-19 pandemic has substantially affected many of the aforementioned sectors
of the economy, even though North Korea claims not to have recorded any case domestically (see the NK
Pro tracker for details). One of the consequences is that it may exacerbate food shortages, notwithstanding
political calls for achieving self-reliance in this area. In this context, the United Nations Office for the
Coordination of Humanitarian Affairs has developed a preparedness and response plan, in conjunction
with the Government, aiming to ensure that humanitarian impacts of the COVID-19 crisis on vulnerable
people and communities are mitigated through continual prioritisation of food security, nutrition, health,
water, sanitation and hygiene interventions (OCHA, 2020).
The North Korean authorities acted swiftly in the face of the COVID-19 threat. Air China flights between
Beijing and Pyongyang were suspended on 20 January and so were national carrier Air Koryo flights soon
thereafter and Chinese tourism more generally. On 21 January, North Korea was reportedly already
working with the World Health Organisation to try and prevent the spread of the virus in the country, whose
health system is ill-equipped to cope with such a pandemic, as the country’s ranking on the Global Health
Security Index illustrates (Johns Hopkins Center for Health Security, 2019). Quarantine measures followed,
including school and university closures, as well as mass disinfection campaigns.
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The COVID-19 crisis has highlighted the country’s high dependence on China, cutting off some of North
Korea’s major sources of supply and the main market for its products – a situation that is hard to sustain
for an economy with limited buffers and stretched resources. Indeed, while North Korea closed its border
with China in January 2020, some traffic has reportedly resumed, with exemptions provided by the Chinese
authorities to North Korean traders in late March (Jang, 2020), container trucks seen to again cross the
Sino-North Korean Friendship Bridge by early April (Ha, 2020) and a freight train loaded up in Dandong
with foodstuffs and construction supplies spotted in Pyongyang in May (Mun, 2020). The supply chain
disruptions and work stoppages entailed by the COVID-19 crisis have put pressure on State finances.
Reportedly, this has led to the first issuance of public bonds since 2003 (Kim, 2020), with the new
entrepreneurial class (donju) being forced to buy them with foreign currency, and another portion of the
bonds to be used by State institutions and companies to pay their suppliers.
Economic cooperation between the two Koreas has not progressed much since the suspension of all
activity in the Gaeseong Industrial Complex in February 2016. One area envisaged in 2018 was to help
improve the North’s vast but antiquated rail network. With the approval of the United Nations, the two
Koreas jointly conducted a field study on two main railways in 2018 (the Gaeseong to Sinuiju line and the
Geumgang to Tuman River line), but progress on the ground is impeded by the prohibition, under the
international sanctions, to bring in machinery and construction materials. The South Korean government
has also offered humanitarian support. Last year, it proposed 50 000 tonnes of rice via the World Food
Programme to address food shortages, which by mid-2020 had not been accepted, however. It has
furthermore decided to contribute USD 4.9 million to a multi-year project run by the United Nations
Economic and Social Commission for Asia and the Pacific to help improve statistical literacy in North Korea.
In the context of the COVID-19 crisis, South Korea has offered to cooperate in the area of health, and in
particular to launch a joint response system against infectious diseases, to help cope with growing threats
from global pandemics.
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References
FAO/WFP (2019), FAO/WFP Joint Rapid Food Security Assessment on DPRK, May.
Fromer, J. (2019), “As UN worker ban looms, Russian tourism and student visas for North Koreans soar”,
NK Pro, 12 December.
Ha, Yoon Ah (2020) “Chinese trucks cross the Sino-North Korean Friendship Bridge”, Daily NK, 6 April.
Jang, Seul Gi (2020), “China exempts N. Korean traders from ban on foreign arrivals”, Daily NK, 1 April.
Johns Hopkins Center for Health Security (2019), Global Health Security Index (2019).
Kim, Byung-yeon (2020), “It’s the economy, stupid”, JoongAng Ilbo, 27 May.
Koen, V. and J. Beom (2020), "North Korea: The last transition economy?", OECD Economics
Department Working Papers, No. 1607, OECD Publishing, Paris.
Lee, Je-hun (2019), “North Korea’s ‘marketized economy’ already at an irreversible stage”, Hankyoreh,
5 February.
Mun, Dong Hui (2020), “North Korea is importing construction materials from China”, Daily NK, 3 June.
NK Pro, Coronavirus in North Korea: COVID-19 Tracker.
OCHA (2020), DPR Korea Needs and Priorities 2020, April.
Park, Ju-min (2019), “How a sanctions-busting smartphone business thrives in North Korea”, Reuters,
26 September.
UN Panel of Experts (2020), Report of the Panel of Experts established pursuant to resolution 1874
(2009), S/2020/151, 2 March.
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2 Raising employment and enhancing
job quality in the face of rapid
ageing
Korea has the fastest ageing population in the OECD, with the number of
persons aged 65 or over projected to exceed 80% of the working-age
population in 2060, the highest ratio in the OECD. In the absence of a
strong policy response, this will lower economic growth, widen inequality
and weaken well-being, and challenge public finance sustainability and
welfare provision. The COVID-19 crisis will exacerbate these tensions, as it
will persistently lower growth and employment and affect low-income
workers most. Against this background, Korea needs to shelter its
workforce from the crisis as much as possible, to prevent scarring and
unemployment hysteresis, and better mobilise its labour resources once the
recovery is underway. This chapter draws on the OECD’s new Jobs
Strategy to suggest ways to raise employment and foster inclusive growth.
Lifting the employment rate and quality of jobs of Korean women, who are
on average highly skilled, should be a priority. Koreans effectively retire at
an advanced age, but often end their working lives in poor-quality non-
regular jobs, after being forced to retire from their career job in their fifties
for various reasons. Maintaining high activity rates, while enhancing the
quality of jobs for older workers will be crucial to sustain the economy’s
growth potential and, along with welfare reforms, alleviate old-age poverty.
To achieve these goals and to lift labour productivity, which remains low by
OECD standards, Korea will need to reduce labour market duality and
improve job matching. This requires a shift in policies. The COVID-19 crisis
has triggered actions to protect the most vulnerable workers. The
reinforcement of the social safety net could facilitate a more permanent shift
from protecting jobs to protecting workers, which along with enhanced
active labour market policies, would support employment and productivity
growth.
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The COVID-19 crisis is lowering employment, especially for non-regular workers (Figure 2.1), and is set to
have a lasting effect on the economy, as well as on public finances, despite ambitious government
measures to support employment (Box 2.1). This will compound Korea’s ageing challenge, which is more
acute than in any other OECD country, with the old age dependency ratio set to increase from about 20%
currently to more than 80% in 2060 (Figure 2.2), clouding economic growth prospects and generating risks
of widening inequality and weakening well-being, as well as challenges for public finances and the welfare
system. Nevertheless, well-designed policies can address the ageing challenge and the “silver economy”
also offers opportunities. No negative association between population ageing and GDP per capita growth
appears across large samples of OECD and non-OECD countries, as ageing countries tend to adopt
labour-saving technologies (Acemoglu and Restrepo, 2017). Korea’s strength in technology and the
innovation capability demonstrated during the COVID-19 crisis could help Korea face the demographic
headwinds. At the microeconomic level, ageing provides opportunities for businesses producing goods
and services demanded by older people. As ageing is a global phenomenon, building a comparative
advantage in the silver economy could enhance export performance. Last but not least, higher and better
employment for older workers would raise their purchasing power and allow them to consume more,
generating a virtuous cycle.
Figure 2.1. Employment falls sharply in services and among non-regular workers
Year-on-year percentage change (unless otherwise specified), June 2020
Employment rate* -1.3
Unemployment rate* 0.3
Participation rate* -1.0
Total Employment -1.3
Agriculture, forestry & fishing 3.4
Manufacturing -1.5
Construction -3.0
Wholesale & retail trade, accommodation & food -6.0
Electricity, transport, communication & finance 0.6
Business, personal, public service & others 0.6
Temporary employees -8.3
Daily workers -5.8
Employers -11.3
Own account workers 0.4
Unpaid family workers -4.6
-20 -15 -10 -5 0 5
* Percentage points.
Note: The self-employed are divided between employers and own-account workers.
Source: Statistics Korea.
StatLink 2 https://doi.org/10.1787/888934157074
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Box 2.1. Main government measures to support employment and incomes during the COVID-19
crisis
Many measures implemented by the government to support the economy during the COVID-19 crisis
(see Chapter 1) support employment, directly or indirectly. This box focusses on direct measures to
preserve or create jobs and on income support.
Subsidy for introducing flexible work arrangements. From February 25, application procedures are
temporarily simplified. SMEs who introduce commuting with time difference, work from home, remote
work or selective work hours can receive up to KRW 5.2 million a year per employee.
Measures to support employment security (presented on 28 February 2020). Easing of eligibility
conditions for the Employment retention subsidy and increase of its level from half to two thirds of the
wage paid for large companies and from two thirds to three quarters for SMEs, for six months (February
to July). On 25 March, the subsidy was increased further for three months (April to June), to up to 90%
of the wage paid for SMEs in all industries. The estimated cost is KRW 0.8 trillion. Additional
employment support is available for the regions and economic sectors (e.g. tourism and
accommodation) most affected by the virus outbreak.
Support for job retention (presented on 22 April 2020). The government announced its Employment
and Business Stability Measures to keep workers employed and to stabilise their livelihood. The
government put together support measures totalling up to KRW 10.1 trillion, which can support 2.86
million persons. In addition, a KRW 40 trillion stabilisation fund for mainstay industries was unveiled,
which provides funding to employers under the condition that they keep their employees.
Income support. From May 2020, relief checks of up to KRW 1 million (USD 820) are being sent to all
households, for a total amount of KRW 14.3 trillion (about 0.7% of GDP). Cash payments are first
directed to some 2.8 million households in the lowest income bracket (13% of the total) and others will
receive coupons to spend within three months. The coupons will have to be spent by 31 August or will
be considered a donation to the state. People can decide whether to apply for relief handouts for their
own use it or to donate them to help the nation overcome the employment crisis caused by COVID-19.
The relief handouts that the people voluntarily donate will be used to fund government projects that help
maintain and create jobs for the vulnerable population. On 7 May, the government announced
emergency unemployment support of a total of KRW 1.5 trillion for temporary workers, including
platform and freelance workers. The first 2020 supplementary budget, passed on 17 March, included
emergency support for distressed households. Some regional authorities have provided additional
support (OECD, 2020a).
Public sector and subsidised job creation (presented on 22 April and 14 May 2020). 1.54 million
public sector jobs will be created. Administrative procedures will be eased to speed up the creation of
the 945 000 jobs already planned for 2020. Among them, more than 600 000 jobs will be positions for
the elderly and the socially disadvantaged. More than 550 000 additional jobs for young adults and low-
income earners will be created, including remote, tech and SME jobs, as well as 48 000 permanent jobs
in the public sector. The programme will require KRW 3.6 trillion, which will mainly be financed through
the third 2020 supplementary budget (35.1 trillion, 1.8% of GDP).
Source: Ministry of Economy and Finance, Ministry of Employment and Labour and OECD (2020b).
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Figure 2.2. The old-age dependency ratio is set to be the highest in the OECD in 2060
%
90
2020 2060
80
70
60
50
40
30
20
10
0 MEX
TUR
CHL
LUX
ISR
KOR
IRL
SVK
AUSISL
NZL
USA
NOR
CAN
POL
AUT
CHE
GBR
BEL
ESP
HUN
NLD
CZE
DNK
LTU
EST
SVN
SWE
LVA
FRA
DEU
GRC
PRT
ITA
FIN
JPN
Note: Ratio of population aged 65 and over to population aged 15-64. Projections are based on the medium fertility variant.
Source: United Nations, Department of Economic and Social Affairs, Population Division (2019), World Population Prospects 2019.
StatLink 2 https://doi.org/10.1787/888934157093
Fostering solid inclusive growth in the face of the demographic headwinds calls for both better mobilising
Korea’s high-quality labour resources and increasing labour productivity. Long-term scenarios suggest that
this could boost average annual GDP per capita growth in 2020-60 by 1 to 2 percentage points. This
chapter focusses on mobilising labour resources, drawing on the OECD’s new Jobs Strategy (Box 2.2).
Productivity is addressed in Chapter 3.
Box 2.2. The OECD’s new Jobs Strategy
The digital revolution, globalisation and demographic change are transforming labour markets. These deep and
rapid transformations raise new challenges for policy makers. The new OECD Jobs Strategy, endorsed by OECD
Ministers at their annual meeting in May and launched in December 2018, provides a coherent framework of
detailed recommendations in a wide range of policy areas to help countries address these challenges. The new
Jobs Strategy goes beyond job quantity and considers job quality and inclusiveness as central policy priorities,
while stressing the importance of resilience and adaptability for good economic and labour market performance in
a changing world of work. The key message is that flexibility-enhancing policies in product and labour markets are
necessary but not sufficient. Policies and institutions that protect workers, foster inclusiveness and allow workers
and firms to make the most of ongoing changes are needed to promote good and sustainable outcomes. The
OECD Jobs Strategy makes use of a data dashboard to assess the strengths and weaknesses of labour markets.
The OECD actively supports countries with the implementation of the OECD Jobs Strategy through the
identification of country-specific policy priorities and recommendations. This is done through special chapters in
the OECD Economic Surveys, as well as analytical background papers. The analysis in this chapter is supported
by analytical background papers that focus on two key policy priorities for Korea, namely promoting labour market
inclusiveness by providing better employment opportunities for disadvantaged groups (Fernandez et al., 2020),
and promoting job quality by reducing the incidence of very long working hours (Hijzen and Thewissen, 2020). The
process will be concluded with a synthesis report that will draw lessons from the country reviews and highlight good
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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practices across the full range of policy tools identified by the OECD Jobs Strategy. More information on the
implementation of the OECD Jobs Strategy can be found here: http://www.oecd.org/employment/jobs-strategy.
Source: OECD (2018a), Good Jobs for All in a Changing World of Work: The OECD Jobs Strategy.
Korea’s employment rate is below the OECD average, largely due to low female employment. The gender
employment gap for people aged 15-64 is nearly 18 percentage points, the fourth largest in the OECD, as
relatively low wages and career prospects often discourage women from working. More than 40% of female
wage earners are in non-regular employment, which prevents them from making the most of their generally
high level of qualification. A number of policies can promote better employment and career progression
opportunities for women, including enhancing childcare quality, supporting better work-life balance,
facilitating return to work after career breaks, tackling discrimination and more generally promoting a
culture of gender equality. These policies could also have a positive impact on the fertility rate, which has
fallen to around one, the lowest level in the OECD. Traditional pro-natalist policies largely based on
financial support for families in Korea and other East Asian countries have so far had limited impact, due
to cultural obstacles, such as long working hours, family organisation and the role of mothers in children’s
education (Jones, 2019). Hence, since 2018 the Korean government has prioritised quality of life, gender
equality and work-life balance (OECD, 2019a).
Even though older Koreans have a relatively high employment rate, especially because of the absence or
low level of pensions, they tend to hold poor-quality non-regular jobs, after being forced to retire from
regular jobs in their fifties for various reasons, such as poor business performance and business
suspension or closure (33%), health conditions (20%), family care (14%) and mandatory retirement (7%).
This generates old-age poverty, lowers well-being and productivity, and encourages working long hours
(Hijzen and Thewissen, 2020). Promoting more flexibility in wages and lifelong learning can boost the level
and quality of employment of older workers.
Reducing labour market rigidities and strengthening social protection is necessary to reduce labour market
duality and improve job matching. A focus on protecting workers, through the expansion of the social safety
net and active labour market policies, rather than protecting jobs, would contribute to raising well-being,
employment and labour productivity, which is only about half of that in the top half of OECD countries.
Greater use of foreign workers could alleviate labour shortages and related pressure to work long hours in
small and medium enterprises (SMEs).
This chapter is structured as follows. The first part explores opportunities to raise employment, especially
in groups where it remains relatively low, and outlines potential impacts on GDP growth and fiscal
sustainability. The second part argues that greater labour market flexibility, combined with stronger social
protection, would foster more inclusive growth.
Scarcer labour resources need to be better mobilised
Key challenges for the Korean labour market
Korea faces important challenges regarding labour market inclusiveness and certain aspects of job quality,
as can be seen from the OECD Jobs Strategy dashboard (Figure 2.3). The gender labour income gap is
the highest in the OECD, while the incidence of low incomes among working-age persons and the
employment gap among disadvantaged groups are well above the OECD average. Promoting employment
among under-represented groups should be a key priority. Concerns about job quality mainly relate to a
high incidence of low pay and very long working hours (60 hours or more per week). These concerns tend
to be amplified by a strongly segmented labour market.
Significant employment disparities exist between socio-economic groups, underscoring the
importance of tailored measures to improve outcomes. The employment gap with prime-age males
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64
for disadvantaged groups is 31.8% (Figure 2.3). Employment gaps are particularly large relative to
the OECD average for youth, women with young children, as well as for people with disabilities
(Figure 2.4). The COVID-19 crisis highlights the vulnerability of disadvantaged groups to economic
shocks. For example, while total employment declined by 1.3% year-on-year in June 2020, the fall
was 8.3% for temporary workers and 5.8% for daily workers.
Figure 2.3. Korea faces important challenges with inclusiveness and some aspects of job quality
Bottom OECD performer Top OECD performer
Turkey: 55.6% OECD: 72.8% Iceland: 86.3%
Employment rate (2018)
Korea: 71.4%
Quantity
Greece: 19.5% OECD: 5.5% Czech Rep.: 2.3%
Unemployment rate (2018)
Korea: 3.9%
Turkey: 42.9% OECD: 25.2% Iceland: 14.3%
Broad labour underutilisation (2018)
Korea: 29.1%
Mexico: 4.9 USD OECD: 17.1 USD Switzerland: 32.4 USD
Earnings quality (2016)
Korea: 11.1 USD
Quality
Greece: 21.7% OECD: 5.1% Iceland: 1%
Labour market insecurity (2016)
Korea: 2.9%
Working very long hours (60 or more) Korea: 10.5% OECD: 5% Lithuania: 1.6%
(2018)
United States: 15.4% OECD: 10.8% Czech Rep.: 5%
Low-income rate (2017)
Inclusiveness
Korea: 12.7%
Korea: 61% OECD: 38.1% Finland: 21.4%
Gender labour income gap (2015)
Korea: 61.0%
Employment gap for disadvantaged groups Turkey: 47.1% OECD: 24.7% Iceland: 9.2%
(2016)
Korea: 31.8%
Note: Employment rate: share of working age population (20-64) in employment (%). Broad labour underutilisation: share of inactive, unemployed
or involuntary part-timers (15-64) in population (%), excluding youth (15-29) in education and not in employment. Earnings quality: gross hourly
earnings in PPP-adjusted USD adjusted for inequality. Labour market insecurity: expected monetary loss associated with the risk of becoming
unemployed as a share of previous earnings. Working very long hours: percentage of workers working 60 or more actual weekly hours. Low
income rate: share of working-age persons living with less than 50% of median equivalised household disposable income. Gender labour income
gap: difference between per capita annual earnings of men and women (% of per capita earnings of men). Employment gap for disadvantaged
groups: average difference in the prime age men’s employment rate and the rates for five disadvantaged groups (mothers with children, youth
who are not in full-time education or training, workers aged 55-64, non-natives, and persons with disabilities; % of the prime-age men’s rate).
Source: OECD calculations based on statistics for 2018 or the last available year and various sources; OECD (2018a), Good Jobs for All in a
Changing World of Work: The OECD Jobs Strategy, OECD Publishing, Paris.
StatLink 2 https://doi.org/10.1787/888934157112
Low employment rates reflect worker-related barriers to employment. New OECD empirical
evidence based on micro data for Korea identifies employment barriers faced by individuals
experiencing major employment difficulties (Box 2.3). The most frequent employment disincentive
is a high partner or non-labour income (Figure 2.5), which discourages employment, particularly
among households’ second-earners (Fernandez et al., 2016). Furthermore, about 20-30% face
work-readiness barriers related to low work-related skills, no past work experience or low
education.
