■ Despite recent economic weakness, the persistence of low unemployment reflects two opposing forces: rising worker discouragement and improvements in matching efficiency. - These two forces were already placing downward pressure on unemployment before the COVID-19 crisis. As labor demand strengthened after the crisis, unemployment fell sharply and has remained low despite recent softening in employment conditions. - Advances in matching technology and demographic shifts have substantially improved matching efficiency, continuing to push down the unemployment rate. - At the same time, the increasing number of discouraged workers, especially among the young, has mechanically lowered the headline unemployment rate. ■ This implies that low unemployment does not necessarily signal improved employment conditions. - A substantial share of the unemployment decline reflects young workers exiting the labor market. This suggests that, as the job creation capacity of firms has weakened and the labor market duality has deepened, a growing share of young people have become pessimistic about securing high-quality, regular employment and have stopped searching for work altogether. - If these structural barriers that discourage job search among the young become entrenched, participation in an already shrinking workforce could decline further, posing risks to social cohesion. ■ Accordingly, efforts to improve matching efficiency should continue alongside measures to reduce labor market duality and strengthen incentives for workforce participation. - It would be advisable to improve business productivity to create quality jobs, ease the labor market duality, and gradually align the education system with industry needs. - Additionally, in-depth analysis of the growing “taking a break“ population should continue to inform the detailed design of mechanisms to help those who have been out of the workforce for extended periods return to work.

■ Despite recent economic weakness, the persistence of low unemployment reflects two opposing forces: rising worker discouragement and improvements in matching efficiency. - These two forces were already placing downward pressure on unemployment before the COVID-19 crisis. As labor demand strengthened after the crisis, unemployment fell sharply and has remained low despite recent softening in employment conditions. - Advances in matching technology and demographic shifts have substantially improved matching efficiency, continuing to push down the unemployment rate. - At the same time, the increasing number of discouraged workers, especially among the young, has mechanically lowered the headline unemployment rate. ■ This implies that low unemployment does not necessarily signal improved employment conditions. - A substantial share of the unemployment decline reflects young workers exiting the labor market. This suggests that, as the job creation capacity of firms has weakened and the labor market duality has deepened, a growing share of young people have become pessimistic about securing high-quality, regular employment and have stopped searching for work altogether. - If these structural barriers that discourage job search among the young become entrenched, participation in an already shrinking workforce could decline further, posing risks to social cohesion. ■ Accordingly, efforts to improve matching efficiency should continue alongside measures to reduce labor market duality and strengthen incentives for workforce participation. - It would be advisable to improve business productivity to create quality jobs, ease the labor market duality, and gradually align the education system with industry needs. - Additionally, in-depth analysis of the growing “taking a break“ population should continue to inform the detailed design of mechanisms to help those who have been out of the workforce for extended periods return to work.

■ As in Japan’s case, the slowdown in productivity growth has been a major driver of declining capital returns in Korea, leading to a shift from domestic to overseas investment. - Looking ahead, a shrinking working-age population will weaken labor input and domestic capital returns, further accelerating the shift toward overseas investment. - A productivity slowdown directly reduces GDP and also shrinks the domestic capital stock, amplifying the total impact on GDP to about 1.5 times the direct effect. - In Japan, where productivity and demographic shifts occurred about twenty years earlier than in Korea, slower productivity growth led to a marked loss of economic dynamism and greater reliance on investment income from abroad. ■ Therefore, restoring growth momentum will require sustained structural reforms that boost productivity. - If the productivity slowdown persists, adverse effects may broaden, particularly for those who depend heavily on labor income. - This will require building an environment that enables innovative firms to enter and unproductive firms to exit, alongside a more flexible labor market that supports economy-wide productivity growth. ※ The shift to overseas investment arises from declining domestic productivity and helps offset the resulting loss in national income. It would therefore not be advisable to restrict it by policy. ※ Since the current account surplus is equivalent to net overseas investment, an increase in the surplus should be interpreted with caution.

■ As in Japan’s case, the slowdown in productivity growth has been a major driver of declining capital returns in Korea, leading to a shift from domestic to overseas investment. - Looking ahead, a shrinking working-age population will weaken labor input and domestic capital returns, further accelerating the shift toward overseas investment. - A productivity slowdown directly reduces GDP and also shrinks the domestic capital stock, amplifying the total impact on GDP to about 1.5 times the direct effect. - In Japan, where productivity and demographic shifts occurred about twenty years earlier than in Korea, slower productivity growth led to a marked loss of economic dynamism and greater reliance on investment income from abroad. ■ Therefore, restoring growth momentum will require sustained structural reforms that boost productivity. - If the productivity slowdown persists, adverse effects may broaden, particularly for those who depend heavily on labor income. - This will require building an environment that enables innovative firms to enter and unproductive firms to exit, alongside a more flexible labor market that supports economy-wide productivity growth. ※ The shift to overseas investment arises from declining domestic productivity and helps offset the resulting loss in national income. It would therefore not be advisable to restrict it by policy. ※ Since the current account surplus is equivalent to net overseas investment, an increase in the surplus should be interpreted with caution.