🚨 Korea's Potential Growth Rate Crisis: Finding Solutions Through Technology Innovation and Labor Reform

Today Korean Economic News | 2025.05.22

📌 Growth Potential Falls Due to Low Birth Rate & Aging, 1%p Increase Possible Through Labor & Technology Reform

💬 Korea's potential growth rate is shrinking due to low birth rates, aging population, and weak technological innovation. The Bank of Korea and KDI analyzed that potential growth rate can be increased by up to 1 percentage point through elderly re-employment, expanding female and foreign workforce, and technological innovation. The OECD forecasts that if current birth rates continue, Korea's population will be cut in half by 2082, with people aged 65 and over making up 58% of the total population. Experts warn that economic recovery will be difficult without structural reforms.

1️⃣ Easy Understanding

Korea's economy is becoming harder and harder to grow. The population is decreasing and aging is accelerating, but new technology development is lacking, so the economy's ability to grow is declining.

The term 'potential growth rate' may be difficult, but simply put, it means 'how much the economy can grow in a year when our country tries its best.' In the 1990s, 7-8% annual growth was possible, but now it has dropped to about 2%.

The biggest problem is the lack of people. The birth rate is 0.72 children, the world's lowest level, and more people die than babies are born each year. This means fewer people can work and more elderly people need to be supported.

The second problem is slow technological development. In the past, we just had to catch up with advanced countries' technology, but now we are at a stage where we need to create new technologies ourselves. However, research and development investment efficiency is low, and it is difficult for innovative companies to emerge.

But there are also solutions. The Bank of Korea and KDI suggested three methods. First, allow healthy elderly people to work longer. Second, increase participation of women and foreign workers. Third, promote technological innovation to increase productivity.

According to OECD forecasts, if current trends continue, Korea's population will shrink to 24 million by 2082, half of what it is now, and 6 out of 10 people will be over 65. This would create an unimaginably super-aged society.

If we don't start structural reforms right now, Korea's economic future could become dark. However, with appropriate policies and social efforts, we might be able to turn this crisis into an opportunity.

2️⃣ Economic Terms

📕 Potential Growth Rate

Potential growth rate means the maximum economic growth rate that a country can achieve without inflation.

• It is determined by the growth rates of production factors such as labor, capital, and technological development.
• If the actual growth rate is higher than the potential growth rate, inflation is likely to occur.
• Korea's potential growth rate has fallen from 7-8% in the 1990s to the current 2% level.

📕 Working-Age Population

Working-age population means the population aged 15 to 64 who can participate in economic activities.

• This is the core age group for economic activities and an important factor that determines a country's economic growth potential.
• Korea's working-age population began to decline in 2017.
• It is expected to shrink to 60% of current levels by 2070.

📕 Total Factor Productivity

Total factor productivity means the productivity improvement that cannot be explained by increases in labor and capital inputs.

• It measures productivity from technological progress, efficiency improvements, and institutional development.
• It is a key indicator showing the qualitative aspect of economic growth.
• Korea's total factor productivity growth rate has slowed from 4% in the 1990s to less than 1% recently.

📕 Employment Rate

Employment rate means the percentage of employed people among the population aged 15 and over.

• It is an indicator showing a country's labor market situation and the degree of economic activity participation.
• Korea's employment rate is lower than the OECD average, especially for women and young people.
• A 1%p increase in employment rate has the effect of raising potential growth rate by 0.4-0.5%p.

3️⃣ Principles and Economic Outlook

✅ Impact of Population Structure Changes on Economic Growth

• We will analyze the structural impact of low birth rates and aging on the Korean economy.

  • First, economic growth momentum is weakening due to the decline in working-age population. Korea's working-age population peaked at 37.57 million in 2017 and then turned to a declining trend. According to Statistics Korea's forecast, it will decrease to 22 million by 2070, which is 60% of the current level. This means more than just a labor shortage - it means a decline in overall economic vitality. The elderly population (65 and older) that one working-age person must support is expected to increase more than five times from the current 0.25 people to 1.3 people in 2070. This creates a structure where the population creating added value through economic activities decreases while the population receiving welfare benefits increases.

  • Second, aging affects the economy through changes in consumption patterns and savings rates. The elderly have lower consumption tendencies than young people and mainly consume medical expenses and daily necessities. This brings about changes in industrial structure along with shrinkage of the overall consumer market. Also, as the elderly spend more than their income, they reduce savings or dispose of assets. Nationally, this can lead to lower savings rates and reduced investment capacity. Korea's household savings rate has already fallen from 4.6% in 2010 to 2.9% in 2023. Lower savings rates can lead to insufficient investment funds, creating a vicious cycle that further reduces economic growth potential.

  • Third, declining birth rates cause long-term crisis by cutting off future labor supply. Korea's total fertility rate was 0.72 children in 2023, the world's lowest level. To maintain the population at current levels, the birth rate needs to be 2.1 children, but Korea is at one-third of that level. What's more serious is that the declining birth rate trend continues. Since 2022, the 'dead cross' phenomenon has begun where more people die than babies are born, causing natural population decline. The OECD forecasts that if current trends continue, Korea's population will shrink to 24 million by 2082. This is half the current level, meaning a sharp contraction of economic scale.

• Population structure change is not just a numbers problem, but a fundamental challenge that requires changing the economic growth model itself. We need to transition from quantitative growth to qualitative growth, from labor-intensive to technology-intensive economy.

✅ Expanding Growth Potential Through Labor Market Reform

• We will look at ways to increase labor utilization to boost potential growth rate.