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65
Figure 2.4. Disadvantaged groups face large employment gaps
Employment gap
%
60
Korea OECD
50
40
30
20
10
0
Youth Women Mothers with Non-natives People with disabilities Older workers
(aged 15-29 years) young children (aged 55-64 years)
Note: Average difference in the prime age men’s (25-54 years) employment rate and the rates for the five disadvantaged groups as a % of the
prime-age men’s rate. Youth excludes those in full-time education or training. Mothers with young children concern working-age mothers with at
least one child aged 0-14 years. Non-natives refers to all foreign-born people with no regards to nationality. Data refer to 2016.
Source: OECD (2018a), Good Jobs for All in a Changing World of Work: The OECD Jobs Strategy.
StatLink 2 https://doi.org/10.1787/888934157131
Figure 2.5. There are multiple worker-related barriers to employment
%
45
Work incentives barriers Work readiness barrier Work availability barrier
40
35
30
25
20
15
10
5
0
High partner or non- No past experience Low work-related Low education Health limitations Care responsibilities High earnings
labour income skills replacements
Note: The population experiencing major employment difficulties is defined as those aged 18-64 that report to be long-term unemployed, inactive
or to have a weak labour market attachment (an unstable job, restricted working hours or with near-zero earnings), excluding full-time students
and those in compulsory military service. The figure indicates the proportion of this population that faces each identified employment barrier.
The bars do not sum to 100 as individuals can face multiple employment barriers.
Source: Fernandez et al. (2020). Calculations based on KLIPS 2016.
StatLink 2 https://doi.org/10.1787/888934157150
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66
Box 2.3. Groups facing major employment barriers in Korea
This box uses the OECD’s Faces-of-Joblessness methodology to identify groups of individuals who experience major
employment difficulties and face similar combinations of barriers (Fernandez et al., 2020). Major employment difficulties
include long-term unemployment, inactivity or a weak labour market attachment (an unstable job, restricted working hours or
near-zero earnings). Employment barriers may relate to either work readiness (low education, low work-related skills or no
work experience), work availability (health limitations or care responsibilities) or work incentives (generous income-support
benefits or a high partner or non-labour income). Statistical segmentation methods are used to identify groups of individuals
who face a similar combination of employment barriers. The statistical portraits of the identified groups can then serve as a
basis for people-centred policy interventions. In the case of Korea, a third of the working-age population experiences major
employment difficulties, slightly above the OECD average of 30%. This group can be divided into nine sub-groups who face
broadly similar employment barriers (Figure 2.6):
Groups primarily facing work incentives barriers. Three groups principally face work incentives barriers because of
access to high partner or non-labour income sources independent of own work effort. One group is young or in prime-
age, in an unstable job and generally living with their parents (Group 1). The second group consists of prime-age
women performing domestic tasks (Group 2). The third group comprises older and richer individuals who have built
up a long previous employment record (Group 3).
Figure 2.6. Groups facing different combinations of employment barriers
Share facing employment barriers related to work readiness, work availability and work incentives
Index of
employment
barriers
Work readiness barrier Work availability barrier Work incentives barrier
High
Low
1. Young & 2. Prime-age 3. Older & 4. Mothers, care 5.Health 6. Youth, no 7. Older low- 8. Parents, care 9. No
prime-age in housewives & richer, high non- responsabilities limitations living experience, educated responsibilities & experience, low
unstable jobs some labour income & low in poor living with housewives no experience skills & low
(19%) experience (9%) experience (9%) households (9%) parents (14%) (9%) (2%) education (6%)
(25%)
Note: The bars refer to the extent the groups face a barrier related to work availability (health limitations and care responsibilities), work readiness (low
education, low work-related skills and no past experience) and work incentives (high non-labour income and high earnings replacements), calculated as
an average across individual barriers and expressed in relative terms (whether a group faces a barrier less or more compared to other groups). The
number in brackets behind each group name indicates the group size as a percentage of the total population experiencing major employment difficulties.
Source: Fernandez et al. (2020). Calculations based on KLIPS 2016.
StatLink 2 https://doi.org/10.1787/888934157169
Groups primarily facing work availability barriers. Three groups predominantly face work availability barriers. For two
groups, these barriers relate to care responsibilities, with one group consisting of mothers with low previous work
experience (Group 4) and the other parents without past work experience (Group 8). Another group consists of
individuals facing health limitations and living in poor households (Group 5).
Groups primarily facing work readiness barriers. Three groups primarily face work readiness problems. Two groups
have never worked before, and consist of inactive youth (Group 6) and individuals with low skills and low education
(Group 9). The third group comprises older low-educated women performing domestic tasks (Group 7).
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Job quality is a concern, in particular for older workers. Many workers earn low hourly wages and
work very long hours. They are particularly vulnerable to economic shocks like the COVID-19 crisis.
In addition to the impact from the economic slump, older workers are more vulnerable to the
disease than younger people. Hence, the government has taken measures to create jobs for the
elderly in outdoor or remote positions (Box 2.1). Even outside crisis times, low-pay incidence,
defined as the share of full-time workers earning less than two-thirds of gross median earnings, is
above the OECD average (Figure 2.7, Panel A). Working very long hours (60 or more per week) is
more common in Korea than on average across the OECD for all age groups, and is particularly
elevated for older workers (Panel B). This reflects both supply factors related to low wages and
concerns about future pensions as well as demand factors related to skills shortages and a limited
flexibility of employers to adjust employment and wages in line with business conditions and
productivity. The current government is seeking to reduce the high incidence of very long working
hours in an effort to improve job quality, health and productivity. Maximum total working hours have
been reduced from 68 to 52 hours per week in firms with 300 or more employees as of July 2018
and in firms with 50 to 299 employees as of January 2020 and will be extended to firms with five
to 49 employees in July 2021. To increase flexibility, a tripartite agreement was signed on a plan
to extend the reference period over which normal working hours can be averaged from three to six
months and a reform bill reflecting the agreement is currently pending at the National Assembly.
The first phase of the reform targeted at firms with 300 or more employees has contributed to
reducing the percentage of individuals working very long hours. Nevertheless, successfully
changing Korea’s long working-hour culture requires additional efforts to improve the effectiveness
of working time regulation and lower incentives to supply and demand long hours (see Key Policy
Insights and Hijzen and Thewissen, 2020).
Figure 2.7. Many workers earn low wages and work very long hours
Korea OECD
A. Incidence of low pay B. Incidence of working very long hours
30 14
25 12
10
20
8
15
6
10
4
5 2
0 0
All persons Working age population Youth Prime-age Older
(15-64) (15-24 years) (25-54 years) (55-64 years)
Note: Incidence of low pay: percentage of full-time workers earning less than two-thirds of gross median earnings of all full-time workers. Data
refer to latest year available (2014-2018; 2017 for Korea). Average for 33 OECD countries (except NOR, SWE and TUR). Incidence of working
very long hours: percentage of workers working 60 or more actual weekly hours. Data refer to 2018. Average for 31 OECD countries (excludes
Chile, Israel, Mexico, New Zealand and Turkey). Data for USA refer to dependent employment.
Source: OECD Earnings Database, OECD Employment database and EU-LFS.
StatLink 2 https://doi.org/10.1787/888934157188
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Promoting female employment is crucial
Women’s employment rate is relatively low past age 30 (Figure 2.8). The COVID-19 crisis may worsen this
situation if it leads to a durable decline in job opportunities. Women are over-represented in activities like
retail trade, accommodation and restaurants, which are the most affected by the crisis and are likely to
recover only slowly. They are also more often than men in insecure jobs. However, there is ample scope
to raise female employment, especially as women have increasingly high qualifications, with the highest
25-34 year-olds tertiary graduation rate in the OECD.
Figure 2.8. Women’s employment rate is relatively low between ages 30 and 60
% Men % Women
100 100
90 90
80 80
70 70
60 60
50 50
40 40
Korea
30 OECD 30
OECD Max Korea
20 20 OECD
OECD Min
OECD Max
10 10
OECD Min
0 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74
0 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74
Age group Age group
Source: OECD (2019), Employment rate (indicator). doi: 10.1787/1de68a9b-en (Accessed on 11 December 2019).
StatLink 2 https://doi.org/10.1787/888934157207
Many women exit the labour market when they have children. On average, women who did so after the
birth of their first child stopped working for three years over the period 2006-15, down from almost six years
over the period 1996-2005 (OECD, 2020c), partly reflecting the declining number of children per women.
To facilitate mothers’ return to work, the government is providing vocational education and training for
women who have taken career breaks through Job Centres for women. Nevertheless, in a system with
responsibilities and pay disproportionately based on seniority, long career breaks hamper career
prospects. Women returning from career breaks for childbirth or childcare often re-enter the labour market
as non-regular workers with low-paying jobs, which is a key factor behind the gender wage gap, which is
the largest in the OECD, at 34.1% in 2018, as against an OECD average of 13.4% (Figure 2.9). Many
mothers with job qualifications are discouraged from returning to work after childbearing by unrewarding
job opportunities. Indeed, Korea is one of the few OECD countries for which data are available where the
difference in the employment rate between genders increases with the level of education (OECD, 2018b).
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69
Figure 2.9. The gender wage gap is the widest in the OECD
%
35
30
25
20
15
10
5
0
Source: OECD (2019), Gender wage gap (indicator). doi: 10.1787/7cee77aa-en (Accessed on 11 December 2019).
StatLink 2 https://doi.org/10.1787/888934157226
Greater transparency about factors determining pay would help reduce gender pay gaps. Korea has an
affirmative action programme, which was gradually expanded since its introduction in 2006, and seems to
have helped narrowing gender wage gaps. In February 2020, the government launched a salary
comparison website for workers in domestic firms, showing salary brackets of private sector employees
according to six criteria -- firm size, type of business, occupation, job career, gender and academic
background. It could build on these data to provide further analysis of wage differences. For example, the
Swedish National Mediation Office issues an annual report analysing the sources of wage discrepancies,
which allows separating differences related to age, education, occupation, sector of employment and hours
worked from gender discrimination, thereby facilitating corrective action (Swedish National Mediation
Office, 2019). Increasing support for potential female entrepreneurs to balance work and family life and
obtain financing would help reduce the gender gap in entrepreneurship rates, which was the third highest
in the OECD in 2017 at about 12.5 percentage points, compared to an OECD average of around seven
(2018 OECD Economic Survey of Korea). Policies need to make it easier for mothers to combine careers
and family life, in particular through promoting the use of paid parental leave by both parents, boosting the
supply of high-quality childcare, improving work-life balance, facilitating mothers’ return to work and
tackling gender discrimination.
Korean women are entitled to 90 days of paid maternity leave (of which the first 60 are mandatory under
the Labour Standards Act and the remaining 30 are covered by the Employment Insurance). However,
only 76.5% of female private-sector workers took maternity leave in 2018, notably because many firms are
reluctant or unable to fill temporary vacancies. Many women tend to leave the labour market shortly before
or after childbirth. Among the reasons cited for career interruptions, “pregnancy and childbirth” accounts
for 22.6%. Beyond female labour market participation and career prospects, insufficient access to
maternity leave may affect fertility, with a three percentage-point higher probability of having children for
women benefitting from maternity leave (Kim, 2018a). The government has recently strengthened its
supervision of businesses to ensure enforcement of maternity leave rights, using health and employment
insurance data. In addition, many working mothers who are not covered by the Employment Insurance (EI)
scheme are now entitled to a flat-rate maternity cash benefit of KRW 500 000 per month for three months.
This covers the self-employed, freelancers, and many employees who are not covered by the EI scheme
and/or do not meet the maternity benefit eligibility criteria.
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Each parent is entitled to a year of paid parental leave, to be taken before the child turns eight, with a
replacement rate of 80%, up to a ceiling of KRW 1.5 million (about 40% of average earnings) for the first
three months, and 50% subsequently, up to a ceiling of KRW 1.2 million. The effective average
replacement rate across the entire one-year leave for a worker on average earnings was 31% in 2019,
which is relatively low, compared to Germany, Japan and Sweden, where the replacement rate is around
60% (OECD, 2019a). Parental leave is estimated to increase the probability of a woman’s continued
participation in the labour market by four percentage points (Kim, 2018a). The second parent taking leave
(usually the father) can benefit from three months leave at a payment rate of 100%, up to a ceiling of KRW
2.5 million (about 60% of average earnings). However, fathers whose spouses are unable to take parental
leave do not benefit from the higher replacement rate. Amending this rule should be considered. In 2018,
about 30 parents per 100 live births (of which 18% were fathers) claimed the parental leave benefit. This
compares to more than 70% in Nordic countries and about 90% in Slovenia. A 2018 relaxation of eligibility
criteria and the 2019 EI extension are likely to lead to an increase in take-up in the future (OECD, 2020c).
The proportion of fathers among parental leave-takers (regardless of duration) increased from 2.4% in
2011 to more than 21.2% in 2019. Nevertheless, negative perceptions in the workplace and income
reduction remain strong obstacles to fathers taking parental leave, particularly in the private sector. Many
firms are reluctant to allow parental leave, especially because of difficulties in hiring replacement workers
and adapting their organisation. Firms are more willing to grant parental leaves in many other OECD
countries. The Korean law provides for the right to maternity leave and the prohibition of discrimination,
and the Korean government grants subsidies to firms offering parental leave and reduced working hours
for parents, as well as additional subsidies for hiring replacement workers, but awareness remains
insufficient.
As the maximum parental leave is fairly long and the effective replacement rate fairly low, allowing higher
replacement rates for shorter leaves, as in Germany, may be a way to alleviate the income reduction
problem (OECD, 2019a). Encouraging fathers to take parental leave leads to better sharing of household
work, even beyond the leave period, supporting female employment. One recent estimate suggests that a
50% increase in her husband’s household work increases a woman’s probability to continue working by
3.5 percentage points (Kim, 2018a). Improving flexibility in workplace practices, in particular through
expanding opportunities to work part-time with remuneration proportional to that of regular full-time workers
and allowing greater working-time flexibility would also encourage female employment (OECD, 2019a).
This could also help encourage births, as voluntary part-time is associated with a fertility rate that is two
percentage points higher relative to full-time work (Kim, 2018a).
The availability of high-quality childcare is essential to support female employment and to limit career
breaks. Government support for children aged 0-5 includes vouchers for children enrolled in childcare
centres and a home childcare allowance for children not enrolled in the centres. The share of out-of-pocket
payments for childcare is among the lowest in the OECD (OECD, 2020c). Participation is high, at over
50% for children aged below three and 93% for those between three and five in 2016, compared to OECD
averages of 33% and 86% respectively (OECD, 2019a). The government aims to increase childcare
capacity further to allow all children to receive basic childcare during the day and extended childcare at
night from March 2020.
Enhancing childcare quality further is a priority. The Nuri curriculum was introduced in 2013 to raise
childcare quality and average user satisfaction with childcare centres has increased from 3.7 to 4 on a
scale of 5 from 2012 to 2018. Nevertheless, further improvement is needed to ensure high quality across
all childcare centres. Hence, the government replaced accreditation upon application by mandatory
assessment for all childcare centres in June 2019, increased the number of assistant teachers by about
15 000 in 2019 and is raising early childhood education and care teachers’ pay and strengthening their
training. Reflecting many parents’ preference for public childcare, the government aims to lift its share to
40% by 2021, from around a quarter currently.
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Older workers need better jobs
Because of low pension entitlements, partly reflecting the late introduction of the National Pension Scheme
(NPS), which was set up in 1988 for companies with more than ten employees and gradually extended to
become quasi-universal only in 1999, 58% of men and 35% of women aged 65 to 69 are still working and
the average full retirement age is around 72. While Korea ranks 30th in the OECD on the employment rate
for individuals aged 25-54, it climbs steadily in the ranking as age increases, reaching the top spot for the
70-74 year-olds (Figure 2.10). However, more than 40% of workers aged over 60 are in non-permanent
jobs, compared to less than 20% in the overall working population (OECD, 2018c). A large proportion of
older workers also lacks an employment safety net (Figure 2.11).
According to the 2017 Additional Economically Active Population Survey for Older Workers, 58% of
workers aged 55-79 work primarily to earn or supplement their living costs. Korea has the highest share of
people aged over 65 earning less than half the median household income of the total population. This
contrasts with the relative poverty rate of the population aged 18-65, which is only slightly above the OECD
average (Figure 2.12). A multidimensional elderly poverty index taking into account assets and housing
(area per household member) suggests that old-age poverty may be overstated when only income is
considered. According to this index, about a fifth of Korean seniors would suffer from deprivation (Yun and
Ko, 2018). This is still a high proportion, asset holdings also mitigate income poverty in other OECD
countries, and the area per household member may overestimate the benefits of housing assets for
households living in large, but low quality dwellings, particularly in rural areas with limited service
availability. Many public sector jobs for older workers are being created. In particular, the government will
create 600 000 jobs for the elderly and the socially disadvantaged in outdoor or remote positions, to ensure
safety from the COVID-19 virus, in 2020 (Box 2.1). While this alleviates old-age poverty and fills some
needs for public service workers, more emphasis should be put on raising the quality of jobs, especially
through reducing the weight of seniority in the wage system and reorienting active labour market policies
(see below).
Figure 2.10. The employment rate falls more slowly with age than in other OECD countries
%
100
Korea OECD Min Max
90
80 30
15
70
8
60
50
40 2
1
30
20
10
0
25-54 55-59 60-64 65-69 70-74
Note: Data labels indicate Korea's employment rate rank in the OECD.
Source: OECD (2018c), Working Better with Age: Korea, Ageing and Employment Policies.
StatLink 2 https://doi.org/10.1787/888934157245
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Figure 2.11. Many older workers are excluded from the social safety net
Wage workers with employment safety net Wage workers without employment safety net Non-wage workers¹
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
15-29 30-49 50-64
1. Non-wage workers include employers, self-employed and unpaid family workers.
Source: OECD (2018c), Working Better with Age: Korea, Ageing and Employment Policies.
StatLink 2 https://doi.org/10.1787/888934157264
Figure 2.12. The share of the elderly in relative poverty is the highest in the OECD
Poverty rates
%
45
Over 65 18-65
40
35
30
25
20
15
10
5
0 DNK
NLD
FRA
NOR
SVK
CZEISL
FIN
IRL
LUX
GRC
BEL
HUN
AUT
POL
ESP
PRT
DEU
ITA
CAN
NZL
SWE
SVN
OECD
GBR
CHL
TUR
CHE
JPN
ISR
USA
AUS
MEX
LTU
LVA
EST
KOR
Note: Number of persons living with less than half of the median household income of the total population.
Source: OECD (2019), Poverty rate (indicator). doi: 10.1787/0fe1315d-en (Accessed on 11 December 2019).
StatLink 2 https://doi.org/10.1787/888934157283
As the NPS matures, pension adequacy will improve. Even so, the net mandatory public and private
replacement rate (taking personal income taxes and social security contributions paid by workers and
pensioners into account) for an average income earner after 40 years of contribution is fairly low, at 43%,
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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compared to an OECD average of 59%. Low-income earners (at 50% of average earnings) currently
benefit from a net replacement rate of 61%, still lower than the OECD average of 68% (Figure 2.13).
Furthermore, as a result of reforms to enhance the financial sustainability, the targeted gross replacement
rate will decrease by 0.5 percentage point per year from 45% in 2018 to 40% in 2028 (OECD, 2019b).
Expanding the coverage of the NPS to non-regular workers is another challenge. Excluding those who are
not considered workplace-based insured, such as short-time workers, who work less than 60 hours a
month, and day workers who work less than eight days a month, coverage was only slightly above 36%
for non-regular workers in 2016, compared with nearly 83% for regular workers. The Duru Nuri social
insurance support programme, initiated in 2012, grants subsidies covering employer and employee NPS
and EI premiums of low-income workers in companies with fewer than ten employees. The subsidy
currently amounts to 40% of contributions for previously covered employees, and up to 90% for new
subscribers. In order to reduce the deadweight costs, and increase the effect of social insurance, it is
necessary to reduce the support for existing insured workers and operate the programme mainly for new
subscribers. More efficient collection of social contributions, notably taking advantage of connecting
various administrative records, would also help raise NPS coverage (Kim, 2016).
