Sean O'Malley

A report by the Korea Employment Information Service (KEIS) garnered much press attention recently. The report concluded that Korea must add 900,000 more workers to its total labor force by 2032 to maintain an economic growth rate of 1.9-2.1 percent. This is based on the fact that the economically active population was projected to increase by a paltry 316,000 workers from 2022 to 2032. To counteract this projected shortfall of workers, the report calls for a systematic and preemptive response from the government, including policy efforts to bolster employment opportunities that young people desire, child care that allows women to remain in the workforce, wage system reorganization, and retraining of the elderly to prolong their period of economic activity.

According to the report, Korea's economically active population grew by nearly four million workers, about 16 percent, from 2010 to 2022. Over that same period, the country maintained a GDP growth rate averaging 2.69 percent annually (excluding the COVID-affected years of 2020 and 2021). This may lead one to ask, "Why does Korea need a historically high number of workers in 2032 to achieve growth rates that are less than the average rate for the past 10 years?"

There are numerous structural issues in Korea's labor market. A large gender wage gap, a large wage gap by enterprise size, age-dictated mandatory retirement, and young people shunning small and medium-sized enterprises (SMEs) are a few such issues. Still, regular workers have increased from just over 50 percent of employed workers to around 58 percent since 2017, which is markedly positive. So, how did an increasing number of workers overall and an increasing number of regular workers seemingly produce minimal returns over the past decade?

Korea's labor productivity rate is, in fact, currently quite low. In relative terms, it is only 74 percent of the OECD average, 55 percent compared to that of the United States, and only 31 percent compared to Ireland, which leads the OECD. Labor productivity represents the volume of output produced per unit of labor input. The OECD explains that "the ratio between output and labor input depends to a large extent on the presence of other inputs, such as physical capital (e.g. buildings, machinery and transport vehicles) and intangible assets used in production (e.g. intellectual property assets), technical efficiency and organizational change."

Moreover, according to the OECD, in 2016, Korea's productivity in market services was 43 percent of the productivity level of the manufacturing sector. Worse still, SMEs were 70 percent less productive than large firms. Such incredible gaps, much higher than OECD averages, beg the question, "Does Korea need 900,000 workers as a means to compensate for incredibly inefficient productivity?" After all, an increase in labor productivity, including an increase in worker efficiency, may very well solve any potential labor shortage. As workers become increasingly efficient, some sectors will necessarily shed workers and other sectors may hire them.

There are a number of trends converging here for Korea. One is a prolonged trend of lackluster labor productivity compared to its OECD counterparts. A second is the adoption of technology by large manufacturing firms, with Korea already housing some 20,000 smart factories and looking to add another 10,000 by 2030. A third is Korea's demographic crisis with a rapidly aging society. Under these circumstances, a pronounced increase in labor productivity from SMEs and the services industries would be welcome in the market. It could drastically increase GDP while compensating for a shortfall in labor or possibly reversing the need for additional labor.

Add to this another factor. In a landmark 2013 study, Frey and Osborne concluded that 47 percent of all U.S. employment would be subject to replacement by technologies available in one or two decades. They drew that conclusion just over one decade ago. Since then, technological solutions have continued increasing, with artificial intelligence (AI) being the latest, high-profile addition to solutions that can displace workers. Korea is not the United States, but they are both advanced economies with similar sectoral outlooks, so it is not a stretch to apply Frey and Osborne's conclusions to Korea.

The worrying prospect here is that economic models may not be able to account for the rapid pace of technological advancement, especially in the age of AI. KEIS does an admirable job of trying to account for trends of technology adoption as reflected in industry surveys. However, considering the large gaps in productivity prevalent in Korea's labor market, one may question how accurate the reflection is being cast. Survey respondents may project a fairly negative outlook on short- to medium-term trends, considering productivity gaps.

In the end, it seems difficult to know whether the KEIS is correct in its conclusion that Korea needs an additional 900,000 workers by 2032. They seemingly focused primarily on demographics for their main conclusion, when accounting for inefficiencies in labor productivity and the potential for an increase in the pace of technological advancement, may change employment prospects significantly.

Although I believe the number of additional workers needed may be in question, one can hardly argue with KEIS' call for the government to take a systematic approach to labor difficulties here in Korea. There is a long list of structural issues in need of correction. A number of those are recorded in the report. I would suggest improvement in worker and labor productivity in the services sector and SMEs should be one new priority placed near the top of that list.

Sean O'Malley (seanmo@dongseo.ac.kr) is a tenured professor of international studies at Dongseo University, where he teaches classes on international relations and technology in society. He has previously published on South Korea's economic underperformance in the journal Asian Women.