KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Research Monograph KOR The Impact of Artificial Intelligence on the Labor Market and Policy Implications

This report provides an overview of the recent advancements in artificial intelligence (AI) and examines its potential to automate jobs in the Korean labor market. Through an analysis that merges expert assessments of AI capabilities with the skill profiles of occupations in Korea, it is found that, as of 2023, 38.8% of current jobs are at risk of having over 70% of their tasks automated. Predictions for 2030 suggest that nearly 90% of tasks across 90% of existing job types might be subject to automation, if the current task structure should remain as it is.

Nevertheless, the technical feasibility of automation does not directly translate to an imminent risk of automation. As of the end of 2021, only 2.7% of private firms with more than ten employees had adopted AI according to official statistics. When considering the differential AI adoption rates by firm size, it is estimated that about 10% of the workforce is exposed to AI.

In pursuit of a more nuanced understanding of the actual risk posed by automation, this research delves into the impact of increased AI exposure within local labor markets. The findings suggest that while AI's introduction does not meaningfully affect total employment, it tends to lower earnings, with women's average earnings disproportionately affected. More granular analyses indicate that an increase in AI exposure, driven by plausibly exogenous factors, has primarily resulted in diminished employment and earnings opportunities for younger workers at the nascent stages of their careers.

Drawing from these findings, this report proposes policy recommendations to navigate the challenges posed by AI in the labor market effectively.

Summary

Policy Study KOR Changes in the employment structure and income gap before and after COVID-19 : Analysis using Quarterly Data of KLIPS

COVID-19 first appeared in Korea in January 2020, reshaping our daily lives over nearly three years. The pandemic exerted a substantial influence on the labor market, resulting in a decline of 200,000 to 400,000 jobs in March 2020 compared to the same month the previous year. By January 2021, when the pandemic peaked in Korea, job losses approximated 1 million. Nevertheless, from March 2021 onward, employment trajectories showed a rapid ascent, and by September 2022, indicators seemed to have returned to pre-COVID levels.

Against this backdrop, this report poses three research inquiries. First, has the employment structure of our labor market undergone any transformation before and after the COVID-19 disruption? Second, while the quantitative recovery of employment is observed, has its quality, i.e., wage (income), been adequately restored to its preceding state? The purpose of these two questions is to determine if the employment shock caused by the pandemic disproportionately affected certain worker cohorts. The third query endeavors to identify factors external to the pandemic that might have exerted influence on the labor market, specifically exploring potential reasons for the observed deviation in recent employment patterns from historical trends.

This study sourced datasets spanning the 18th (2015) to the 24th (2021) series of the Korean Labor & Income Panel Study (KLIPS). The annual data was restructured into a quarterly format, thereby facilitating an analysis of employment dynamics across pre- and post-COVID intervals. Quarterly employment figures were derived from individual employment records curated by KLIPS to examine labor state transitions and associated income fluctuations within the quarterly timeframe. This quarterly analytical paradigm offered an advantage in capturing more short-term job transitions than annual data might have.

Summary

KDI FOCUS OECD Average Annual Hours Worked: Comparative Analysis and Implications

The OECD statistics on annual hours worked per person are often cited as evidence for Korea’s long working hours, but this in fact tends to be the result of the nation’s high proportion of self-employed workers and low proportion of part-time workers. When this distinct employment composition is taken into account, the difference between Korea’s hours worked and those of other OECD countries turns out to be much less significant compared to previous estimates. However, Korea’s hours worked do remain relatively longer even after such an adjustment. Therefore, it is important to figure out and thereby address underlying institutional factors of unproductive long working hours. Furthermore, flexible and choice-based working arrangements should be promoted for improving labor market efficiency.

- Since the proportion of self-employed and parttime workers differs from country to country, inappropriate to make direct comparisons of the average hours worked per person across different countries without considering such factors.

- Korea’s annual hours worked per worker are rapidly declining, primarily due to improvements in productivity resulting from economic growth and institutional efforts to reform long working practices.

- Annual hours worked per person tend to increase when the proportion of self-employed individuals among total employment rises, and decrease when the proportion of part-time workers increases.

- Compared to other countries, Korea shows longer annual hours worked per person due to a higher proportion of self-employed and a lower proportion of part-time workers. Controlling for these differences in employment composition, the gap in annual hours worked between Korea and other OECD countries falls by approximately 31%.

- However, even when accounting for the impact of the proportion of selfemployed and part-time workers, Korea remains among the nations with extended hours worked.

- Approximately 33% of the reduction in Korea’s annual hours worked per worker during 2010-2021 is attributable to the decrease in the proportion of self-employed workers and the increase in the proportion of part-time workers.