Figure 2.13. Net pension replacement rates are relatively low
Low earner (50% AW) Average earner (AW)
%
120
100
80
60
40
20
0
MEX LTU IRL JPN NZL CHE GRC NOR EST LVA SVN CZE FIN SVK BEL DNK FRA ESP ITA TUR
KOR OECD
GBR POL CHL AUS USA CAN DEU SWE ISR ISL NLD HUN PRT AUT LUX
Note: The net replacement rate is calculated assuming labour market entry at age 22 in 2018 and retirement after a full career. The net
replacement rates shown are calculated for an individual with 100% and 50% of average worker earnings (AW).
Source: OECD pension models.
StatLink 2 https://doi.org/10.1787/888934157302
Given the short periods of contribution and the low replacement rates, many pensioners rely on the means-
tested, tax-financed basic pension, to which 70% of the elderly are eligible. Despite recent increases to up
to KRW 300 000 (about USD 260 or less than 8% of average earnings), the basic pension remains very
low. It should be increased further and focussed on the elderly in absolute poverty. The Basic Livelihood
Security Programme provides means-tested, non-contributory social assistance for people living below the
poverty line. However, to turn it into a better instrument against old-age poverty, the family support
obligation, which takes into account earnings and assets of a claimant’s children and parents to determine
entitlements (irrespective of whether they actually provide support), should be phased out, as in other
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OECD countries which previously had similar rules, including Austria, Belgium and France (OECD, 2018b).
Under the New Deal, the Korean government plans to phase out the family support obligation from the
Basic Livelihood Security Programme by 2022 and to expand the level of coverage.
Employees with at least a year of service are entitled to a severance lump-sum payment corresponding to
a month of wages for each year of service. Since 2005, the government has allowed the conversion of
severance pay into a traditional employee retirement scheme, subject to employee consent (Kim, 2018b).
However, employees generally prefer the severance lump-sum, which they can use, for example, to set
up a business after mandatory retirement or to finance their children’s education. The lack of portability of
benefits is a hindrance to conversion into traditional pensions and hampers labour mobility, two issues
which have been addressed in the reform of the Austrian severance pay system (Box 2.4).
Box 2.4. Austria: from severance pay to individual savings accounts
Until 2003, Austria had a standard severance pay system under which employees became eligible to a
cash payment from their employer in case of dismissal after three or more years of tenure. However,
concerns were raised about its ability to provide effective income protection to all workers in the case
of job loss, since workers with shorter tenures account for the bulk of dismissals but are not entitled to
severance pay. Concerns were also raised about its ability to support robust productivity growth based
on the reallocation of workers from less to more productive firms. In particular, the fact that voluntary
moves would entail the loss of the severance pay entitlements was thought to discourage mobility
towards better paying firms.
To address these concerns, Austria adopted a major reform in 2003, which involved replacing its
existing system of severance pay by a system of individual savings accounts, funded through
mandatory monthly contributions by employers, which could be used by workers to withdraw severance
pay in the case of dismissal. Since contributions are not contingent on dismissal and the funds are
linked to the worker rather than their job, the new system no longer reduces hiring and firing by firms or
mobility between jobs. Upon retirement, employees can claim the remaining balance in their savings
accounts as a one-off cash payment or have it converted into a pension. The latter aspect of the reform
was meant to support the growth of the private pillar of the pension system and help prepare it for the
challenges arising from population ageing.
A major benefit of the reform has been the increase in coverage by severance pay entitlements in the
case of job loss, with all workers on a permanent contract now eligible. A lesson from the Austrian
experience is that the implications of the new system for the pension system largely depend on the
rules for making withdrawals (e.g. limits) and investing the savings held in the accounts (e.g. capital
requirements) (Hofer et al., 2011). There is only limited evidence on the impact of the reform on hiring
and firing or on the mobility of workers: while the effects have likely been positive, they do not appear
to have been very large (Hofer et al., 2011; Kettemann et al., 2017).
Maintaining very high employment rates of older workers as the pension system matures, which is
necessary to support growth and ensure fiscal sustainability, will require improving job quality. The
spectacular progress in workforce skills will help, as workers with higher qualifications can better adapt to
evolving labour market needs and tend to benefit from better working conditions. Korea has experienced
the fastest increase in educational attainment in the OECD over the past decades, with a rise in the share
of tertiary graduates from around 20% in the 55-64 age group to around 70% for the 25-34 year-olds. The
OECD Survey of adult skills (PIAAC) also reveals much stronger skills in younger generations than in older
ones (OECD, 2013a).
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Nevertheless, policies will also need to support older workers’ employment. Even though pension
adequacy will improve as the pension system matures, incentives to work until an advanced age will remain
fairly strong (see below). Conversely, incentives for firms to retain older workers are still weak. Incentives
for workers and employers to ensure that workers stay longer in their career jobs need to be strengthened.
The minimum mandatory retirement age that firms can set was raised to 60 in 2016-17. It is necessary to
analyse the employment effects of the 2016-17 extension of the minimum mandatory retirement age to 60
and find ways to encourage employers to retain workers in their main job longer. In the long term, the
retirement age should be gradually pushed up further, to beyond 65 as in most OECD countries. Measures
to prevent circumvention through “honorary retirement” may be necessary. An obstacle to retaining older
workers is the seniority-based wage system, which opens a gap between wages and productivity at older
ages. Korea, like Japan, has much steeper wage increases in relation to age beyond the mid-30s or early-
40s than most other OECD, countries, for example Germany or the United States (Figure 2.14).
In recent years, over half of the companies with over 300 employees have adopted the wage peak system,
which freezes or gradually reduces the wages of older workers, with partial compensation through
government subsidies granted to the employee. However, the wage peak system has met opposition from
some workers and trade unions, as the current wage structure provides relatively high earnings to workers
at the time they have to pay for their children’s education, support their parents and make contributions for
their retirement (OECD, 2018c).
Japan and Singapore have promoted employment of older workers through re-hiring policies. In Japan,
employers with a mandatory retirement age below 65 were required to introduce one of the following
measures from 2006: i) raise the mandatory retirement age to at least 65; ii) abolish mandatory retirement;
or iii) retain or re-hire workers who wish to continue working until age 65. A large majority of companies of
all sizes have chosen the third option. This policy has contributed to raise the employment rate of older
workers, albeit at a cost in terms of job quality, work satisfaction and well-being. Workers reaching the
mandatory retirement age are generally re-hired as non-regular workers and suffer large wage cuts, for
many in the order of 40%. While wage cuts partly reflect changes in job responsibilities, many older workers
find these wage cuts excessive. Moreover, systematic re-hiring of older workers in lower positions may be
detrimental to productivity, as some may not be able to fully use their skills in their new job or become less
motivated (OECD, 2018d, Jones and Seitani, 2019). In Singapore, since 2012 employers must offer
medically fit employees with satisfactory performance reaching the retirement age (currently 62) re-
employment up to the Re-employment Age (currently 67), though the job and salary may change. The re-
employment system has allowed older workers’ employment to rise, while preserving firms’
competitiveness. It is complemented by policies to enhance the quality of employment for older workers,
including financial incentives for employers to redesign jobs and adopt age-friendly workplace practices,
government support for building capability in human resource management, and public education initiatives
to raise the employability and productivity of older workers (WEF, 2017). In 2019, the Tripartite Workgroup
on Older Workers formed by the government, employers and trade unions recommended to gradually raise
the retirement age and the re-employment age to respectively 65 and 70 by 2030, as well as additional
measures towards more inclusive workplaces, including structured career planning, transformational job
redesign and better opportunities for part-time re-employment (Tripartite Workgroup on Older Workers,
2019).
The ultimate objective should be a flexible wage system based on performance and job content and skills
requirements (2018 OECD Economic survey of Korea). The government has limited direct influence on
wage-setting arrangements negotiated at the firm level, but can cooperate with the social partners to
promote mutually beneficial deals and new qualification frameworks to align wages with job requirements
and skills, possibly using transitory compensation to minimise the current cohort of workers’ potential loss
of lifetime earnings (OECD, 2018c). The government should push ahead in this direction, through adjusting
the institutional framework and providing market wage information.
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Technological progress calls for re-skilling and up-skilling. The COVID-19 crisis will speed up the move
towards digital technologies and labour reallocation across sectors, which intensifies the need to upgrade
skills. Workers need to participate in lifelong learning to retain or enhance their employability. Participation
of workers aged 55-64 in training is below the OECD average and the unmet training needs are the largest
among the countries for which data are available. More than a fifth of workers aged 55-64 were willing to
participate in training, but did not (Figure 2.15). Being too busy at work was cited as the main reason by
almost 40% (OECD, 2018c).
Figure 2.14. Wages reflect seniority more than in most other OECD countries
Age-earnings profiles in Korea compared with selected OECD countries (latest available year), Index, 25-29 year-
olds = 100
Total Women Men
Korea, 2016 Japan, 2015
180 180
160 160
140 140
120 120
100 100
80 80
60 60
40 40
Germany, 2014 United States, 2016
180 180
160 160
140 140
120 120
100 100
80 80
60 60
40 40
Source: OECD (2018b), Towards Better Social and Employment Security in Korea, Connecting People with Jobs.
StatLink 2 https://doi.org/10.1787/888934157321
The uptake of training needs to be increased, especially in SMEs, for example by providing, in conjunction
with the Public Employment Service, programmes that would help firms find adequate replacement
workers (OECD, 2020c). Developing further labour market-relevant training is essential. The government
is providing tailored training programmes to help older workers adapt to new technologies and enhancing
education programmes on core technologies and skills in Polytechnic Universities, as well as other
universities and public institutions at the regional level. The National Learning Card introduced in January
2020 by integrating and reorganising previously separate unemployed and incumbent individual learning
cards, reduces the blind spot in vocational training for older workers and other disadvantaged groups, and
allows individuals to design their own learning plan on a long-term basis. It will be important, however, that
adequate career guidance is provided to individuals so that they can take informed training decisions.
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Figure 2.15. Many older Korean workers would like to get education and training
Population aged 55-64 participating in education and training or expressing an interest in training but not actually
participating, 2012
% %
55 55
50 Wanted to partcipate in education and training activities but did not 50
Participation in formal or non-formal education or training for job-related reasons
45 45
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
Source: OECD (2018c), Working Better with Age: Korea, Ageing and Employment Policies.
StatLink 2 https://doi.org/10.1787/888934157340
Formal recognition and validation of competences acquired through different channels, including non-
formal education and informal learning, is crucial, especially in a society with a strong focus on academic
credentials (OECD, 2020d,e). The new National Competency Standards (NCS) is an important tool in that
respect, and the government is already operationalising and promoting the effective use of the NCS and
introducing monitoring instruments. The government has also institutionalised the participation of industry
and workers in the process of developing and improving the NCS. However, the NCS has been
underutilised in promotion and wages, and more efforts and time will be needed to ensure it takes root in
workplaces. This will require continuous government monitoring and management.
Healthy ageing is essential to enhance the contribution of older workers to the economy and the well-being
of the elderly. The health and long-term care system will need to adapt to the evolution of needs related to
ageing. Korean health care has made spectacular advances over the past decades, as illustrated by its
very effective response to the COVID-19 outbreak. It provides universal coverage and contributes to
Koreans having one of the highest life expectancies in the world. Long-term care insurance was introduced
in 2008. However, the current hospital-based system is not well equipped to deal with chronic diseases
and multiple morbidities associated with ageing (OECD, 2013b). Korea has the second longest length of
stay in hospital in the OECD behind Japan (OECD, 2019c). Strengthening primary care would limit
avoidable hospital admissions, reduce the length of hospital stays and ensure better monitoring of chronic
conditions. The use of electronic medical records, which the government has been promoting, can help in
that respect (Kwon et al., 2015). Non-face-to-face medicine also offers opportunities for monitoring chronic
conditions (Oliveira Hashiguchi, 2020). Reinforcing prevention, notably measures to discourage smoking
and excessive alcohol consumption, would also favour healthy ageing (OECD, 2016).
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Raising employment would counteract the projected fall in trend GDP
According to OECD long-term projections, Korea’s potential GDP per capita growth will fall from an average
of nearly 3% between 2005 and 2020 to an average of 1.2% from 2020 to 2060 (Guillemette et al., 2017).
About half of this fall is due to the decline in the share of the working-age population, with the remainder
accounted for by slower increases in the employment rate, less capital deepening and weaker productivity,
despite Korea’s expected convergence towards the best-performing OECD economies. These projections
pre-date the COVID-19 crisis, which may affect Korea’s growth potential, although to an extent which is
too early to assess. A protracted global crisis would lower productivity through lower capital intensity due
to a lack of physical investment and through lower efficiency due to a lack of intangible investments and
the reorganisation of global value chains. Prolonged unemployment may also affect the productive capacity
of workers, and result in labour-market participation remaining depressed for a protracted period. While in
the OECD long-term projections, Korea is expected to continue catching up with higher-productivity OECD
members, the shrinking share of the working age population will have a stronger negative impact on Korea
than on the average OECD country. To some extent, the slowdown in GDP per capita growth is inevitable,
as population ages and the income gap with the top OECD countries shrinks, reducing opportunities for
rapid catch-up. However, Korea can achieve higher growth than in the baseline scenario, by raising its
employment rate and productivity.
This section explores various scenarios, using the OECD long-term model (Guillemette et al., 2017;
Guillemette and Turner, 2018). The baseline incorporates a reduction of the gender employment gap from
about 18 percentage points currently to 6 percentage points in 2060, based on education and societal
trends. Assuming unchanged male participation, fully closing the gap would raise GDP per capita by 4.5%
compared to the baseline in 2060 (Table 2.1). The youth employment rate is also relatively low. Lifting it to
the OECD average would add more than 3% to GDP per capita by 2060. Even though, as noted above,
the baseline scenario is more uncertain than ever, deviations from the baseline are likely to show little
sensitivity to changes in the baseline.
The importance of employment rates in different population groups for the aggregate employment rate and
GDP growth can also be illustrated by applying employment rates from other countries to the structure of
the Korean population.
With the same employment rates in each age group as Japan, Korea’s employment and GDP per
capita would be about 9% higher than the baseline in 2060, as female employment in most age
groups and male youth employment would be higher.
Assuming that Korea moves to the highest employment rate in the OECD in each age group for
both men and women raises GDP per capita by nearly 25% by 2060. This scenario provides an
upper bound to the potential impact of increasing employment rates, insofar as it is unlikely that a
country could have the highest employment rates in all age groups, not least because individuals
entering the labour market earlier may also retire earlier.
A second set of simulations explores the impact of increases in productivity related to a reduction in
economic duality. Raising SMEs’ average productivity from its current level of about a third of that of large
firms to half, which corresponds to the OECD average, would lift GDP per capita by more than 40% in
2060, amounting to an increase in the 2020-60 annual growth rate of 0.9 percentage points. Raising
services productivity from about 45% of that of industry to the OECD average of 85% by 2060, would
increase GDP per capita by nearly 60% in 2060, or equivalently raise the 2020-60 annual growth rate by
1.2 percentage points.
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Table 2.1. Long-term scenarios: GDP growth and employment
Potential
GDP per capita Employment rate
employment
Deviation from baseline in 2060
Per cent Percentage points
Alternative employment scenarios
Closing gender employment gap 4.5 4.7 3.2
Raising the youth employment rate to the OECD average 3.3 3.4 2.3
Employment rates as in Japan 9.2 8.8 6.0
Employment rates at OECD maximum 24.6 23.6 16.1
Alternative productivity scenarios
SME's relative productivity raises to OECD average 41.7 0.0 0.0
Service sector's relative productivity raises to OECD average 59.7 0.0 0.0
Closing the gender wage and employment gaps 17.8 4.7 3.2
Closing half of the old age wage gap 6.1 0.0 0.0
Source: OECD calculations based on the OECD Long-term model.
If women could get better access to more productive jobs (proxied by higher wages), aggregate productivity
and hence GDP per capita would increase. Under the assumption that the gender employment gap fully
closes, GDP per capita is nearly 18% above the baseline in 2060.
Another way to lift output would be to boost the productivity of older workers, through enhancing lifelong
learning, while discouraging early retirement from career jobs, which pushes workers toward lower-
productivity jobs. Closing half of the wage gap between older workers and those aged 45-49 by 2060,
assuming a corresponding increase in productivity, would raise GDP per capita by about 6% in 2060.
The alternative scenarios for employment or productivity are largely overlapping, preventing their
aggregation into a single result. As noted earlier, the scenario where employment rates reach the maximum
OECD level in every age category is likely to be an upper bound for employment-related increases.
Similarly, the increase in service sector productivity would require higher productivity of SMEs and of most
categories of workers. It likely constitutes an upper bound for productivity-related increases in GDP per
capita, at 1.2 percentage points.
Combining the most optimistic scenarios for employment and productivity raises 2020-60 average annual
GDP per capita growth by 1.8 percentage points. A less optimistic scenario, which would combine the
employment rates of Japan with a catch-up of SMEs to OECD average productivity levels, would raise
annual 2020-60 average GDP per capita growth by 1.1 percentage points.
The rising old age dependency ratio will increasingly strain public finances
The OECD long-term baseline scenario has total primary (excluding interest) government expenditure
rising by over 10 percentage points of GDP by 2060 (Table 2.2). Health and pension expenditure account
for more than half of the increase. The rise in pension spending essentially stems from the growing number
of retirees, but is also sensitive to the pension indexation assumption. The baseline scenario assumes that
pension benefits in Korea and other non-EU countries grow at an equally weighted average of price and
wage inflation. This may overstate the increase for Korea, as pension uprating is currently based on price
inflation. Assuming that price indexation prevails until 2060, the increase in pension spending from 2020
to 2060 would be only 0.7 instead of 2.3 percentage points of GDP in the OECD long-term model.
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Table 2.2. Long-term scenarios: Government expenditure and revenue
Public Public Other Total Total primary
health pension primary primary revenue
expenditure expenditure expenditure expenditure
Percentage points of GDP
Baseline
Change 2020-60 3.2 2.2 4.9 10.4 8.4
Deviations from baseline in 2060 Percentage points of GDP
Alternative employment scenarios
Closing gender employment gap -0.1 -0.2 -1.3 -1.6 -1.5
Raising the youth employment rate to the OECD average -0.1 -0.2 -0.9 -1.2 -1.1
Employment rates as in Japan -0.2 -0.4 -2.3 -2.9 -3.0
Employment rates at OECD maximum -0.5 -1.1 -5.4 -6.9 -7.0
Alternative productivity scenarios
SME's relative productivity raises to OECD average 0.6 -0.9 0.0 -0.3 0.4
Service sector's relative productivity raises to OECD average 0.8 -1.1 0.0 -0.4 0.6
Closing the gender wage and employment gaps 0.1 -0.5 -1.3 -1.7 -1.4
Closing half of the old age wage gap 0.1 -0.2 0.0 -0.1 0.0
Source: OECD calculations based on the OECD Long-term model.
Pressure for higher increases may, however, build up over time as indexation to prices implies, all else
equal, a continuous decline in the ratio of pension income to work income, which is already very low in
Korea. Public health expenditure is projected to rise by more than three percentage points of GDP between
2020 and 2060. The increase in primary expenditure other than pensions and health reflects the higher
share of output needed to maintain a constant level of public service per capita when the employment-to-
population shrinks (Guillemette and Turner, 2017). The increase in total primary revenue is generated
endogenously to stabilise gross government debt around 45% of GDP in the long run. The fiscal response
to the COVID-19 crisis will increase government debt to an extent which will depend on the depth and
length of the downturn (Chapter 1). This will require either allowing government debt to stabilise at a higher
level, which would be possible without jeopardising sustainability since 45% of GDP is low by international
standards, or raising taxes once the economy has recovered.