  • First, expanding economic participation of the elderly is important. Korea's elderly employment rate is higher than the OECD average, but it is mainly concentrated in low-wage, unstable jobs. There are particular concerns about losing skilled labor as the baby boom generation (born 1955-1963) enters full retirement. To solve this, we need to extend retirement age, introduce gradual retirement systems, and strengthen re-employment support. According to Bank of Korea analysis, if employment rate for those 65 and older increases by 5%p, potential growth rate rises by 0.2%p. Currently, the employment rate for those 65 and older is 34%, and raising this to 40% could yield significant growth effects. However, it's important to create quality jobs that can utilize the experience and skills of the elderly, not just increase the number of jobs.

  • Second, we need to expand the workforce by improving women's employment rates. Korean women's employment rate is 57.5%, lower than the OECD average (61.3%). The career interruption problem for women in their 30s is particularly serious, caused by childbirth and childcare. Raising women's employment rate to OECD average levels could increase potential growth rate by about 0.3%p. This requires expanding childcare facilities, improving parental leave systems, spreading flexible work arrangements, and eliminating gender wage gaps. Career interruption of highly educated women is especially a national waste of human resources, so policies supporting work-life balance are urgent. France and Sweden are model cases that achieved both high birth rates and women's employment rates through active women's employment policies.

  • Third, utilizing foreign labor is also an important alternative. Currently, Korea has about 900,000 foreign workers, accounting for 3.3% of total employees. This is lower than Germany (12%) and Japan (4.1%). Increasing foreign labor by 100,000 has the effect of raising potential growth rate by 0.1%p. However, expanding foreign labor can cause social conflicts and job competition concerns, requiring careful approach. We should focus on attracting high-skilled workers rather than simple labor, and support stable settlement through Korean language education and social integration programs. Singapore and Canada are contributing to economic growth by attracting excellent foreign talent through selective immigration policies.

• Labor market reform is not simply about increasing the number of workers, but about creating high-productivity jobs and building an inclusive labor market where all classes can participate in economic activities.

✅ Productivity Improvement Strategy Through Technological Innovation

• We will look at ways to secure economic growth momentum through technological development and innovation.

  • First, recovery of total factor productivity growth rate is urgent. Korea's total factor productivity growth rate has plummeted from 4% in the 1990s to less than 1% recently. This shows the limits of technology catch-up growth, and now we need to transition to technology-leading growth. Increasing total factor productivity growth rate by 1%p can raise potential growth rate by 0.5%p, making it the most effective growth driver. However, productivity improvement doesn't happen overnight. R&D investment expansion, strengthening corporate innovation capacity, regulatory reform, and education system innovation must be pursued comprehensively. Securing competitiveness in new technology fields such as digital transformation, artificial intelligence, and biotechnology suitable for the Fourth Industrial Revolution era is particularly important.

  • Second, building an innovation ecosystem and activating startups is necessary. Korea's large corporation-centered economic structure makes it difficult for innovative small and medium enterprises and venture companies to grow. There is a lack of startup culture that tolerates failure and supports re-challenges like Silicon Valley or Israel. Also, excessive regulations make it difficult for new business models to emerge. To create an innovation ecosystem, we need to expand regulatory sandboxes, activate venture investment, change social perceptions of failure, and strengthen win-win cooperation between large and small companies. The government is expanding innovation support through 'Digital New Deal' and 'K-New Deal 2.0', but it will take time for results to appear.

  • Third, qualitative improvement of human capital is important. As the speed of technological development accelerates, existing knowledge and skills are quickly becoming obsolete. Therefore, continuous capacity development through lifelong education is necessary. We especially need to transition to an education system that can develop capabilities needed for future society such as digital literacy, creativity, and problem-solving skills. University education should also be reorganized to meet industry needs, and vocational training programs should be expanded. We need to create a Korean talent development model by benchmarking Germany's Meister system and Finland's educational innovation. We also need to improve visa systems to attract excellent foreign talent and improve research environments.

• Technological innovation has limits with government policy alone. Sustainable growth is possible only when companies' voluntary innovation efforts, strengthened basic research by universities and research institutes, and fostering an innovation culture throughout society are achieved together.

4️⃣ Conclusion

Korea's declining potential growth rate is an unavoidable reality, but we can slow the pace of decline and create new growth drivers through active structural reforms. The important thing is to act right now.

Population structure changes are already underway and are an irreversible trend. But there's no need to despair. Many developed countries like Japan and Germany are experiencing similar problems and are finding their own solutions. We too must establish and implement strategies that fit Korea's characteristics.

Labor market reform is the policy that can show the most immediate effects. We need to increase economic participation of the elderly and women, and utilize foreign labor when necessary. However, this is only a temporary solution. Fundamentally, we need to change to an economic structure that can create more added value with fewer workers by increasing productivity.

Technological innovation and productivity improvement are the most important tasks from a long-term perspective. We need to build innovation capacity through R&D investment expansion, regulatory reform, and educational innovation. Securing competitive advantages in future growth fields such as artificial intelligence, biotechnology, and renewable energy is particularly important.

Above all, the entire society must recognize the need for change and cooperate. Companies should increase innovation and investment, the government should pursue regulatory reform and infrastructure construction, and individuals should develop capabilities through lifelong learning.

Crisis is opportunity. If we can turn the challenge of the demographic cliff into an opportunity for innovation and reform, Korea can leap forward as a developed country with a new growth model. Now is the time to start that change.