- Comprehensive and concerted policy efforts are necessary to facilitate a more inclusive labor market that accommodates diverse workforce groups, endorsing flexible working hours options and choice-based working arrangements.

Summary

KDI Policy Forum Wage Inequality: How and Why it has Changed over the Decades

■ From 1980 to 2016, Korea exhibited ups and downs in wage inequality and a slowdown in wage
growth.

- Wage inequality fell in the 1st phase (1980-1994), rose in the 2nd (1995-2007), and fell again in the 3rd (2008-2016).

- The annual growth rate of the real median wage plummeted from 9.2% in the 1st phase to 4.0% in the 2nd and then to 1.1% in the 3rd.

■ So far as wages are a form of compensation for the skills provided, wage inequality is affected by the changes in the supply of and demand for skills.

- An important indicator of skill is the educational attainment of workers. The demand for high-school graduates rapidly increased in the 1st phase, weakening the wage premium of college graduates and reducing wage inequality. The situation reversed in the 2nd phase with a sharp upturn in the demand for college graduates, in their wage premium, and in wage inequality. In the 3rd phase, the wage premium of the latter dipped again as their supply continued amid the subdued demand for them.

- The large demand for high-school graduates observed in the 1st phase may derive from the rising demand for mid-skilled workers by the heavy and chemical industry while the growing demand for college graduates observed in the 2nd phase may be the result of an increasing demand for high-skilled workers driven by technological progress.

■ To accelerate the wage growth while keeping wage inequality in check, technological progress should be encouraged and the quality of higher education upgraded.

Summary

Research Monograph KOR A Decade after the Global Financial Crisis and a New Growth Agenda for the Korean Economy

1. Shift in the Economic Policy Paradigm

Most notable among the changes in major economies in the wake of the 2008 global financial crisis is the shift in the economic policy paradigm in regards to the expansion of the government's role in the market. Consequently, growth agendas are seeking to enhance growth potential and a policy combination that could resolve structural problems to improve growth sustainability.

In Korea, although have been studies that linked the decline in the growth rate to problems in the social structure such as income inequality, the majority were unable to go beyond the trade-off between growth and distribution. After the global financial crisis, however, debates have grown over the fact that actively responding to social problems can contribute to sustainable growth. There is growing recognition that growth and distribution are no longer a target of contradicting policies and can be pursued in a complementary manner.

Thus, even if growth policies can satisfy the demands from an era of a paradigm shift to a universally strengthened policy, and presents the explicit goal of actively responding to concerns that the economy will be stuck with slow growth, the validity and effectiveness of the policies need to be constantly checked and supplemented. This study intends to analyze the post-crisis progress made on addressing Korea’s socioeconomic issues and to provide a basis to explore whether social structural phenomena, now being the target of policy correction due to their role in current problems, will be actually and empirically identifiable beyond some logic. This study analyzed the structural changes in major sectors that are considered as an important premise in planning and executing policies for sustainable growth but require a more thorough review. It also aims to ascertain how these changes are related to the key growth factors such as productivity.

2. Analysis of the Factors of the Recent Growth in the KoreanEconomy

This study first looks into slowing economic growth, the most obvious macroeconomic change faced by Korea since the global financial crisis. In particular, by analyzing the changes in growth factors using the growth accounting method, this study rechecked whether the fall in the growth rate was due to cyclical factors or was driven more by long-term structural characteristics.

According to the authors, the decline in economic growth in 2011-2017 can be explained by the drop in the contribution of physical capital and total factor productivity (TFP). Based on the finding that the decreased growth in TFP led to the reduced growth in marginal capital productivity and thus, diminished the contribution of material capital, the authors consider it too early to conclude that investment in physical capital has been stagnant since the global financial crisis. In addition, considering that Korea’s growth capacity is slowing on rapidly aging demographics, the future will be dependent on how well the productivity growth can buffer the pace of slowing growth. Even with continuous efforts to enhance productivity, Korea’s economic growth in the 2020s is expected to slow down to about an annual 2% on average. This result implies that the slowing growth of the Korean economy can be seen as a long-term structural phenomenon, and that a clearer understanding of the structural economic changes is needed when designing responsive policies.

3. Corporate Labor Share of Income and Market Dominance

This study found that contrary to domestic studies stating that labor share has continued to descend since the foreign exchange crisis in the late 1990s, large enterprises—subject to the external audit system—exhibited a rebound since the 2000s following a decline from the early 1990s. The study focuses on 'market changes' such as technological progress, growing trade represented by globalization, and the increase in monopoly profit as factors driving the change in the labor share of income. This point is where this study distinguishes itself from previous studies, concentrating on labor market flexibility, including rising non-regular workers, in the post-crisis period, and the ensuing relative sluggishness of labor and household income growth. In particular, this study found a close correlation between the markup—that represents the market concentration of Korean firms—and labor income share, and the fact that the markup has declined since the 2000s while labor income share has risen suggests that there have probably been positive welfare effects on the Korean economy.