Improving job matching for youth and foreigners’ workforce contribution
Less than half of youth aged 15-29 were employed before the COVID-19 crisis, the fifth lowest share in
the OECD. Youth employment has fallen rapidly since February 2020, particularly in the service sector,
and is expected to contract further over the coming months. The generation currently entering the labour
market is likely to suffer scarring effects. A year delay in job entry is estimated to lower the average wage
over ten years by up to 8%. Lower initial wages due to unfavourable economic conditions also show strong
persistence (Han, 2020a). The pre-crisis low youth employment rate reflects long studies, as more than
two-thirds of youth obtain tertiary degrees, but also slow transition from education to employment. Labour
market duality encourages young people to extend formal or informal education in the hope of joining large
firms or the public sector, rather than SMEs, which often suffer from a shortage of skilled workers. The
COVID-19 crisis is likely to exacerbate this phenomenon, as the number of jobs offered by large firms is
likely to shrink, while preference for job security is likely to increase even further. Measures to further
support youth employment in the wake of the crisis and limit scarring effects could include gathering
evidence on the impact of the crisis by age group to inform decision making, anticipating the distributional
effects of policy action across different age cohorts, updating policies in collaboration with youth
stakeholders and providing targeted services for the most vulnerable youth populations (OECD, 2020f).
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
81
To address skills mismatches, the government has stepped up career counselling, developed
apprenticeships and vocational education (notably Meister schools) and introduced incentives for tertiary
education institutions to propose more market-relevant degrees. In the context of the COVID-19 crisis,
additional funds will be allocated to job training programmes and the creation of jobs for young adults (Box
2.1). An ambitious plan to support youth employment was announced in March 2018, extending previous
measures, but also representing a shift from indirect measures, such as job subsidies, to steps directly
benefitting youth, like tax exemptions and in-work benefits (OECD, 2019d). Career guidance and
counselling will need to be developed further, in particular through increased resources for the public
employment service (see below) and stronger involvement of employers. Creating a one-stop-shop online
portal for career guidance to replace the various websites currently available would also help (OECD,
2020e). Developing job opportunities would also improve young Koreans’ life satisfaction and possibly
facilitate family formation and raise the fertility rate. Importantly, efforts to promote youth employment
should complement, rather than substitute for policies to increase older workers’ employment, as OECD
evidence shows that older workers do not crowd out youth (Box 2.5).
Foreign-born accounted for only about 3% of the Korean population in 2016 and for 3.7% of the
economically active population. These shares are among the lowest in the OECD. Nevertheless, temporary
foreign workers alleviate labour shortages in some sectors, notably manufacturing SMEs, where they make
up 10% of total employment. Around 10% of companies with more than five employees recruit foreign
workers (OECD, 2019e). The Employment Permit System (EPS) has been successful in providing low-
skilled, fixed-term workers to Korean firms, while protecting local workers from competition and substitution
effects. It has also allowed the permanent settlement of ethnic Korean Chinese, primarily employed in
services and construction.
However, EPS workers are allocated to an employer and job mobility is allowed only in the event that a
worker cannot continue to work at the workplace for any reason not attributable to himself (e.g. illegal
employment practices, company closure) and sector mobility is impossible. This prevents EPS workers
from getting better jobs and pay and reduces employers’ incentives to improve their working conditions.
Maximum duration of stay has been extended from three to ten years in several steps, as employers were
keen to retain experienced workers. Nevertheless, EPS workers are still generally not eligible for income
support from the Basic Livelihood Security Programme (BLSP) and the earned income tax credit (EITC).
Although a possibility for skilled EPS workers to get an indefinitely renewable visa was opened in 2011,
very few can meet the requirements. The rapid rise in educational attainment implies that Korean low-
skilled workers will become increasingly scarce. Even though automation may reduce demand for low-
skilled workers, foreigners are likely to be needed to fill some positions. The job mobility system for foreign
workers should be gradually adapted to enhance their contribution to the Korean economy, to enhance
their contribution to the Korean economy, while continuing to shield local workers from undue competition.
Foreigners with permanent residence should also be granted access to the BLSP and EITC.
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Box 2.5. Do older workers crowd out youth?
It is often believed that older workers’ early retirement creates employment opportunities for youth. But
past policies to promote early retirement in the hope of lifting youth employment in OECD countries
have proven ineffective. In fact, there is a positive relationship between the employment rates of old
and youth across OECD countries (Figure 2.16). Underlying reasons are that demand for labour is not
fixed (the so-called “lump of labour fallacy”) and that youth and older workers, having different skills and
experience, tend to be complements rather than substitutes. Panel regressions across 25 OECD
countries, including a range of controls for economic and labour market conditions, policies and
institutions and differences in skills across generations, confirm that the relationship is not the result of
exogenous factors affecting the employment rate of both groups. Moreover, the relation is not affected
by the business cycle (OECD, 2013c).
However, concerns that delaying the mandatory retirement age may reduce youth employment persist
in Korea, partly due to two Korean labour market specificities. The first is the cost of older workers in
the seniority-based wage system, which may exceed their productivity, affecting companies’
competitiveness and therefore their ability to hire younger workers. The second is the competition
between generations for high-quality jobs in the public sector and large firms, which are in limited supply
(Hwang, 2013). The mandatory retirement age of 60 implemented in phases since 2016 is estimated to
have increased employment for older workers (aged 55 to 60), but lowered the number of youth (aged
15 to 29) employed in private companies. At the company level, when one worker can benefit from the
postponement of the retirement age, the number of older employees increases by 0.6, while the number
of youth employed decreases by 0.2. The increase in elderly and decline in youth employment is
particularly large in companies with over 100 employees and those with a low initial retirement age
(Han, 2020b). To mitigate potential adverse side-effects on youth employment, extending working
careers needs to be complemented by reforming the wage setting system and addressing labour market
duality.
Figure 2.16. Youth and elderly employment rates are positively correlated
Employment rate 15-24 (%)
80
ISL
70
y = 0.84x - 11.11
R² = 0.41 NLD
CHE
60 AUS
CAN DNK NZL
50 AUT GBR NOR
USA FIN
ISR DEU SWE
MEX EST JPN
40
TUR SVN IRL
LVA
LUX POL FRA LTU
30 HUN CZE
PRT CHL
BEL SVK
KOR
ESP
20
ITA
GRC
10
0
30 40 50 60 70 80 90
Employment rate 55-64 (%)
Source: OECD (2019), Employment rate by age group (indicator). doi: 10.1787/084f32c7-en (Accessed on 11 December 2019).
StatLink 2 https://doi.org/10.1787/888934157359
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A more flexible labour market should be combined with stronger social
protection
Beyond the measures aimed at raising employment in specific groups outlined above, a more flexible
labour market would help reduce duality in the labour market and direct workers towards their most
productive employment, which would alleviate shortages of skilled workers in SMEs. Easing employment
protection for permanent workers, once the recovery from the COVID-19 crisis is well entrenched, would
encourage firms to hire regular workers, as they would face lower costs in case of being subsequently
forced to reduce staff. Reinforcing social protection, notably unemployment insurance, as well as active
labour market policies, including job counselling, training and upskilling, would allow workers to smoothly
transition from one job to another. In turn, more efficient reallocation of labour would raise productivity (see
Chapter 3).
Reducing labour market duality is crucial to foster inclusive growth
The Korean labour market is characterised by strong duality, which affects older workers disproportionately
(OECD, 2018c). Non-regular workers, which include temporary, part-time and atypical (e.g. daily workers,
contractors, temporary agency) workers, account for about a third of salaried workers. For nearly half of
them, being a non-regular worker is not their first choice (OECD, 2018b). Besides, non-salaried workers
(self-employed and unpaid family workers) make up about a quarter of the employed population, well above
the OECD average of about 15% (Figure 2.17). The COVID-19 outbreak highlights the vulnerability of non-
regular workers. In the year to June 2020, while total employment declined by 1.3%, the employment of
temporary employees and daily workers dropped by respectively 8.3% and 5.8%.
Reducing labour market duality requires reducing incentives for firms to employ non-regular workers,
notably the need for flexibility and the lower labour costs (2018 OECD Economic Survey of Korea).
Flexibility could be enhanced by lowering employment protection for permanent workers, which is relatively
strong (Figure 2.18). An obstacle to reducing employment protection in Korea is the weak social safety
net. To enhance labour flexibility and promote inclusive growth, policies will need to shift from protecting
jobs to protecting workers (OECD, 2018a). Another important obstacle to labour mobility in Korea is the
seniority-based wage structure, which will need to be gradually replaced by a more job and performance-
based structure, as discussed above.
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84
Figure 2.17. The share of non-regular employment is high
A. Temporary1
%
30
25
20
15
10
5
0
LTU LVA EST USA AUS GBR HUN SVK NOR CZE AUT ISL LUX IRL BEL DNK GRC DEU TUR CHE CAN SVN FIN SWE FRA ITA KOR NLD PRT POL ESP CHL
OECD
B. Self-employed
%
40
35
30
25
20
15
10
5
0
USA NOR DNK CAN LUX SWE AUS DEU JPN HUN LVA LTU FRA AUT ISR FIN BEL CHE IRL GBR SVN ESP PRT NLD CZE NZL POL ITA KOR CHL MEX TUR GRC
OECD
C. Part-time
%
40
35
30
25
20
15
10
5
0
HUN CZE SVK POL LVA LTU PRT SVN EST TUR GRC KOR LUX ESP SWE FRA FIN ISR BEL MEX ISL CHL ITA CAN NOR DNK AUT NZL IRL DEU GBR JPN AUS CHE NLD
OECD
1. Per cent of dependent employment.
Source: OECD (2019), Temporary employment (indicator). doi: 10.1787/75589b8a-en; OECD (2019), Self-employment rate (indicator). doi:
10.1787/fb58715e-en; OECD (2019), Part-time employment rate (indicator). doi: 10.1787/f2ad596c-en (Accessed on 11 December 2019).
StatLink 2 https://doi.org/10.1787/888934157378
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85
Figure 2.18. Permanent workers’ employment protection is relatively strong
Index of protection of permanent workers against individual dismissals, 2013
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
USA CAN GBR NZL HUN CHE IRL AUS JPN EST SVK MEX ESP SVN ISL GRC DNK AUT BEL POL TUR NOR LUX KOR ISR FIN SWE CHL DEU ITA LVA FRA NLD CZE PRT
Note: The index ranges from 0 (no regulation) to 6 (detailed regulation).
Source: OECD (2018c), Working Better with Age: Korea, Ageing and Employment Policies.
StatLink 2 https://doi.org/10.1787/888934157397
Social protection remains weak despite recent reforms
Only about 43% of the unemployed receive benefits. Exceptional government emergency measures to
support households during the COVID-19 crisis (Box 2.1) mitigate hardship. However, raising coverage on
a more permanent basis would be desirable. While nearly 95% of regular workers were covered by
employment insurance (EI) in 2018, coverage among non-regular workers, although on an upward trend,
was only 71%, which is problematic given their vulnerability (2018 OECD Economic Survey of Korea). The
low EI coverage of non-regular workers both entails a high risk of poverty and hampers the reallocation of
workers towards more productive jobs, which is essential to sustain productivity growth (Adalet McGowan
and Andrews, 2015). The legal coverage of EI has been gradually extended over the years, but compliance
remains an issue for non-regular workers. The Duru Nuri social insurance support programme described
above has increased coverage somewhat, but at a high deadweight cost. Since 1995, legislation enables
undocumented workers to claim EI benefits to which they should have been eligible if contributions had
been properly made and there were 22 000 claims in 2018.
Raising EI coverage further requires better legislation enforcement and premium collection. Employers
that employ workers eligible for Employment Insurance, but fail to report their employees’ insured status
are subject to a fine for negligence. In 2018, a fine for failure to report workers eligible for the insurance
was imposed in about 85 000 cases. However, penalties for failing to register employees with EI are low,
at KRW 30 000 per unregistered employee (about USD 25). A recent change in premium collection
procedures is likely to facilitate EI enforcement. Since 2017, the Korea Workers’ Compensation and
Welfare Service (KOMWEL), which already administered industrial accident compensation insurance,
where the coverage of non-regular workers is above 90%, was tasked with the management of the EI
insured. The KOMWEL calculates and imposes EI premiums, which are collected by the National Health
Insurance Service, like all other social insurance premiums.
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Helping workers with health problems stay in employment is essential, both from an employment and well-
being perspective. Korea has no statutory (or a coherent privately-regulated) cash sickness benefit, despite
the option for such a benefit in the National Health Insurance Act and some specific initiatives, such as
Seoul municipality’s paid sick-leave policy since 2019 and the recent measures taken in the context of the
COVID-19 outbreak. Employees who are (self-)quarantined or hospitalised due to COVID-19 are entitled
to paid leave from the employer or living allowance from the government (KRW 1.23 million per month
(about USD 1 000) for a four-member households). For quarantine cases, the government can reimburse
the cost of paid leave to the employer from 17 February 2020 (up to KRW 130 000 per day). Workers may
have to quit their job in case of sickness and many may not regain their original job and may face difficulties
in finding a new one. Employers in most OECD countries are liable to pay all or part of their absent workers’
wages for a specified period, generally between a week and a month, but up to two years in the
Netherlands. Introducing such a mechanism in Korea could secure a minimum level of protection for all
salaried workers. In addition to a period of employer liability, most OECD countries provide cash sickness
benefits, usually through social insurance, financed by premiums collected from both employers and
employees, either within health insurance, as in most OECD countries, or within EI, as in Canada and
Ireland. Sickness benefits should be complemented by a strong focus on rehabilitation and return to work,
including clear protocols defining the rights and duties of workers, employers, doctors and insurance
authorities, and regular work capacity assessments (OECD, 2018c). Given the examples from other OECD
countries, Korea also needs to consider a similar system for workers with health problems to secure their
income and employment during the treatment. The New Deal includes a sickness benefit implementation
study in 2021 and a pilot project for households, including low-income families, in 2022.
Another challenge is reducing in-work poverty. The government has hiked the minimum wage by nearly
30% over 2018-19. It reached about 58.6% of the median wage in 2018, which is relatively high among
the OECD countries with a minimum wage. The rapid increase is likely to have weighed on employment in
SMEs, despite subsidies to help them adjust. The minimum wage hike has been set at 2.9% for 2020 and
1.5% for 2021. The coverage of the earned income tax credit (EITC) has been increased several times
since its introduction in 2008, most recently in late 2019, through lower qualification requirements:
abrogation of the minimum age; a hike in the asset limit from KRW 140 million to KRW 200 million (around
USD 170 000); and increased income limits, for example from KRW 2.5 million to KRW 3.6 million (around
USD 3100) for a dual-income family. In addition, the ceiling on EITC payments was raised, for example
from KRW 2.5 million to KRW 3 million (around USD 2 600) for a dual-income family.
The EITC, when supported by a moderate minimum wage, is an efficient tool to increase low-paid workers’
income, used in many OECD countries (OECD, 2018a). It prevents low-skilled workers from being priced
out of the job market while preserving strong work incentives, albeit at a cost for the government budget.
To some extent, the EITC can be an alternative to minimum wage hikes, although there is also some
complementarity (Williams and Waxman, 2019). Hence, it is necessary to carefully monitor the effects of
the minimum wage and EITC on the employment of vulnerable groups.
Active labour market policy should focus on reducing skills mismatches
Spending on active labour market policies as a share of GDP was less than two-thirds of the OECD
average in 2017 (Figure 2.19, Panel A). Moreover, about half of that amount was spent on direct job
creation (Panel B). Creating public sector jobs helps low-skilled workers and contributes to expanding the
provision of needed public services. During the COVID-19 crisis, direct job creation will limit the contraction
in total employment. In the case of older workers, it amounts to an imperfect solution to compensate for
early mandatory retirement with insufficient pension coverage. However, policies focussing on re-skilling
and up-skilling would be needed to respond to the need of labour reallocation induced by the COVID-19
crisis, address skill mismatches, create better quality jobs, thereby reducing labour market duality and
fostering higher productivity growth. The Employment Success Package Programme (ESPP), a rapidly
growing programme to raise the employability of disadvantaged groups, including low-skilled elderly
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
87
jobseekers and youth, could be strengthened further through promoting participation, increasing resources
and enhancing the monitoring of performance (OECD, 2018b). Public employment service organisations,
such as Job Centres and Job Hope Centres for middle-aged and elderly people provide a wide range of
re-employment services tailored to individual needs, but second-career guidance should be stepped up,
through comprehensive assessments of worker skills and experience, and additional training where
necessary, with formal recognition and validation of acquired skills (OECD, 2018a). Strengthening the
governance of adult learning to create a common, comprehensive and inclusive long-term vision, as well
as enhance coordination across ministries and levels of government and with stakeholders, would support
adult learning policies (OECD, 2020d,e).
Figure 2.19. Active labour market programmes focus most on direct job creation
A. Public spending on active labour market programmes
Expenditure on ALMPs (left scale) OECD (left scale)
% of GDP Relative to unemployment rate (right scale) OECD (right scale) Ratio
2.5 0.40
0.35
2.0
0.30
1.5 0.25
0.20
1.0 0.15
0.10
0.5
0.05
0.0 0.00
B. Composition of active labour market programmes
25th percentile Korea 75th percentile OECD
% %
50 50
45 45
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
PES and Training Employment Sheltered Direct job Start-up
admnistration incentives employment, creation incentives
rehabilitation
Source: OECD, Database on Labour Market Policies.
StatLink 2 https://doi.org/10.1787/888934157416
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Spending on Korea’s public employment service (PES) as a share of GDP is among the lowest in the
OECD (Figure 2.20), despite evidence that it is more effective, along with vocational education and training,
than other active labour market programme in increasing employment rates in the medium to long term
(Kim, 2015). Although low PES spending on active labour market policies partly reflects the low
unemployment rate, resources are too scarce to allow sufficient job search support and counselling on
training, which would be most useful to address labour market mismatches. Only one in four prime-age
jobseekers reports having been in contact with the PES in the past month to find work, the lowest proportion
in the 22 OECD countries for which information is available, and 30 percentage points below the cross-
country average (OECD, 2018c). Even though Job Centre staff has increased over recent years and
contracting out more employment services to external providers has alleviated the burden on the PES,
additional public resources should be directed to the PES to secure successful employment transitions. A
comprehensive approach should be used to support groups facing multiple barriers to employment
(OECD, 2018a). As the risk of long-term unemployment varies greatly across individuals, statistical
profiling could be used to target the most vulnerable and enhance the efficiency of active spending, as in
Flanders (OECD, 2020g). Besides, increasing EI coverage, in addition to alleviating poverty, may help
activation, as it provides a contact point through which the unemployed can be approached and assisted.
Figure 2.20. Employment service resources are among the lowest in the OECD
Expenditure on administering employment services and benefits administration, 2017
% of GDP % of labour force
0.45 20
PES and administration (left scale) Unemployment rate (right scale)
0.40 18
0.35 16
14
0.30
12
0.25
10
0.20
8
0.15
6
0.10 4
0.05 2
0.00 0
Note: For Korea, does not include the labour costs of public officials working in job centres.
Source: OECD Labour market programmes database and OECD Economic Outlook database.
StatLink 2 https://doi.org/10.1787/888934157435
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Recommendations to raise employment and enhance job quality and inclusiveness in the face of
COVID-19 and rapid ageing
Key recommendations in bold
MAIN FINDINGS RECOMMENDATIONS
Job quantity and quality post-COVID-19
About half of spending on active labour market policy is for direct job Adjust resources for the public employment service and training
creation. Public employment service resources are limited. Funding for programmes to maintain effective support for jobseekers.
training programmes has increased in response to the COVID-19 crisis.
Workers are often forced to retire from their career job in their fifties for Expand incentives for workers and employers to ensure that
various reasons, leading to a waste of human resources and worsening workers stay longer in their career jobs, including through more
old-age poverty. The mandatory retirement age was increased to 60 in flexibility in wages, with the view to raising the minimum
2016-17. mandatory retirement age further over time
Korea has no statutory (or coherent privately-regulated) cash sickness Match the introduction of a cash sickness benefit planned in the
benefit, causing hardship and complicating return to work. However, New Deal with a strong focus on rehabilitation and return to work.
crisis measures were taken in the context of COVID-19. The New Deal
includes a sickness benefit implementation study in 2021 and a pilot
project for households, including low-income families, in 2022.
Assessment of worker skills and experience, with additional training Encourage participation in training and strengthen second-career
where necessary and formal recognition and validation of acquired skills, guidance for mid-career and older workers.
is insufficient.
Job mobility is allowed only in specific cases and sector mobility is Gradually adapt the job mobility system for foreign workers.
impossible for foreign workers, which limits their opportunities and
contribution to the Korean economy.
The nearly 30% rise in the minimum wage over 2018-19 may have Carefully monitor the effects of the minimum wage and EITC on the
affected employment in sectors employing low-skilled workers. employment of vulnerable groups.
Labour market inclusiveness
The take-up of parental leave is low, partly due to lack of coverage Encourage the take-up of parental leave by extending coverage to
(particularly for self-employed and atypical workers) and weak financial groups of workers hitherto not covered and introducing options to take
incentives, especially for fathers. This hinders the rise in the female parental leave for shorter periods at higher payment rates.
employment rate.
The old-age poverty rate is the highest in the OECD, partly due to the Further increase the Basic Pension and focus it on the elderly in
immature pension system, but also to low and restricted means-tested absolute poverty.
support, despite recent improvements. As planned under the New Deal, phase out the family support
obligation from the Basic Livelihood Security Programme.
The gender wage gap is the largest in the OECD. Regularly publish a national-level analysis of wage difference
determinants to promote fairer wages across genders.
Foreign workers under the Employment Permit System (EPS) are not Grant foreigners with permanent residence access to income support
eligible for income support, even though they may stay in Korea for up (BLSP and EITC).
to 10 years.
Resilience and adaptability to withstand possible future shocks
Social protection for non-regular workers and workers in small Strengthen protection and coverage for non-regular workers and
companies remains weak, exposing them more to the COVID-19 shock, workers in new forms of employment (e.g. platform workers) and
and significant coverage gaps in Employment Insurance remain. increase compliance with social insurance through more effective
enforcement.
Employment protection legislation for individual dismissals of permanent Once the COVID-19 crisis is overcome, taking into account labour
workers is relatively stringent, which may affect labour reallocation market conditions, gradually ease employment protection legislation for
towards the most productive uses. permanent workers.
Coordination between the authorities responsible for adult education is Enhance coordination of adult education policies across ministries
insufficient to support effective adult learning policy implementation and and levels of government and with stakeholders.
ensure sufficient access to information for users.
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90
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OECD (2019d), Investing in Youth: Korea, OECD Publishing, Paris.
OECD (2019e), Recruiting Immigrant Workers: Korea 2019, OECD Publishing, Paris.
OECD (2018a), Good jobs for all in a changing world of work: The OECD Jobs Strategy, OECD
Publishing, Paris.
OECD (2018b), Towards Better Social and Employment Security in Korea, Connecting People with Jobs,
OECD Publishing, Paris.
OECD (2018c), Working Better with Age: Korea, Ageing and Employment Policies, OECD Publishing,
Paris.
OECD (2018d), Working Better with Age: Japan, Ageing and Employment Policies, OECD Publishing,
Paris.
OECD (2018e), OECD Economic Surveys: Korea 2018, OECD Publishing, Paris.
OECD (2016), Health policy in Korea, OECD Health policy overview, Paris.
OECD (2013a), OECD Skills Outlook 2013: First Results from the Survey of Adult Skills, OECD
Publishing.
OECD (2013b), Strengthening Social Cohesion in Korea, OECD Publishing, Paris.
OECD (2013c), OECD Employment Outlook 2013, OECD Publishing.
Oliveira Hashiguchi, T. (2020), “Bringing health care to the patient: An overview of the use of
telemedicine in OECD countries”, OECD Health Working Papers, No. 116, OECD Publishing, Paris.
Swedish National Mediation Office (2019), Wage Differences Between Women and Men 2018,
Stockholm.
WEF (2017), “Case Studies in Retirement System Reform”, White paper, World Economic Forum,
Geneva.
Williams, E. and S. Waxman (2019), “State earned income tax credits and minimum wages work best
together”, Policy Futures, Center on Budget and Policy Priorities, Washington, DC.
Yun, S. and K. Ko (2018), “Multidimensional Elderly Poverty Index”, Korea Institute for Health and Social
Affairs, Sejong.
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3 Promoting the diffusion of
technology to boost productivity
and well-being
Korea is a top player in emerging digital technologies, with an outstanding
digital infrastructure and a dynamic ICT sector. The COVID-19 outbreak
highlighted the importance of digitalisation to contain the spread of the
virus, by allowing quick testing and tracing of infected people, and spurred
the development of the “untact economy”. Remote access both facilitated
physical distancing and mitigated the economic impact of the crisis by
enabling more people to continue working. Digital technologies offer
opportunities to raise firms’ productivity and the population’s well-being.
However, wide productivity gaps between large firms and SMEs and
between manufacturing and services weigh on economy-wide productivity,
which is far below the OECD average. A wide skills gap between youth and
older generations prevents an increasing share of the population from
taking part in and enjoying the benefits from a digitalised economy. This
chapter suggests ways to narrow the digital divide by enhancing the
diffusion of digital technologies among firms and individuals. Increased
participation in quality ICT education and training for students, teachers,
SME workers and older people is key to address the lack of adequate skills
and awareness of digital benefits or dangers (online security, cyberbullying,
addiction). Promoting innovation networks between SMEs, academia and
large firms through vouchers or platforms can support SMEs’ R&D and
commercialisation of innovative goods and services. Waiving stringent
regulations through regulatory sandboxes can help identify and alter
regulations that hinder the adoption and diffusion of digital technologies.
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Rapid diffusion of technology is key to supporting output growth and raising well-being standards in the
context of a rapidly ageing population and a weakening trend in global growth. The COVID-19 outbreak is
also strengthening the existing trend towards digitalisation, with a growing use of artificial intelligence and
remote services by firms and households (Box 3.1). While Korea has made tremendous economic
progress over the past decades, its productivity remains below the OECD average. This largely reflects
gaps between large firms and SMEs and between industry and services. Productivity gaps are mirrored
by wage inequality, which is among the highest in the OECD, and more broadly by differences in working
conditions and levels of social protection among different categories of workers (OECD, 2020a).
Digitalisation offers huge opportunities to raise productivity economy-wide and to tackle inequality, but
widespread diffusion requires adequate policies, notably to enhance skills, adapt regulations, create
networks for technology diffusion and innovation, and ensure cybersecurity.
Korea is a frontrunner in digital technologies and one of the top five contributors to the development of
emerging digital technologies. Over 2013-16, Korea accounted for 4 to 46% of global patenting in fast-
growing information and communication technology (ICT) fields (Figure 3.1). The digital infrastructure is
also outstanding. Access to high-speed internet is almost generalised and 5G was introduced nationwide
earlier than in any other country in the world. Within one year of 5G services’ commercial introduction on
3 April 2019, the number of subscribers had almost reached six million, with high fibre-backhaul availability
enabling fast adoption (OECD, 2019a). Korea’s density of broadband fibre subscriptions is the highest
OECD-wide (Figure 3.4).
Figure 3.1. Korea is one of the top players in emerging digital technologies
Share of top five economies’ patents in top 25 technologies fast accelerating from 2010 onwards, 2013-16
%
United States Japan Korea China Chinese Taipei Germany Sweden France Canada
5.8 4.6 19.1 0.3 0.5 0.7 0.3 1.3 0.4 1.6 0.2 4.1 1.1 0.3 1.3 0.4 0.5 0.6 3.1 3.3 0.2 8.0 0.4 2.0 1.1
100
Number of IP5 patent families,
thousands
80
60
40
20
0
Note: IP5 denotes the five largest intellectual property offices worldwide (European Patent Office, Japan Patent Office, Korean Intellectual
Property Office, National Intellectual Property Administration of People’s Republic of China and United States Patent and Trademark Office).
Fast-accelerating ICT fields are defined as technology fields where substantial increases in the number of patents are observed.
Source: OECD (2019b), calculations based on STI Micro-data Lab: Intellectual Property Database.
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Box 3.1. Use of digitalisation to tackle COVID-19
Korea has been leveraging various digital tools to contain COVID-19 without shutting down the economy,
by quickly testing and tracing infected people and facilitating a contact-free lifestyle.
Artificial intelligence and fast testing
Artificial intelligence (AI) contributes to significantly shorten research-to-market cycles and improve
diagnosis efficiency. A famous example is the Seegene COVID-19 test kit: an AI-based big data system
was used to develop this test within two weeks, instead of two to three months had it been done manually.
VUNO developed AI techniques used by public health centres and hospitals to quickly identify patients
requiring intensive care by reading lung X-rays within seconds.
Mobile apps and transparent information
Several mobile apps have been developed since the outbreak of COVID-19 to inform and advise the public
in real time. Korea Spatial Information & Community developed a map service to direct people with COVID-
19 symptoms to the nearest testing stations, using a geographic information system. Inbound travellers
are required to install an app on their smartphone to submit a daily self-diagnosis for 14 days and check
the location of screening clinics.
Naver, Kakao and other software developers use data provided by pharmacies to share information on the
sales and inventories of publicly-supplied filtering respirators within their respective map apps. 22 000 out
of Korea’s 23 000 pharmacies have agreed to share their data. This helps reducing crowding at pharmacies
and ensuring physical distancing.
Apps like Corona 100m or Corona Map plot locations visited by patients diagnosed with COVID-19
(Figure 3.2). In the case of Corona 100m, information such as age, gender and nationality, is also made
available, which raises privacy concerns. Other privacy concerns involve the potential use of wristbands
connected to a mobile app and alerting the authorities in case of self-quarantine violations.
Figure 3.2. Corona Map App plots locations with confirmed cases of COVID-19
Source: https://coronamap.site
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Remote services and untact lifestyle
The COVID-19 outbreak has led to the emergence of a new lifestyle with less physical contact to limit the
spread of the virus. Many firms have allowed their employees to work from home, while schools have
started online classes in April. In both cases, a continuous internet connection and reinforced cybersecurity
are key to ensure the proper functioning of remote work and videoconferences. For students, it also implies
the need to have easy access to a digital device and, for the younger ones, adult assistance, to complete
studies at home. For teachers who are still inexperienced in holding classes online and often lack digital
skills, it requires specific training.
Households have increasingly turned to e-commerce for their daily purchases. In March 2020, year-on-
year online purchases of food and beverages and household goods were up respectively by 59% and 47%,
after a year-on-year surges of 71% and 53% in February (Figure 3.3). AI robots are allowed to deliver food
and parcels in the Magok and Gangseo districts of Seoul, thanks to a regulatory sandbox.
Figure 3.3. Households turned to e-commerce during the COVID-19 outbreak
Year-on-year changes, %
A. Food & beverages B. Household goods
90 70
Total Internet shopping Mobile shopping Total Internet shopping Mobile shopping
80 60
70
50
60
40
50
40 30
30 20
20
10
10
0
0
-10 -10
-20 -20
Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20
Source: KOSIS.
StatLink 2 https://doi.org/10.1787/888934157473
Healthcare services also went through important changes, especially in the case of telemedicine. Since
the end of February, doctors are allowed to treat patients with mild symptoms on the phone. Other ways
of being informed on COVID-19 while avoiding physical contact involve AI robots. Wisenut developed a
public chatting robot that informs people on ways to prevent and respond to COVID-19, while Naver
developed an AI-based voice robot that automatically calls people needing attention, inquires about their
health condition and then informs the public health centre.
Source: ITU (2020); Tonby et al. (2020).
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Figure 3.4. High-speed broadband is widespread in Korea
Percentage of fibre connections in total fixed broadband
%
90
2018 2009
80
70
60
50
40
30
20
10
0 GRC
BEL
GBR
ISR
AUT
DEU
ITA
IRL
USA
CAN
FRA
NLD
CHE
CZE
MEX
POL
TUR
CHL
HUN
OECD
SVK
DNK
LUX
SVN
EST
NZL
PRT
AUS
NOR
FIN
ESP
SWEISL
LVA
LTU
JPN
KOR
Note: 2010 for Canada, Turkey and United Kingdom instead of 2009.
Source: OECD Broadband Database.
StatLink 2 https://doi.org/10.1787/888934157492
The government’s plan for innovative growth focusses on digital opportunities raised by the use of 5G,
which brings three key advantages. First, its higher speed allows the transmission of large volumes of data,
for instance for virtual reality TV or hologramme calls. Second, its lower latency allows instant response,
for example for automatic and connected vehicles or Internet of Things (IoT) devices. Third, its hyper-
connectivity allows the simultaneous connection of numerous sensors and devices, as needed in smart
factories and smart cities. The government promotes numerous projects relying on 5G to increase
competitiveness and innovation in industries (for example smart manufacturing, smart grids and smart
healthcare) or enhance the quality of life by solving social problems with smart cities and homes (notably
in Sejong), as well as smart roads and traffic systems. The expected effects include higher production,
exports and employment (Fourth Industrial Revolution Committee, 2017). Amid the COVID-19 outbreak,
Korea contained the spread of the virus, using advanced digital tools based on artificial intelligence and
mobile apps, as well as remote access to daily life services (telework, online classes, e-commerce,
telemedicine…).
Korea’s dynamism in digital technologies is reflected in its high share of value added and employment in
ICT sectors (Figure 3.5). Even so, economy-wide productivity is far below the OECD average (Figure 3.6).
This reflects several structural features. Low-productivity sectors like trade, transportation, accommodation
and catering account for a higher share of total employment than the OECD average (28% against 25%).
Moreover, most jobs created in new Korean small and medium sized enterprises (SMEs) are in low
productivity activities, like in many OECD countries (OECD, 2019c): in 2017, 56% of jobs created by the
birth of new SMEs were in trade, transportation, accommodation and food services. Furthermore, in high-
productivity sectors like manufacturing, SMEs account for a high share of enterprises and of employment,
but are less productive than large firms (2018 OECD Economic Survey of Korea). This productivity gap is
observed across OECD countries but is substantially larger in Korea (OECD, 2020a).
Firms can raise their productivity by adopting digital technologies or benefit from spillover effects from firms
adopting digital technologies within the same industry (Gal et al., 2019). Korea’s ICT manufacturing
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productivity is far higher than in other industries, with a much wider gap than in the average OECD country
(Figure 3.5). Non-ICT manufacturing also enjoys a larger relative productivity advantage than the OECD
average, albeit much smaller than in ICT. Conversely, there is scope to increase productivity in services,
especially in ICT services, which are knowledge-intensive and tend to be more productive than other
services (Sorbe et al., 2018).
Figure 3.5. Low-productivity sectors account for a high share of total employment
A. Sectors' productivity relative to total productivity B. Sectors' share of employment
% %
350 45
OECD Korea OECD Korea
40
300
35
250
30
200 25
150 20
15
100
10
50
5
0 0
ICT Other ICT services Other business ICT Other ICT services Other business
manufacturing manufacturing services manufacturing manufacturing services
Note: Data refer to 2015. ‘ICT manufacturing’ includes manufacture of computer, electronic and optical products. ‘ICT services’ include
publishing, telecommunication and IT services. ‘Other business services’ excludes the housing sector.
Source: OECD STAN Database.
StatLink 2 https://doi.org/10.1787/888934157511
Figure 3.6. Economy-wide productivity in Korea is far below the OECD average
USD (current PPPs) per hour, 2018
120
100
80
60
40
20
0 MEX
CHL
HUN
LVA
GRC
KOR
POL
PRT
EST
SVK
TUR
CZE
ISR
LIT
JPN
NZL
SVN
ESP
CAN
OECD
ITA
AUS
GBR
FIN
ISL
DEU
SWE
NLD
FRA
AUT
USA
CHE
BEL
DNK
NOR
IRL
LUX
Source: OECD Productivity Database.
StatLink 2 https://doi.org/10.1787/888934157530
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Digital opportunities to raise productivity are not used to their full potential
Smartification of factories can raise SME productivity in manufacturing
Smart factories use information and intelligence technology (cloud computing, big data, artificial
intelligence, IoT) to move the production process from traditional automation to a fully connected, flexible
and optimised system, and design customised products at mass-production prices (Kim et al., 2019). Smart
factories present several advantages in terms of production performance and employment. In enterprises
that have adopted smart technology and actively used and shared data generated by technology,
productivity and product variety have improved, while defect rates have fallen (Kim et al., 2019).
Smartification of factories can contribute to job creation in the country by allowing factory reshoring (Fourth
Industrial Revolution Committee, 2019). The composition of workers in smart factories can also change as
the use of advanced technologies attracts young workers and lowers the intensity in physical labour,
facilitating the employment of women and older workers. There is already evidence of a slight increase in
youth employment in some enterprises, after they adopted smart technologies, but not yet in the
employment of women and older workers (Nho, 2019).
Smart factories are central to the government’s plan for the Fourth Industrial Revolution. At the end of
2019, Korea had 12 660 smart factories. To promote the development of SME smart factories, the
government has introduced pilot smart factories as benchmark for other SMEs, inspired by experiences in
countries like Germany and in relevant industries. Factories operating successfully can be designated as
pilot factories and get financial support for half of their expenses spent to purchase smart devices and
develop partnership programmes. In early 2020, 51 SMEs in car parts, paper, electronic parts, aircraft and
machinery industries became pilot smart factories. Other strategies to expand and upgrade smart factories
include financial support from the government and large business partners, the construction of a cloud-
based smart factory for SMEs with insufficient data storage and management skills, and development of
training and diplomas in smart factory-based technology (Fourth Industrial Revolution Committee, 2018).
The goal is over 30 000 smart factories by 2022.
Table 3.1. The five levels of smart manufacturing
Development stage Level Goal Main ICT tools
Level 1 – Identify Construct the information system to identify materials Barcodes and RFID
Basic Gather and monitor in real time data from the workforce,
Level 2 – Monitor Sensors
machines, equipment and materials
Intermediate I Level 3 – Analyse Control, measure and analyse data collected in level 2 Sensors and analysing tools
Gather, analyse and simulate data to optimise the
Intermediate II Level 4 – Optimise production process (workforce, machines, equipment, Sensor controller optimisers
materials, operating conditions)
Customise the production process by optimising the Artificial Intelligence, Augmented
Advanced Level 5 – Customise workforce, machines, equipment, operation and Reality/Virtual Reality, Cyber-
environment conditions Physical System
Source: https://www.smart-factory.kr/smartFactoryIntro.
The development of smart factories goes through five levels (Table 3.1). In Korea, the level of development
in smart factories is still low. In 2018, most of them were at the basic or intermediate I level (80.0% and
18.6% respectively), only 1.4% were at the intermediate II level and none of the SMEs had reached the
advanced level. The main reasons behind this slow development include a lack of workers with the relevant
skills and of an efficient retraining system, as well as underdeveloped innovation networks promoting
collaboration between innovative companies, especially between SMEs and large enterprises (Fourth
Industrial Revolution Committee, 2019). A sample of SMEs that adopted smart technologies were surveyed
by the Korean Agency of Information on Technology. Their main problems included the maintenance or
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instability of the new production system, its incompatibility with former systems, skill shortages and training
difficulties. The lack of awareness from managers was also underlined by these SMEs. This contributes to
the low level of development in Korean smart manufacturing, since good management practice and interest
of CEOs in upgrading their manufacturing system are important drivers of factory smartification. For
instance, factories in the bottom 20% of the distribution of incentives in management practices have not
experienced any increase in the level of smartification (Kim et al., 2019). The Ministry of SMEs and Startups
(MSS) put forward a wide range of measures to further support and enhance the development of smart
SME factories in its 2020 budget (Box 3.2).
Box 3.2. Government measures to support smartification projects in 2020
The Ministry of SMEs and Startups (MSS) 2020 budget plan amounts to KRW 13.5 trillion (about USD
11.5 billion), up from KRW 10.3 trillion for 2019 and mainly includes measures to promote manufacturing
innovation in SMEs and support their scaling-up.