This study reviews various adjustment measures and provides alternatives for measuring labor income share. Taking into account their problems, the author reexamined the trend of labor income share and analyzed the relationship between markup and labor income share—as a variable related to corporate decisions and market structural changes. In doing so. this study intends to suggest an important reference point in understanding the causes and backgrounds of social structural problems such as income inequality in our economy, and seeking solutions.

4. Causes of Increased Corporate Savings and the Ripple Effects onGrowth and the Distribution Structure

This analysis targets the problem of increased corporate savings. The mounting savings by corporations implies that firms are relatively indifferent about developing production capabilities for the future, indicating that the economy will slow as the growth of total factor productivity (TFP), including technology input and progress, decelerates. Some view this as a sign that the economy will face low growth as TFP growth—including capital input required for growth as well as technological progress—slows down. Others argue that rising cash holdings is the optimal choice for firms coping with increasing uncertainties, and most of the savings are used for the formation of fixed assets and hence, there is no need to view it only negatively.

Between these two opposing views, this study begins with checking the validity of the latter. In the Korean economy, the increase in corporate savings is usually due to a rise in fixed capital consumption and savings-investment gap. Particularly after the 2000s, firms may have chosen to increase their corporate savings to deal with the increase in fixed capital consumption resulting from technological changes. This could lead to a widening productivity gap between firms actively adapting to the technological changes and those that do not. This study found that corporate savings have a significant positive correlation with productivity growth―instead of the possibility that firms accumulating cash will exhibit inefficiency. These findings suggest that a policy curtailing corporate savings could undermine the efficiency of the market as it could distort the optimized corporate decision-making and reduce incentives to push for technological change.

5. Household Debt and Private Consumption

This study analyzes the macroeconomic risks inherent in rising household debt and draws on the implications for growth policy. The problem of mounting household debt has been recognized as the most characteristic risk factor for the Korean economy over the past several years. On the other hand, unlike most advanced economies who have expanded their debt to avoid a plunge in growth after the global financial crisis, Korea has put fiscal soundness before others in pursuit of growth at the expense of the financial soundness of the household sector.

This study can be of great importance for discussions on future growth policies as it examines the role of household debt in relation to sluggish private consumption after the crisis and draws on the implications of slow growth. It empirically showed that Korea’s household debt could amplify the instability and thus, weaken the growth of consumption, resulting in sluggish growth. Debt will have a bigger negative impact on consumption during the phase of aggravating recession, possibly leading to a longer slump and delayed recovery.

Based on these discussions, this study calls for a more active solution to the excessive household debt, as it will weigh heavily on the economy and entail enormous losses for social welfare. The author suggests that in normal situations, macroprudential policy should be strengthened by, for example limiting the proportion of overly indebted people in order to induce a soft landing. But, in a recessionary phase with shrinking domestic demand, monetary and fiscal policies should be managed through an expansionary stance. This is because macroprudential policy alone cannot restrain the downward pressure of aggregate demand from becoming prolonged particularly for heavily debted households. This study also stressed consistent efforts to rectify the financial weakness in the household sector as a full-fledged recovery of consumption cannot be expected unless financial soundness improves.

Summary

Policy Study KOR A Study on the Sources of Lifetime Inequality in Korea

This study quantified the sources of lifetime inequality, which is defined as the increase in the within-age-group wage income inequality by age. First, the degree of the lifetime wage income inequality in Korea was estimated by using the wage income data in the Korea Labor Income Panel Survey (KLIPS) from 2002 to 2015. Second, the sources of lifetime wage income inequality were analyzed based on the life cycle model that reflects the endogenous human capital accumulation of Huggett et al. (2011). Specifically, this study quantified whether lifetime income inequality is due to the differences in the initial conditions at the time of entry into the labor market (human capital, assets, and learning ability), or an exogenous change in labor productivity during the life cycle. Then, an analysis was conducted to examine which initial conditions of human capital, assets and learning abilities have a more significant impact on lifetime income inequality.

According to the analysis, the difference in the initial conditions (66.9%) at the time of entry into the labor market had a greater impact on the lifetime wage income inequality than the exogenous labor productivity change during the life cycle (33.1%). In particular, it was found that the difference in the amount of human capital in the initial conditions was most important. These results are consistent with the findings of Huggett et al. (2011) who studied the US’ case. The results in this study suggest that the government should improve the quality of secondary school and college education in order to alleviate lifetime income inequality. It also suggests that policy efforts should be made to improve human capital in regards to low-income students by widening educational opportunities through welfare programs.