Measures to support manufacturing innovation and technology development
Establish the “Manufacturing Data Centre” to analyse and process data generated from smart
factories (KRW 6.7 billion).
Further increase the penetration rate of smart factories in manufacturing (KRW 415 billion).
Extend the coverage of smart factories from manufacturing to services, with the smart service
project (KRW 9.3 billion) and the smart store project (KRW 1.7 billion).
Further support R&D for technological innovation and commercialisation for SMEs, and for
stronger collaboration between SMEs and large enterprises, and between industries,
universities and institutes (KRW 1.5 trillion).
Measures to support the scale-up of start-ups and venture companies
Support 300 start-ups in the fields of semiconductors, bio-health and future cars
(KRW 45 billion); set up a mentoring project between retired experts and start-ups
(KRW 6 billion).
Increase the budget for the Tech Incubator Programme for Start-ups (TIPS, KRW 54.4 billion).
Double the budget for the in-company venture programme (to KRW 20 billion).
Help promising start-ups become unicorns (KRW 12 billion).
Other measures
Provide R&D and other funds for seven regulation-free special zones to support regional
industries in future cars and bio-health (KRW 61.5 billion).
Provide vouchers to manufacturing SMEs for technical assistance and consulting services
(KRW 59.4 billion).
Further encourage youth to work in SMEs through the Naeil Cheum Mutual Aid Programme for
Youth Employees (KRW 339.9 billion).
Create a Korea Start-up Centre in Finland and Sweden to help start-ups establish networks
there and carry forward the Youth Personnel Global Marketing project (KRW 2 billion).
Expand the project for Export Vouchers to help SMEs enter the international market
(KRW 99.8 billion).
Source: Ministry of SMEs and Startups, Press Release, 29 August 2019.
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Digitalisation can increase productivity through servicification of manufacturing
With the development of ICT technologies, services are increasingly embedded in manufactured products,
a phenomenon known as “servicification” of the manufacturing industry. Manufacturing firms increasingly
rely on services, either as inputs, as production activities within the firm, or as output sold bundled with
goods (Miroudot and Cadestin, 2017). For instance, manufacturing uses services, such as R&D, design,
transport, logistics, finance, distribution and marketing as inputs. These input services can be produced in-
house or outsourced. Manufacturers of cell phones can bundle their product with telecommunication
services to allow users to install apps, which will generate additional service transactions, such as
audiovisual services with video streaming and music, publishing services with e-books, or computer
services with video games. Smart manufacturing, as well as IoT and 3D printing, contribute to the
increasing servicification of manufacturing. ICT services, such as computer programming, software
publishing, telecommunication, data processing and advanced data analytics, are the main producers and
users of data, which are central to smart manufacturing. For instance, data processing services like cloud
computing generate data for smart factories, while advanced data analytics services optimise the
production process based on this real-time information (Hallward-Driemeier and Nayyar, 2018).
Servicification of manufacturing helps firms create value and increase their productivity and exports.
Manufacturing firms use three types of services to create value: input, in-house production, and output
(Miroudot and Cadestin, 2017). In the case of service inputs, manufacturing firms may improve their
productivity or reduce their costs, by using legal, management, engineering or banking services. In the
case of in-house production, more R&D increases the innovative capacity of the firm and its
competitiveness, while more IT services improve the production process and productivity. For example,
there is evidence of higher exports for Swedish manufacturing firms that have a larger share of manager,
professional or technical services – more likely to be in knowledge-intensive services – in their in-house
production (Lodefalk, 2014). In the case of sales of services bundled with manufacturing goods, after-sales
services or installation and maintenance services become new sources of income for firms.
Korea is lagging behind the most advanced OECD countries in the development of manufacturing
servicification, in terms of service inputs, production and exports. First, the share of service inputs in
Korean manufacturing exports is one of the lowest among OECD countries (25%), with half of these inputs
outsourced to foreign firms (Figure 3.7). Like in other OECD countries, Korean manufacturing industries
mainly use distribution services as domestic and foreign services inputs (12% of manufacturing exports),
as well as professional and administrative services (5%), while ICT services are barely used as inputs
(1%). Second, the share of in-house services produced by Korean manufacturing firms to export their
goods is one of the lowest among OECD countries (less than 10% of gross exports), along with Eastern
European countries, while the United States and Germany have over 20% of in-house services in their
exports (Miroudot and Cadestin, 2017). Third, Korea has the lowest share of firms selling both
manufacturing goods and services (3.5%), after Mexico, Chile and Iceland, based on the ORBIS database
(Miroudot and Cadestin, 2017). The share of firms exporting both manufactured goods and services is
even lower (0.5%).
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Figure 3.7. The contribution of domestic services to Korean manufacturing exports is low
Value added share of manufacturing gross exports by industry inputs, 2015
Services - domestic Services - foreign Manufacturing - domestic Manufacturing - foreign Other - domestic Other - foreign
%
100
90
80
70
60
50
40
30
20
10
0 ISR
KOR
GRC
JPN
LTU
SVN
FIN
DEU
HUN
USA
CHLISL
CAN
CZE
AUT
SVK
OECD
SWE
POL
DNK
TUR
GBR
PRT
NZL
LVA
CHE
ESP
EST
MEX
AUS
ITA
FRA
IRL
BEL
NOR
NLD
LUX
Note: ‘Other’ includes primary, utilities and construction industries.
Source: OECD TiVA Database.
StatLink 2 https://doi.org/10.1787/888934157549
Digital technologies can increase productivity in services
In Korea, productivity in ICT services and other business services are respectively equal to 74% and 41%
of that of manufacturing. Productivity is even lower in trade, transportation and accommodation (31% of
manufacturing productivity). Traditional services have intrinsic characteristics that reduce the scope for
productivity gains. Compared to goods, they tend to be less standardised and require more face-to-face
interactions in their delivery. This reduces productivity in services through three channels. First, the
additional transaction costs reduce competitive pressures, efficient reallocation mechanisms and hence
incentives to improve productivity. Second, the gains from economies of scale and automation are smaller.
Third, services are less tradable within and across countries, which limits productivity gains from trade
through knowledge spillovers, better specialisation and heightened competitive pressure (Sorbe et al.,
2018).
Digital technologies offer new ways of producing and consuming services. For instance, artificial
intelligence and advanced robotics can automate cognitive tasks typically carried out in service activities.
Digital platforms can enhance competition among service providers and increase productivity in services,
by reducing information asymmetries between consumers and service providers, thanks to ratings and
reviews, or by substituting existing services, like Kakao T and TADA for taxis or Baemin for delivery
services. Digital platforms also provide a wide range of services for consumers, like market services that
can replace home production, such as housework with gig economy platform Daelijubu, or innovative
FinTech services, such as peer-to-peer money transfer services proposed by Viva Republica’s mobile app
“Toss”. However, the rapid emergence of digital platforms is facilitated by strong network externalities and
the intensive use of data as input to their matching algorithms, which favour the emergence of dominant
platforms and hinders competition. In Korea, Kakao T emerges as a dominant platform in transportation,
with 24 million users registered, representing over 84% of the economically active population as of
September 2019 (Kakao, 2019). The exact definition of gig economy workers is under discussion among
tripartite partners. The National Learning Card introduced in 2020 will support the participation of gig
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102
workers in vocational training. Other measures under discussion include the extension of industrial
accident compensation insurance and unemployment insurance to platform workers.
Digital technologies improve the tradability of services and provide alternative ways of trading. For
instance, blockchain provides new financial services that are fully digitally tradable and require no direct
physical interactions. However, in the case of Korea, exports of digitally deliverable services are well below
the OECD average, even though barriers to digital service trade are among the lowest in OECD (OECD,
2019d; Figure 3.8). SMEs can also benefit from digital technologies to gain access to international markets
and take advantage of enhanced linkages to enhance their productivity (2018 OECD Economic Survey of
Korea). E-commerce can help SMEs expand their business within and across countries, by significantly
reducing upfront fixed costs, such as logistics or customer services (OECD, 2019e). In low-productivity
sectors like accommodation and trade, where SMEs are more numerous, the share of Korean firms using
websites for online ordering or reservation has significantly increased and has room to rise further (Figure
3.9).
Figure 3.8. Korean exports of predominantly digitally deliverable services are weak
As a percentage of total services exports, 2017
%
80
Insurance and pension services
70 Financial services
Charges for intellectual property use not included elsewhere
60 Telecommunications, computer and information services
Audiovisual and related services
50
40
30
20
10
0 TUR
GRC
PRT
LTU
CHL
SVN
AUS
NZL
ISL
DNK
EST
MEX
POL
SVK
NOR
ESP
AUT
KOR
HUN
CZE
ITA
LVA
FRA
BEL
CAN
DEU
ISR
JPN
OECD
SWE
USA
FIN
NLD
GBR
CHE
IRL
LUX
Source: OECD (2019b), calculations based on EBOPS 2010, https://www.oecd.org/sdd/its/EBOPS-2010.pdf; WTO, Trade in Commercial
Services, October 2018.
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Figure 3.9. Use of websites for online ordering or reservation has increased rapidly in Korea
As a percentage of enterprises with ten or more employees; Accommodation and trade sectors
%
60
2019 2010
50
40
30
20
10
0
TUR LVA POL ESP HUN ISL IRL SVK CAN LTU FRA DEU NOR NZL EST AUT SVN KOR CZE SWE NLD DNK
Note: Simple average of the share of enterprises in the accommodation, wholesale and retail sectors. 2018 for Germany, Iceland, Korea and
New Zealand and 2017 for Canada instead of 2019; 2011 for France, Latvia, Poland and Sweden and 2013 for Korea instead of 2010. The
statistical unit for Korea is the establishment and not the enterprise and covers public and private sectors.
Source: OECD ICT Access and Usage by Businesses Database.
StatLink 2 https://doi.org/10.1787/888934157587
The diffusion of digital technologies among firms and workers is slow
The development of smart factories, servicification of manufacturing or digital platform requires
sophisticated digital technologies, such as cloud computing, big data, IoT and artificial intelligence. Korea
actively contributes to the development of emerging digital technologies and benefits from a nationwide
coverage of 5G. However, Korea still lags behind most advanced OECD countries in the adoption of these
sophisticated digital technologies, especially in SMEs. This hinders the development of smart
manufacturing. The lack of digital skills in SMEs and among older workers is also a barrier to the diffusion
of digital technology.
Korea has margins for improvement in the adoption of sophisticated digital technologies
Over the past two decades or so, Korea remained at the cutting edge of ICT technologies, thanks to
outstanding achievements in mobile devices, chips and appliances. In recent years, Korean firms have
strived to reinforce their global competitiveness in new digital technologies, such as artificial intelligence,
cloud computing, big data, 3D printing and IoT. However, IITP (2019) estimates Korea has a two-year lag
in 3D printing, artificial intelligence, big data and cloud computing, and a one-year lag in IoT compared to
the United States, which is considered the frontrunner in these technologies. Only 23% of Korean
companies use cloud computing, against over 50% in the Nordic countries (Figure 3.10).
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Figure 3.10. Korea is below the OECD average in sophisticated digital technologies adoption
As a percentage of enterprises with ten or more employees, 2019 or latest available year
%
70
Cloud computing Big data RFID CRM ERP
60
50
40
30
20
10
0
TUR POL GRC LVA HUN FRA SVK CHE ESP DEU ITA LTU KOR AUT LUX PRT SVN CZE EST BEL GBR AUS IRL NLD NOR USA CAN DNK SWE JPN FIN
OECD
Note: RFID stands for Radio frequency identification; CRM for Customer relationship management; ERP for Enterprise resource planning. Data
for cloud computing refer to 2018, except for Canada, Switzerland and United States (2017) and Australia (2016). Data for big data refer to
2018, except for United Kingdom (2016). Data for RFID refer to 2017 except for Japan and Korea (2018). Data for CRM refer to 2018 for Korea
and to 2017 for Iceland and Switzerland. Data for ERP refer to 2018 for Korea and to 2017 for Canada and Switzerland. The statistical unit for
Korea is the establishment and not the enterprise and covers public and private sectors.
Source: OECD ICT Access and Usage by Businesses Database.
StatLink 2 https://doi.org/10.1787/888934157606
However, the Korean government and private firms are taking measures to catch up, especially in the
adoption of cloud computing and artificial intelligence. Major business groups like Samsung and LG already
committed to ambitious plans to expand their cloud-based systems. Samsung is expected to establish a
cloud-based business management system by 2020, while LG is expected to switch 90% of its subsidiaries’
IT infrastructure to a cloud-based system by 2023. Cloud computing services are key to lowering barriers
to the adoption of the latest technologies (OECD, 2019c). They provide both individuals and businesses
with on-demand access to ICT over a network at any given time. For SMEs and young firms, cloud-
computing services are an important asset for digital transition, reducing the cost of experimenting with
new technologies and increasing flexibility, as data processing and storage are managed in a remote data
centre. During the COVID-19 outbreak, Korea stood out among OECD countries with its use of artificial
intelligence to significantly speed up and improve diagnosis efficiency, especially with its test kits (Box 3.1).
The digital divide between SMEs and large enterprises is wide
Digital technologies are increasingly powerful and affordable for SMEs, but are not used to their full
potential. The gap between SMEs and large firms in the adoption of sophisticated digital technologies is
wide and higher than the OECD average (Figure 3.11). This gap reflects several obstacles to the adoption
of digital technologies faced by SMEs. First, Korean SMEs are concentrated in services like trade,
transportation, accommodation and food services, which are less knowledge intensive (Sorbe et al., 2018)
and hence less prone to innovation than manufacturing: 56.7% of service firms are not innovating (against
47.9% in manufacturing) and they are less likely than manufacturing firms to engage in innovation to pursue
cost reductions (Kang and Lee, 2019).
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
105
Figure 3.11. Digital gaps between large and small firms remain high
Percentage of enterprises with ten or more employees using selected digital tools, 2018 or latest year
%
100
Large firms Small firms
90
80
70
60
50
40
30
20
10
0
OECD Korea OECD Korea OECD Korea OECD Korea OECD Korea
Cloud computing Big data RFID CRM ERP
Note: RFID stands for radio frequency identification; CRM for customer relationship management; ERP for enterprise resource planning. The
statistical unit for Korea is the establishment and not the enterprise and covers public and private sectors.
Source: OECD (2019b); OECD ICT Access and Usage by Businesses Database.
StatLink 2 https://doi.org/10.1787/888934157625
Second, SMEs tend to lack information and funds. They are often not aware of the potential new digital
tools could offer to increase their productivity or lower their production costs. They also consider the costs
of adopting more sophisticated digital tools to upgrade their business model as too high (OECD, 2019c).
According to the Survey on the Informatisation Level in Small and Medium Business conducted by the
Korean Agency of Information on Technology, these are the main difficulties SMEs faced while
participating in the smart manufacturing programme. In 2017, 57.4% of the 356 companies surveyed
mentioned the lack of information on smart factories and 50.8% the issue of raising initial investment. The
lack of information causes a lack of trust, which is the main obstacle to the adoption of cloud computing by
SMEs (OECD, 2019c).
Third, SMEs face a lack of skilled workers and low access to training. For one third of SMEs in the 42
countries covered by the OECD/Facebook/World Bank Future Business Survey, hiring and keeping skilled
employees is the most pressing challenge (OECD, 2019c). Compared to other OECD countries, Korean
SMEs have more difficulties to hire high-skilled university graduates than larger firms because they offer
less attractive jobs in terms of wages, stability, working hours and career advancement opportunities
(OECD, 2020b). Across OECD countries, smaller firms lack soft skills for innovation, such as managing
and communication skills, readiness to learn and creative problem-solving skills (Grundke et al., 2017). In
Korean micro-firms, 34% of workers have low problem-solving skills in technology-rich environments
(against 28% for the OECD average), while this share is much lower in large firms (19%), according to the
OECD Survey of Adult Skills (PIAAC). In addition, training participation in Korean SMEs is one of the lowest
among OECD countries, especially in micro-firms. The duration of training is also shorter in SMEs than in
large firms: the median hours spent on (non-formal) job-related training is 32 hours per year for SME
workers, compared to 48 hours in larger firms, according to PIAAC data. For SME workers, the main barrier
to training is the lack of time because of work (52% of workers, against 32% for the OECD average). For
firms, the lack of manpower is the most frequently cited reasons for not implementing or supporting training
(30% of SMEs), along with fear of poaching (OECD, 2020b).
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The digital divide between generations exacerbates social inequality
Adequate digital skills are key to thrive in an increasingly computerised society and economy. A digital
divide is opening up between those who can get the most out of the Internet and online activities and the
others. This in turn exacerbates well-being inequalities. Koreans have access to high-speed Internet, which
allows them to undertake diversified and sophisticated online activities, such as online purchasing, Internet
banking, online learning or uploading self-created content on sharing websites such as Youtube. The types
and sophistication of activities undertaken on the Internet depend on several factors, like age, educational
attainment, familiarity with online services, trust and skills (OECD 2019b).
In Korea, the types of activities carried out by Internet users vary widely across age groups. In 2019, 92%
of Koreans aged 16-74 used Internet daily, the highest share among OECD countries, after Iceland,
Denmark and Norway (OECD ICT Access and Usage by Individuals Database). While this share varies
across age groups, with nearly all Koreans aged 16-24 being daily Internet users, it is also one of the
highest for Koreans aged 55-74 (78%). The difference between youth and older people relates to the
sophistication of their online activities. Individuals aged 55-74 limit their use of the Internet to basic
activities, such as reading newspapers and news magazines online, and do not make the most of the wide
range of online activities available. For instance, e-commerce gives access to a wider choice of products
and can offer a more convenient shopping experience for persons with low mobility. Across OECD
countries, young individuals engage more in online purchasing, but the age gap between e-consumers is
usually small. In Korea, the age gap is the highest among OECD countries: 88% of individuals aged 16-
24 versus only 24% of those aged 55-74 participate in e-commerce (Figure 3.12).
Figure 3.12. The age gap in online purchasing is the highest among OECD countries
Share of individuals participating in e-commerce, 2019 or latest available year
%
100
All Individuals aged 55-74 Individuals aged 16-24
90
80
70
60
50
40
30
20
10
0 COL
MEX
TUR
CHL
ITA
PRT
GRC
ISR
LVA
LTU
HUN
POL
SVN
USA
JPN
ESP
OECD
SVK
AUT
KOR
CZE
BEL
IRL
AUS
EST
FRA
LUX
FIN
CAN
DEU
CHE
NLDISL
SWE
NOR
DNK
GBR
Note: Data refer to 2018 for Canada, Columbia, Japan and Mexico, 2017 for Chile, Israel and United States, 2016 for Australia.
Source: OECD ICT Access and Usage by Individuals Database.
StatLink 2 https://doi.org/10.1787/888934157644
This digital divide in the diversity and sophistication of online activities reflects gaps in digital skills
(problem-solving skills in technology-rich environments), as well as in basic skills (literacy and numeracy).
An analysis on a sample of European countries directly connects digital and basic skills to the profile of
Internet users. Lacking basic cognitive skills is a barrier to performing any online activities, while lacking
digital skills is a barrier to performing diversified and complex online activities like e-finance, learning and
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
107
creativity (OECD, 2019f). Korea has the largest gap in digital skills between youth and older people
(Figure 3.13). The share of 16 to 24 year-olds with limited or no digital skills is the lowest across OECD
countries (37%). But nearly all adults aged between 55 and 65 lack digital skills. Age gaps in Korea are
also observed for basic skills, though they are smaller than for digital skills. Less than 2% of Koreans
between 16 and 24 lack basic skills in literacy and numeracy, against 30% of Koreans between 55 and 65
(OECD, 2019f). Digital and basic technology divide between the elderly and young generations is primarily
due to a sharp increase in educational investment during the period of rapid economic growth in the 1970s
and 1980s, as well as insufficient investment in lifelong learning.
In an ageing and increasingly digitalised society, it is essential to keep up with the need for new skills and
equip individuals with the adequate skills to participate in diversified and sophisticated online activities.
Otherwise, the digital divide will exacerbate well-being inequalities as part of the population will be left
behind. For instance with e-commerce, if higher competitiveness of online vendors causes physical stores
to close down, it could limit the access to certain products for part of the population (OECD, 2019b). In
addition, the COVID-19 outbreak underlines the growing importance of e-commerce as consumers
increasingly switch to online shopping to avoid further spreading of the virus (Box 3.1). In addition,
individuals with a well-rounded skill set (literacy, numeracy and digital) are better prepared to face changes
in their job content induced by digitalisation and automation (OECD, 2019f). This is particularly relevant for
workers in Korean SMEs whose jobs face higher automation risk than in larger companies (44.3% against
36.5%, OECD 2020b). Having a well-rounded skill set can help workers be re-assigned to non-routine
tasks more easily.
Figure 3.13. The digital skills gap between generations is the highest among OECD countries
Share of adults with limited or no digital skills, by age group, 2012 or 2015
120
%
16-24 25-34 35-44 45-54 55-65
100
80
60
40
20
0
KOR FIN SWE NLD BEL NOR CZE DEU NZL CAN AUT AUS EST DNK SVN JPN GBR SVK IRL IRL POL USA ISR LTU CHL GRC TUR
OECD
Note: No digital skills' includes adults who have had no computer experience, failed the ICT core test or opted out of taking the test. 'Limited
digital skills' includes adults scoring below or at level 1 of proficiency in problem solving in technology-rich environments
Source: OECD Survey of Adult Skills (PIAAC).
StatLink 2 https://doi.org/10.1787/888934157663
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108
Policies supporting digital adoption and productivity need strengthening
The lack of adequate skills and knowledge is the main barrier to the diffusion of digital technologies among
firms and workers. Preparing individuals to thrive in a digital society begins in families and at school and
continues at work with on-the-job learning and training. The lack of strong innovation networks between
SMEs and academia or large firms and the presence of stringent regulations hinder the adoption and
diffusion of digital technologies. R&D and commercialisation of new products and services should be
further promoted in innovative and productive SMEs. Stringent barriers in product markets and in services
should be lowered to adjust to the rapid development of digital innovations.
Better quality training for teachers and SME employees is crucial
Teachers play an important role in ensuring that students and workers develop relevant skills to thrive in
the context of the digital transformation, but also in raising awareness of the risks associated with new
technologies. Teachers’ digital competencies are key in that regard and there is a positive relationship
between teacher problem-solving skills in technology-rich environments and student performance in
computer problem solving and computer-based assessment of mathematics (OECD, 2019f). In Korea, the
share of teachers (including adult learning teachers) with high digital skills is low compared with the most
advanced OECD countries (Figure 3.14). The lack of digital skills raises issues amid the COVID-19
outbreak as teachers had to switch to online teaching (Box 3.1). Among OECD countries, a relatively high
share of Korean teachers have the “use of ICT for teaching” included in their formal education or training,
or in their recent professional development (for instance attending courses and seminars outside of
school). Nonetheless, more than half of Korean teachers do not feel sufficiently prepared for the use of
ICT for teaching and the share of teachers in high need of training in ICT skills for teaching is above the
OECD average (Figure 3.15). The quality of their training in ICT skills should be improved. As is currently
discussed by the government, lifelong learning teachers should have mandatory refresher training to
update their skills on a regular basis. Furthermore, to attract highly-qualified lifelong learning teachers, and
hence increase the quality of training, their working conditions and wages should be enhanced. Their
pedagogical and professional skills could also be publicly highlighted, as it is the case with Singapore’s
adult education network SkillsFuture SG (OECD, 2020b).
Workers with ICT professional skills (such as programming and data analytics) are needed to support the
diffusion and the efficient use of digital technologies, as well as to compete in the digital economy (Cho et
al., 2019; Sorbe et al., 2019). In terms of graduation fields, the share of Korean tertiary graduates is the
second to Germany among OECD countries in natural sciences, engineering, ICTs, and creative and
content fields (Figure 3.16). These qualifications are especially useful in increasingly digitalised working
environments (OECD, 2019b). Artificial intelligence and big data have proven to be core technologies to
tackle the COVID-19 outbreak, which implies that more specialists and high-level researchers in these
technologies are needed (Box 3.1). The Korean government started to take steps in this direction by
promoting plans to train more experts in fourth industrial revolution core technologies. In December 2019,
the government initiated a strategy promoting the adoption of artificial intelligence, which includes making
artificial intelligence courses compulsory in primary and secondary schools, opening artificial intelligence
departments in colleges and providing training to the military and public officials. Such courses and training
should be extended to other fourth industrial revolution core technologies like big data and training should
be provided to private sector workers as well.
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109
Figure 3.14. The share of teachers with high digital skills is relatively low in Korea
Share of top performing teachers in problem solving in technology-rich environments, by country
%
70
60
50
40
30
20
10
0
LTU ISR EST TUR SVK POL CHL GRC IRL SVN AUT KOR DNK DEU USA BEL CZE JPN CAN NOR NLD NZL FIN SWE GBR AUS
Note: Top performers are defined as scoring Level 2 or 3 in problem solving in technology-rich environments.
Source: OECD (2019f), calculations based on OECD Survey of Adult Skills (PIAAC).
StatLink 2 https://doi.org/10.1787/888934157682
Figure 3.15. Teachers can further improve their use of ICT for teaching
Share of teachers reporting about the "use of ICT for teaching”
%
100
Gap 1st and 3rd quartiles Korea Highest Lowest OECD
90
80
70
60
50
40
30
20
10
0
Included in formal "Well prepared" or "very Included in their recent High need for "Frequently" or "always" Percentage of principals
education or training well prepared" for the use professional professional let students use ICT for reporting shortage or
of ICT for teaching development activities development in ICT skills projects or class work inadequacy of digital
for teaching technology for instruction
Source: OECD, TALIS 2018 Database, Table I.4.13, Table I.4.13, Table I.5.18, Table I.5.21, Table I.2.1 and Table I.3.63.
StatLink 2 https://doi.org/10.1787/888934157701
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
110
Figure 3.16. The share of tertiary graduates in science, engineering and ICT is high
As a percentage of all tertiary graduates, 2016
45
% Natural sciences, mathematics and statistics Engineering, manufacturing and construction
ICT Creative and content
40
ICT breakdown not available
35
30
25
20
15
10
5
0 DEU
KOR
PRT
EST
GBR
FIN
AUT
IRL
SWE
GRC
FRA
ESP
LTU
MEX
CHE
SVN
ITA
OECD
CZE
NZL
DNK
HUN
LVA
NOR
SVK
POL
NLD
AUS
USA
ISR
BEL
CHL
TUR
CAN
LUX
JPN
Note: The ‘Creative and content’ field includes arts (including graphic design), journalism and information.
Source: OECD (2019b), calculations based on OECD Education Database, September 2018.
StatLink 2 https://doi.org/10.1787/888934157720
Firm-based training can complement and update academic qualifications and enhance the generic digital
skills of all workers, as well as complementary skills like managerial skills. High managerial skills are
required to improve business processes and are associated with higher digital adoption and productivity
(Bloom et al., 2019; Sorbe et al., 2019). Among OECD countries, workers in very digital-intensive sectors
are more likely to receive formal firm-based training leading to official qualifications than workers in other
sectors. Korea has scope to increase firm-based training, as even in very digital-intensive sectors,
participation is relatively low compared to OECD frontrunners (Figure 3.17). The lack of access to training
in SMEs, compared to larger firms, and the low quality of training are important issues. In 2015, 52% of
SMEs provided only legally mandatory training (mostly industrial safety and health training) or no training
at all to their workers, based on PIAAC data. Compared to other OECD countries, Korean SME workers
seem to be less satisfied with their training, with less than a third of them finding it useful. The government
is already addressing issues related to the lack of training participation in SMEs. Nevertheless, there is still
a lack of information about the benefits of training, available training options and their quality, as well as
available financial support (OECD, 2020b). Career guidance services can raise SME workers’ awareness
of training opportunities and understanding of their training needs. However, Korea counts numerous
competing online career guidance platforms (HRD-net, Neulbaeum, Work-Net, Q-Net, regional lifelong
learning portals, K-MOOC, Smart Tech Education Platform), which makes finding information more difficult
for workers. The government should merge the many online career guidance portals into a single one to
centralise information on available training programmes and help users navigate training options. Targeting
adult learning programmes on SME managers would help ensure they are aware of the potential of digital
technologies and hence supportive of workers training. Korea could learn from other countries like the
United Kingdom, Mexico, New Zealand and Australia, where special management programmes are
provided to SMEs’ CEOs and owners. Financial incentives to reduce training costs are numerous for
Korean SMEs and are funded by the Employment Insurance for SMEs that meet a number of criteria.
Making these criteria less restrictive would allow more SMEs to be eligible to these government-supported
subsidies. Furthermore, financial incentives should be aligned to SMEs’ training needs and hence be more
generous for innovative training contents or methods that better fit SMEs’ need. Finally, developing an
online guide like in Ireland (Supporting SMEs Online Tool) would help SMEs be aware of all the subsidies.
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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Figure 3.17. Korea can further increase the share of workers receiving firm-based training
As a share of workers in each sector group, 2012 or 2015
%
90
Highly digital-intensive sectors Other sectors
60
30
0
ITA GRC JPN FRA SVK LTU BEL TUR POL SVN AUT KOR DEU CZE ESP ISR IRL CHL CAN GBR AUS EST USA NOR SWE DNK FIN NZL NLD
Source: OECD (2019b), calculations based on OECD Survey of Adult Skills (PIAAC).
StatLink 2 https://doi.org/10.1787/888934157739
Digital technologies create new opportunities to update and develop new skills throughout life, for instance
via distance and modular learning. Education systems such as massive open online courses (MOOCs)
provide a wide range of courses to anyone at any age by top universities, the business sector, international
institutions or independent experts. In Korea, MOOCs like those provided by Tooling U-SME specifically
for manufacturers and their workers can teach needed digital manufacturing skills (Kim et al., 2018). E-
learning allow studying and working at the same time and even obtain full degrees with modular learning,
providing flexibility to workers and savings to firms, especially in SMEs where lack of time is the main
barrier for workers (OECD, 2019f; OECD, 2020b). Korea has the third highest participation rate in online
courses in the OECD, after Mexico and Finland (Figure 3.18). Drawbacks of e-learning include the lack of
information on their quality and the risk of exacerbating inequalities. Indeed, youth and high-educated
adults are more likely than older and low-educated adults to further develop their skills through such
education systems. In Korea, 59% of youth aged 16-24 have used Internet online courses in 2019, while
this share is only 20% for people aged 25-54 and 5% for 55-74 year-olds (Figure 3.18). A similar pattern
is observed in other OECD countries, but the age gap is the highest in Korea. More basic ICT courses
should be provided to older and low-qualified adults who are also over-represented in SMEs (OECD,
2020b). Regarding older adults, Korea could take advantage of existing infrastructure like senior
universities which help improve seniors’ well-being and could operate as an extension of adult lifelong
learning (Jun and Evans, 2019). Users are over 60 years old and courses are mainly related to hobbies
and health maintenance. But courses dedicated to ICT could be introduced, either as basic courses or as
university-level courses like in Germany’s Universities of the Third Age (Schmidt-Hertha, 2019). Finally,
the government should collaborate with education and training providers, employers, job-search agencies
and MOOC platforms, to increase participation in open education and expand the use of distance and
modular learning on the job, as well as define standards and good practices to better signal quality courses
(OECD, 2019f).
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112
Figure 3.18. The participation in online courses is the third highest in Korea
Share of individuals participating in online courses, in 2019 or latest available year
%
80
All Individuals aged 55-74 Individuals aged 25-54 Individuals aged 16-24
70
60
1
50 1
40
30
20
10
0
TUR LVA SVK POL SVN HUN GRC PRT CZE CHL ITA LTU FRA DEU AUT JPN BEL LUX DNK CHE IRL NLD EST CAN ESP NOR USA SWE GBR COL ISL KOR FIN MEX
OECD
Note: Data refer to 2018 for Canada, Columbia, Japan and Mexico, 2017 for United States.
Source: OECD ICT Access and Usage by Individuals Database.
StatLink 2 https://doi.org/10.1787/888934157758
R&D support needs to better target innovative and productive SMEs
The digital divide between Korean SMEs and large enterprises is high and Korean SMEs do not take
advantage of advanced technologies enough to enhance their productivity. Access to finance is critical for
SMEs to adopt innovation and scale up. Overall, SMEs in OECD countries face financial barriers to the
adoption of innovation, especially young firms, start-ups and innovative ventures (OECD, 2019c). The
Korean government supports SMEs through the Korea Small Business Innovation Research (KOSBIR)
programme and R&D grants since 1998. KOSBIR is based on the US Small Business Innovation Research
(SBIR) programme that supports SMEs in three phases: feasibility, R&D and commercialisation. Compared
to SBIR, KOSBIR dedicates most of the funding to the R&D phase, at the expense of the feasibility and
commercialisation phases. Reallocating financial support for turning successful technology R&D into
commercial applications could help SMEs convert their R&D inputs into economic benefits. The proportion
of firms able to launch new products or significantly improve existing products is much lower in smaller
firms than in larger ones. The lack of funds and of market analysis and research consulting on project
feasibility are considered as the main barriers to commercialisation, especially for small firms (Yang, 2018).
Promoting e-commerce could help SMEs sell their products to a wider range of consumers. For instance,
Israel’s National Digital Programme has a component dedicated to e-commerce with an assistance
package that includes subsidised training and grants to establish a digital marketing system.
However, when it comes to support commercialisation, financial markets and innovative financial services
like Fintech should also be considered for funding and expertise on project feasibility. Directing R&D
support towards innovative SMEs and boost their productivity requires an efficient selection process of
recipients. For instance, recipients of R&D grants selected on the number of their registered patents
expanded their investments in R&D, intellectual property rights, tangible assets, human capital and
marketing over the period 2010-15, but on average did not show significant improvement in their value
added, operating profits and sales, unlike non-recipient SMEs (Lee, 2018a). Fintech brings new
opportunities for SMEs seeking finance (OECD, 2019c). In August 2020, the three data bills (Personal
Information Protection Act, Information and Communications Network Act and Protection of Credit
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Information Act) were to come into effect. Fintech companies are expected to be among the first applicants
to have access to anonymised personal data like electricity bills and use them to establish new credit
ratings using algorithms. SMEs can then have higher credit ratings than those provided by commercial
banks and have access to funding for their R&D and commercialisation projects.
R&D support mainly benefits firms already investing in R&D. Providing SMEs in manufacturing and
services with innovation vouchers would encourage them to engage in innovative projects and assess the
feasibility of their research projects, for instance by purchasing studies on potential for new technology
introduction from universities and research institutions (Kim et al., 2018). Introduced for the first time in the
Netherlands in 1997, innovation vouchers are now used by many European countries, as well as in regions
of Canada and the United States. Vouchers are usually granted as a one-off payment to SMEs that covers
all the eligible costs. In some countries like Estonia, Germany, Ireland and Italy, recipient SMEs are
required to provide a share of own-funding (Box 3.3). Evidence of advantages in using innovation vouchers
include increased R&D projects, reduced time-to-market, and further collaboration with academia (Cornet
et al., 2006; Matulova et al., 2015; Sala et al., 2016). Overall, innovation vouchers would help developing
innovation networks, which are limited in Korea, and facilitate the diffusion of digital technology (2018
OECD Economic Survey of Korea).
Box 3.3. Innovation vouchers for SMEs: case studies of selected European Union countries
Voucher programmes consist of grants given by local, regional and national government to private firms,
usually SMEs, as an incentive to adopt new technologies or services, or to invest in skills. In the
European Union, such vouchers mainly aim at assisting SMEs in investing in innovative solutions or
services, or acquiring machinery that will facilitate innovation (digital or not). Some vouchers specifically
target training of staff and/or citizens to increase their basic or digital skills (for instance in Poland).
Activities covered by these vouchers include consultancy services, knowledge transfers from research
institutes, access to research centres and their testing facilities, first-time contacts between
entrepreneurs and/or research centres, nationally or internationally and investments in ICT instruments,
among others.
Table 3.2. Main innovation vouchers currently available to SMEs in the European Union
Amount Beneficiaries Purpose Number of
vouchers
granted
Austria Maximum: EUR 12 500 Smaller firms without R&D staff Enlist the services of 4 442 in 2016
Total: EUR 29.3 million research institutions and
pay for these services
Denmark Large voucher: EUR 13 400 SMEs Strengthen digital and e- Not available
Small voucher: EUR 3 350 commerce capabilities and (target of 2 000
Total envelope: EUR 12.3 million increase competitiveness by 2021)
(over 2018-21)
Estonia Maximum: EUR 4 000 SMEs cooperating with a higher Supports the creation of Up to 4 000 from
Own funding rate: minimum 20% education institute, test laboratory, first-time contacts autumn 2015
Total envelope: EUR 4 million (over or intellectual property experts between entrepreneurs until summer
2014-20) and innovation service 2019
providers
Germany Maximum: EUR 1 100 (excluding SMEs with less than 100 Advance recipients' 863 in 2018
VAT) for a day of consulting services employees digitalisation in IT security, 1238 in 2017
(maximum 30 days of consulting digital marketing and
services in a period of up to 6 months) digitalised business
Own funding rate: 50% processes
Ireland Maximum: EUR 2 500 (excluding SMEs with limited online trading Invest in developing e- 5 000 since
VAT) presence and 10 employees or commerce capability 2014
Own funding rate: 50% less, EUR 2 million or less in
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Total envelope: EUR 7.3 million since turnover and at least 6 months of
2017 trading
Italy Maximum EUR 10 000 Micro enterprises and SMEs in the Encourage investments in 10 000
Own funding rate: 50% pursuit of the digitalisation of their ICT innovation and
Total envelope: EUR 45 million (over processes and modernisation of digitalisation among micro
2017-19) their technologies enterprises and SMEs
Source: Backer Gonzalez Salido (2019).
In addition to promoting collaboration between SMEs and academia, encouraging collaboration between
SMEs and large enterprises would enhance innovation diffusion, for instance through an open collaborative
platform to exchange new products, services and big data (Fourth Industrial Revolution Committee, 2019).
The United States and other OECD countries focus on the importance of networks for the growth phase of
start-ups and SMEs (Box 3.4). The Korean steelmaker POSCO paved the way for a successful
collaborative platform between SMEs, large enterprises and academia. It started introducing new
technologies like big data in 2015. In July 2019, POSCO became the first Korean smart factory designated
as “Lighthouse Factory” by the World Economic Forum, which establishes a list of global leading factories
applying core fourth industrial revolution technologies (artificial intelligence, big data and IoT). One of
POSCO’s special features is the collaboration with academia, SMEs and start-ups to build its own smart
factory platform (World Economic Forum, 2020). POSCO collaborates with universities like POSTECH and
UNIST to provide special training in artificial intelligence. This collaboration has brought more than 60
artificial intelligence experts in POSCO. By providing big data to a SME specialised in data mining like
ECMiner, POSCO succeeded in optimising their equipment with artificial intelligence. The academics,
SMEs and start-ups that collaborated with POSCO can help constructing another smart factory based on
POSCO’s technology (POSCO, 2020).
Box 3.4. Helping SMEs scale up: selected country examples
Since its inception in 1979, the US Small Business Development Center (SBDC) network has grown
from a few centres in six states to a nationwide network of nearly 1 000 centres at the service of
approximately one million small business owners and aspiring entrepreneurs each year. SBDCs provide
one-on-one counselling and training to help micro enterprises and SMEs start their business and grow.
The SBDC network is a partnership that includes the US Congress, the US Small Business
Administration (SBA), the private sector, colleges, universities, state and local governments. Half of
SBDC funding is provided by the SBA, and the other half by the other partners and through donations.
SBDCs offer services in general management, assistance in getting financing and more specialised
services for gazelles, such as assistance to expand their market at the international level. They also
monitor and evaluate business performance using indicators like jobs creation, sales, access to capital,
exports and the number of government contracts.
Over a more recent period, other OECD countries introduced similar programmes to help SMEs grow
through mentoring and collaboration between companies, the public sector and academia. In 2014,
Korea launched the Tech Incubator Programme for Start-ups, which is modelled on Israel’s Technology
Incubator 1991 programme (2018 OECD Economic Survey of Korea). Both programmes provide
incubation and mentoring, and they are funded by government R&D combined with angel investors in
the case of Korea and venture capitalists in the case of Israel. Over 2018-20, the European Innovation
Council supports top-class innovators, entrepreneurs, small companies and scientists for scaling up
internationally, by offering new networking, mentoring and coaching opportunities as well as strategic
advice for upgrading the European innovation ecosystem. Several countries have used network-based
approaches like cluster policies to strengthen industry-science linkages and cross-sectoral interactions
(Baltic Sea Region countries, Canada, Korea, Spain).
Source: https://americassbdc.org/; 2018 OECD Economic Survey of Korea; Choi (2019); OECD (2019c).
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Barriers to the adoption and diffusion of digital innovations are too high
Regulatory frameworks are often unable to adjust to rapid technological innovations, like FinTech services
or gig economy platforms. Stringent regulations limit possibilities to experiment and create uncertainty for
innovators, hampering investment in digital innovations and the emergence of new business models
(Planes-Satorra and Paunov, 2019). Furthermore, stringent regulations are barriers to competition and
reallocation, hindering productivity growth. Reducing them can boost the diffusion of digital tools and
maximise their impact on productivity (Sorbe et al., 2019, 2018). Product market regulations in Korea are
among the most stringent in the OECD, especially state involvement in business operations, barriers in
service and network sectors and barriers to trade and investment, which are among the highest across
OECD countries (Figure 3.19). Reducing barriers to trade and investment would promote foreign
investment in R&D and SME innovation through better connection to global innovation networks (2018
OECD Economic Survey of Korea). Services in Korea also face high trade barriers in transports and
telecommunication (Figure 3.20). These sectors are important for the development of manufacturing
servicification and reducing barriers in these sectors would enhance productivity. Indeed, there is evidence
of a positive association between services deregulation and productivity of manufacturing firms using
services as inputs, for example in the case of Czech Republic (Arnold et al., 2011).
Figure 3.19. Korea has high regulatory barriers to competition
Index scale 0 to 6 from most to least competition-friendly regulation, 2018
4.5
Korea Most competition friendly Least competition friendly OECD
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Public ownership Involvement in business Simplification and Administrative burdens on Barriers in service and Barriers to trade and
operations evaluation of regulations startups network sectors investment
Distortions induced by state involvement Barriers to domestic and foreign entry
Source: OECD Product Market Regulation Database.
StatLink 2 https://doi.org/10.1787/888934157777
Services like ride hailing and medical services are subject to strict regulations, hindering the development
of new business models or the commercialisation of new digital products. Companies like Uber and Kakao
Carpool struggle to service the Korean market, because of the “Passenger Transport Service Act” that
limits commercial use of private cars during rush hours (7-9 in the morning and 6-8 in the evening). Huinno
had to delay the launch of its wearable electrocardiogramme monitoring system until 2019, despite
finalising its development in 2015 (before the Apple 4 watch) because of the stringent regulations on
OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
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medical services. Regulatory sandboxes are recommended to enhance regulatory flexibility as they allow
firms to experiment innovative products and business models without being subject to all existing legal
requirements (2018 OECD Economic Survey of Korea). The government has introduced regulatory
sandboxes since January 2019 in areas such as FinTech, the medical sector, manufacturing, electronics,
telecommunication, energy and mobility. In terms of digital technology, regulatory sandboxes have been
approved for app-based platform technology, IoT, big data, blockchain, artificial intelligence and virtual
reality. Huinno was among the first firms to benefit from the regulatory sandboxes programme.
Furthermore, amid the COVID-19 outbreak, the ban on telemedicine services was temporarily lifted,
allowing patients to consult their doctors without risking mutual exposure to the virus (Box 3.1). In 2019,
195 projects were approved by the regulatory sandbox system and over 200 projects are aimed at in 2020.
The government also announced the designation of regulation-free special zones. Like regulatory
sandboxes, they allow firms to experiment innovative technologies in designated areas without restrictions
from regulations (digital healthcare in Gangwon, blockchain technology in Busan, autonomous driving in
Sejong and so forth). After four years at most, if a regulatory sandbox is considered effective and safe, it
can lead to the definitive suppression of the regulation that was temporarily waived, its amendment, or the
extension of the trial period. It can also lead to the creation of licences with a narrower scope, for example
for FinTech companies, which could be allowed to provide some banking services, without needing a full
banking licence. Follow up on this strategy should allow identifying regulation breaches and reviewing
regulations, notably in the case of telemedicine.
Figure 3.20. Korea should be more open to foreign entry and competition
Index scale 0 to 1 from least to most restrictive, 2019
1.0
Restrictions on foreign entry
0.8 Restrictions to movement of people
Other discriminatory measures
0.6 Barriers to competition
Regulatory transparency
0.4 OECD average STRI
0.2
0.0
Air transport Construction
Insurance Computer
Broadcasting
Telecom
Road freight transport
Distribution
Courier
Sound recording
Commercial banking
Accounting
Logistics
Engineering Architecture
Motion pictures
Rail freight transport
Martime transport
Legal
Transport Market bridging and Digital network Physical
supporting services infrasctructure
services
Note: OECD is the simple average across OECD countries. Logistics is computed as the simple average of the four logistic sectors.
Source: OECD STRI database, OECD calculations.
StatLink 2 https://doi.org/10.1787/888934157796
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Ensuring digital trust is key to digital development and well-being
Digital technologies provide a wide range of innovative products and services to individuals. However,
increasing online activities entail higher exposure to digital risks like privacy violations or cyberbullying, as
well as higher addiction to digital activities and tools. The COVID-19 outbreak also highlights the
importance of digital trust, as individuals and firms rely more on remote services like telework, online
classes and e-commerce (Box 3.1). Reaping the full well-being benefits of digital transformation requires
ensuring online security, as well as raising individuals’ awareness of digital downsides and dangers. This
implies the need for better digital education in schools and at work, better digital security technologies and
the involvement of the government to lead by example.
Online security must be improved
Ensuring trust in digital technologies is key to promote their adoption and diffusion among individual users.
A lack of online security or digital privacy will make users more reluctant to trust such technologies and
engage in the digital economy (OECD, 2019g). For instance, better trust in payment services is essential
for the development of e-commerce (OECD, 2019e). E-consumers must be protected against financial
losses resulting from fraudulent payment card use after completing an online payment. Greater openness
of the government to share online data and information previously unavailable to the public can promote
innovation in the public sector and improve people’s trust in institutions (OECD, 2019g). This in turn can
increase people’s trust in online activities.
E-government can also encourage firms to adopt digital technologies to exploit synergies between
digitalisation in the public and private sectors, and hence increase their productivity (Sorbe et al., 2019).
Korea performs well in this regard, ranking second in the world on the United Nations e-Government
Development Index (United Nations, 2020; Figure 3.21) and first among OECD countries in open-useful-
reusable government data (Figure 3.22). In June 2020, the Ministry of Interior and Safety presented the
post-Corona Digital Government Innovation Development Plan, following the October 2019 Digital
Government Innovation Promotion Plan. Its goal is to promote digitalisation in the public sector. The
expansion of non-face-to-face services will be accelerated through the use of mobile ID cards and the
MyData portal, which will allow people to use government services from their smartphones from 2021, as
well as download personal information held by public institutions, and submit that information directly to
public authorities and banks. Besides, online education will be expanded. The Korean government also
plans to increase the provision of customised services related to health check-ups, national scholarship
applications, civil defence education or tax payments. The openness of public data will be further promoted
to strengthen cooperation between the public and the private sectors, and support new industries such as
autonomous driving and healthcare. Finally, the government will further develop digital infrastructure in the
public sector by increasing 5G wireless networks and building a security control system using artificial
intelligence. Civil servants will also follow more training on digital government innovation (Ministry of
Interior and Safety, 2020).
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Figure 3.21. Korea is a leader in e-government
Index
1.00
0.98
0.96
0.94
0.92
0.90
0.88
0.86
JPN NOR ISL SGP NLD USA NZL GBR SWE AUS FIN EST KOR DNK
Source: 2020 United Nations E-Government Survey.
StatLink 2 https://doi.org/10.1787/888934157815
Figure 3.22. Korea has the highest score in open-useful-reusable government data
OURdata Index scores in the dimensions of data availability, accessibility and reusability, 2019
1.0
Data availability Data accessibility Government support for data re-use
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
TUR LTU SWE CHL CHE FIN DNK SVK DEU EST PRT LUX LVA GBR BEL ISR ITA CZE NOR POL USA NLD NZL AUT SVN GRC ESP MEX AUS CAN JPN IRL FRA KOR
Source: OECD OURdata Index on Open Government Data.
StatLink 2 https://doi.org/10.1787/888934157834
However, Korea has a relatively high share of individuals reporting security incidents, even though this
share has significantly decreased since 2010 (Figure 3.23). Security incidents like losing information, time
or device damaging after catching a computer infection (virus, worm, Trojan) are the most frequent, while
financial losses resulting from fraudulent messages (phishing), fake websites asking for personal
information (pharming) or fraudulent payment card use affect fewer users. For such security incidents,
Korea is close to the OECD average. However, Korea has the second highest share of Internet users
experiencing privacy violations in the OECD (malicious attacks, poor data security, accidental publication
of user data), which may hold back the development of on-line applications (Figure 3.24). There are also
growing concerns across countries about “predictive privacy harm” related to the use of big data by
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companies to predict individuals’ preferences and behaviour, which can harm their physical safety and
mental health (OECD, 2019g).
Figure 3.23. Online security incidents are relatively frequent in Korea
Percentage of individuals who report having experienced security incidents
%
40
2015 2010
35
30
25
20
15
10
5
0
CZE NLD SVK IRL SVN LVA LTU AUT DEU FIN TUR CHE GRC NOR POL ITA KOR GBR SWE ESP BEL EST MEX PRT DNK HUN FRA LUX
OECD
Note: 2017 for Korea and Mexico; 2014 for Chile and Switzerland. For Korea and Mexico, the share in 2015 is respectively 23.4% and 28.4%.
Source: OECD (2019g), calculations based on OECD ICT Access and Usage by Individuals Database.
StatLink 2 https://doi.org/10.1787/888934157853
Figure 3.24. Privacy violations are second highest in Korea
Share of Internet users who experienced abuse of private information on the Internet, 2015
%
8
7
6
5
4
3
2
1
0
CZE LTU LVA IRL SVN FIN GRC ISL EST DEU CHE SVK POL AUT FRA BEL NLD DNK NOR SWE HUN GBR MEX PRT LUX ESP TUR CRI ITA KOR CHL
OECD
Note: 2017 for Korea and Mexico; 2014 for Chile and Switzerland. For Korea, the share in 2015 is 7%.
Source: OECD (2019b), calculations based on OECD ICT Access and Usage by Individuals Database.
StatLink 2 https://doi.org/10.1787/888934157872
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Better online security can be achieved through higher skills, more robust digital security technologies and
the involvement of the government to lead by example. High-skilled individuals are more likely to be aware
of online security threats and find solutions to address them, like managing the access to personal
information online, using anti-tracking software and changing website settings to limit cookies (OECD,
2019f). A well-rounded set of skills in literacy, numeracy and problem-solving in technology-rich
environments improves individuals’ abilities to protect themselves against online security breaches.
Additional education from school and training explicitly dedicated to such digital issues can also increase
individuals’ awareness and help them adopt a safer online behaviour. Digital technologies such as
blockchains can also be powerful tools to strengthen safety of transactions and information exchange or
block hacking (quantum cryptography communication). In this regard, Korea lags behind countries like the
United States, Japan or China (IITP, 2019). Research and investment in these next-generation security
technologies must be promoted with financial incentives.
Towards a sound digital society and culture
Other downsides of digital transformation include cyberbullying and other forms of online harassment like
cyber-stalking, as well as excessive dependence on the Internet or smartphones. Hidden behind the
anonymity provided by the Internet, bullying perpetrators feel freer to harass their victims in their public
and private lives, at any time, by spreading false rumours or sending threats. Such online harassment can
generate severe mental health problems, leading in extreme cases to suicide (OECD, 2019g), as was the
case for two K-pop singers in 2019. Children and teenagers are more exposed to online harassment,
especially as smartphones keep them connected at all time to the Internet and social networks. Parents
with higher digital skills are more likely to educate their children about a sound use of the Internet and
address cyberbullying issues (OECD, 2019f). ICT education at school, as well as information campaigns
on Internet cyber violence prevention are key to promote a sound web culture.
The increasing use of new technologies and devices may also generate health problems (such as sleep
disorder, depression or stress) and harm social relationships, mainly because of the constant connectivity
and the wide range of online activities (Montagnier, 2016). This mainly affects youth and children who can
end up missing school. In Korea, youth aged 10-29 are at much higher risk of Internet or smartphone
addiction than other age categories. In the case of smartphone addiction, risks are also higher for children
less than 10 years old (Figure 3.25). Provide specific and compulsory ICT courses in school and training
in firms, can help raise awareness of dangers related to digital addiction and reduce it.
The relationship to work has changed amid the COVID-19 outbreak as more firms resorted to telework to
contain the spread of the virus. In the United States 5% of working days were spent at home before the
outbreak, against 40% during the pandemic (Bloom, 2020). Korean firms also rapidly turned to telework.
Based on a survey of 300 enterprises, 45.8% of large enterprises, 30.6% of mid-sized enterprises and
21.8% of SMEs practiced teleworking after the COVID-19 outbreak, against respectively 9.7%, 8.2% and
6.7% before the outbreak (Korea Chamber of Commerce and Industry, 2020). The Korean government
also encouraged the use of flexible work arrangements in SMEs – staggered hours, work from home,
remote work – by simplifying the procedures to apply for a subsidy from late February 2020. The subsidy
can go up to KRW 5.2 million (USD 4 300) a year per worker. After the COVID-19 crisis, the number of
teleworked days is expected to decrease, while remaining higher than before the pandemic. In the United
States, 20% of working days are likely to be spent at home – four times higher than before the COVID-19
crisis (Bloom, 2020). Beyond containing the spread of the virus, teleworking can improve firms’ productivity,
workers’ well-being and help tackle other economic and social issues, such as gender and regional
inequalities, housing, carbon emissions and traffic congestion (Bloom et al., 2014; OECD, 2020c).
However, teleworking can also have adverse effects, such as lower productivity for workers who lack an
appropriate working environment at home, less innovation because of impaired communication or
increased hidden overtime. To make the most of teleworking, policymakers can promote the diffusion of
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best management practices, self-management and ICT skills, investment in home offices, and fast, reliable
and secure ICT infrastructure for firms and workers (Bloom, 2020; OECD, 2020c).
Figure 3.25. The share of Korean youth at risk of addiction to Internet and smartphones is high
A. Internet addiction, 2015 B. Smartphone addiction, 2018
% Potential risk High risk % Potential risk High risk
14 35
12 30
10 25
8 20
6 15
4 10
2 5
0 0
All 3-9 10-19 20-29 30-39 40-49 50-59 All 3-9 10-19 20-29 30-39 40-49 50-59
Age group Age group
Source: Montagnier (2016), calculations based on based on National Information Society Agency of Korea (NIA) Survey on Internet
overdependence 2015; NIA Survey on smartphone dependence.
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Recommendations to promote the diffusion of technology to tackle the COVID-19 shock and to
boost productivity and well-being
Key recommendations in bold
MAIN FINDINGS RECOMMENDATIONS
Diffusion of technology
Product market regulations remain tight. However, the government has Use regulatory sandboxes to identify excessive regulation and
introduced a programme to shift the burden of proof from the regulated revise or abolish it. Facilitate telemedicine, as long as it is
to the regulator and regulatory sandboxes are allowing firms in new compatible with preserving patient safety and quality of care.
technologies and new industries to test their products and business
models without being subject to all existing legal requirements. The
temporary lifting of the ban on telemedicine during the COVID-19
outbreak illustrates the potential benefits of a timely review of
regulations.
Subsidies to SMEs have limited effects on promoting growth and Subsidies to SMEs should focus more on promoting growth and
boosting innovation and productivity. Despite the efforts of the Korean boosting innovation and productivity. Provide SMEs in
government to better target subsidies, the latter still allow the survival manufacturing and services with innovation vouchers that can
of low-productivity companies. be used to commission R&D and studies on potential for new
technology introduction.
Korean SMEs lag behind in the adoption of sophisticated digital Further strengthen the collaboration of SMEs with large enterprises
technologies, hampering telework and adaptation to digitalisation. and with academia, for instance through an open collaborative
network to design new products and services, and exchange data.
Korean SMEs face a lack of funds and expertise on project feasibility, Reallocate financial support for technology R&D to commercialisation
which prevents them from launching new products developed through for SMEs that successfully developed new technology.
R&D.
Lifelong learning in digital fields
SMEs face a lack of skilled workers, notably in digital fields, and their Provide more basic ICT courses to SME employees and older
employees have limited access to training. Managers’ awareness of persons, reduce training costs for SMEs and provide targeted
the potential of digital technologies is insufficient. The digital skills gap adult learning programmes to SME managers.
between youth and older generations is the highest in the OECD.
Most teachers feel they are not sufficiently prepared to use ICT for Make refresher training mandatory for adult learning teachers to
teaching, which has been a hurdle during the COVID-19 school update their skills on a regular basis.
closures.
Fast technological change implies a constant need to update and Leverage distance and modular learning for digital skills and lifelong-
develop new skills throughout life. SME employees face time learning to provide a wide range of courses and more flexibility to
constraints preventing them to participate to training and ICT training learn and work at the same time, and define standards and good
in SMEs is scarce. practices to better signal their quality.
Lack of information or difficulties to find it because of numerous Merge all online career guidance platforms to centralise information
competing online career guidance platforms, is another barrier to on available training programmes for SMEs and help users navigate
training for SME workers. training options.
More specialists and high-level researchers in fourth industrial Introduce courses at school, develop tertiary graduation programmes
revolution core technologies like artificial intelligence and big data are and provide trainings in firms dedicated to artificial intelligence and
needed. big data.
Digital security and well-being
A relatively high share of individuals experienced privacy violations Provide specific ICT courses in schools and training in firms to raise
and youth are at higher risk of Internet and smartphone addiction. awareness of digital dangers such as cyberbullying, privacy violation
Privacy issues also arose in the context of the COVID-19 crisis control and addiction to ICT technologies.
measures.
Korea lags behind in the adoption of next-generation security Reallocate R&D support to promote research and investment in next-
technologies like blockchains and quantum cryptography generation security technologies.
communication.
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123
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OECD ECONOMIC SURVEYS: KOREA 2020 © OECD 2020
OECD Economic Surveys
KOREA
Economic activity has contracted less in Korea than in other OECD countries, thanks to the prompt
and effective reaction of the authorities to contain the spread of the COVID-19 virus and to the wide-ranging
government support to households and businesses. Nevertheless, the pandemic generates strong headwinds.
Huge uncertainty surrounds global economic prospects and hence the outlook for exports, which are a key
engine of the Korean economy. The crisis will have a lasting effect on some economic sectors and therefore
require significant resource reallocation. The impact of the COVID-19 pandemic compounds pre-existing
challenges, notably rapid population ageing and relatively low productivity in parts of the economy. This Survey
draws on the OECD Jobs Strategy to outline policies to enable the creation of more and higher-quality jobs
and foster more inclusive growth. It also highlights how further digitalisation can boost productivity growth,
competitiveness and well-being.
SPECIAL FEATURES: AGEING, DIGITALISATION
PRINT ISBN 978-92-64-73384-8
PDF ISBN 978-92-64-49619-4
Volume 2020/9
August 2020
ISSN 0376-6438
2020 SUBSCRIPTION
(18 ISSUES)
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