Additionally, the analysis found that the difference in human capital at the beginning stage of entry into the labor market was an important factor in lifetime wage income inequality, but the impact of the changes in labor productivity during the life cycle was non-negligible. Considering the specificity and viability of policies, those that reinforce social safety nets for income risks in the labor market such as unemployment benefits, vocational training and health insurance can be more effective policy instruments to mitigate lifetime income inequality in the short-term.

Summary

Policy Study The Evolution of Wage Inequality in Korea

Wage inequality in Korea has undergone several changes in 1980-2016. It fell in 1980-1994, rose in 1995-2007, and then fell again in 2008-2016. Different worker characteristics have had different impacts on wage inequality. In the early years, sex, age, and education were the three most important characteristics, but in later years, firm tenure became the most important one, followed by education and establishment size.
The impact of each worker characteristic can be decomposed into price effect (the sensitivity of wage inequality to a marginal change in worker characteristics) and distribution effect (the impact of changing distribution of worker characteristics across wage quintiles). In the cases of sex and age, both price and distribution played important roles in reducing inequality. In the case of education, price was the main driver in all periods, reducing inequality in the first period (1980-1994), increasing it in the second (1995-2007), and again reducing it in the third (2008-2016). In the cases of tenure and establishment size, distribution contributed significantly to increasing inequality.
Price is determined through the interaction between demand and supply. As for sex, the relative demand for male workers declined in all periods and particularly in the second and third periods, and accordingly their relative wage fell. As for age, the relative demand for older workers increased in all periods. But it was outpaced by the increase in supply, and as a result the relative wage fell for older workers. As for education, the relative demand for college graduates over high school graduates increased faster than the supply in the second period but not in the first and third periods. The relative wage of college graduates rose in the second period but not in the other periods.
There have been suggested many explanations for the changes in demand. Among them, the endogenous technical change hypothesis posits that the increased supply of a particular group induces innovations that make more use of that group. According to this hypothesis, the increasing supplies of female workers and older workers increased the demand for these workers. Similarly, an increasing supply of high school graduates in the 1970s and 1980s led to the subsequent increase in the demand for them in the first period; an increasing supply of college graduates in the 1990s and early 2000s led to the subsequent increase in the demand for them in the second period; and the leveling off of their supply at the end of the 2000s led to the subsequent leveling off of the demand for them in the third period. On the other hand, the stories based on skill-biased technical change (SBTC) cannot provide explanations on the increases in the relative demand for some groups of unskilled workers―female workers (in the second and third periods), elderly workers (in the third period), and high school graduates (in the first period).
The rapid rise in the skill levels of female workers and younger workers appears to have added to the demand for them. On top of the endogenous technical change, this may explain the declining relative demand for male workers, and the slow increase in the relative demand for older workers (relative to the supply).
In addition to the price, the distribution of worker characteristics across wage quintiles have had important impact on wage inequality. In the case of sex, light manufacturing (most notably textiles, apparel, and leather products) had provided low-pay blue-collar jobs for the mass of female workers. Since the 1980s, however, the decline of this industry and the expansion of service industry and white-collar jobs provided female workers with the opportunity to move up the wage ladder and helped reduce the gap between sexes.
The average tenure has grown continuously, and so has the wage gap between long tenure and short tenure. This has increased the importance of tenure as a determinant of wage inequality. In the meantime, the group of workers with short tenure came to include not only younger workers but also older ones who have entered the labor market at later ages or who have had to hop around unstable jobs during their career. All older workers are not necessarily earning high wages, and this makes age less important now as a predictor of wage inequality.
Over the decades, large establishments have increasingly relegated blue-collar jobs and low value-added activities to smaller establishments and focused instead on white-collar jobs and high value-added activities. Now a smaller number of workers are working in large establishments, and establishment size is more important than before in increasing wage inequality.
A look at the changes in employment and wage across occupations indicates that supply factors (i.e., workers migrating into high-paying occupations) were at work in the first period to reduce the gap between low-paying and high-paying occupations. In contrast, it is difficult to find a clear pattern in the second and third periods. Much the same story can be told of the changes in employment and wage across industries.
These findings have important policy implications. Efforts are needed to further upgrade women’s skill levels. It is also necessary to strengthen the labor market attachment of disadvantaged workers (including older workers) and help them stay with an employer longer, for example by reducing the regulations on their employment. Priority should also be given to improving the quality of education at all levels of schooling (especially at the upper-secondary level) rather than expanding its quantity. Any impediments to SMEs’ growing large should be eliminated and firms with stronger potential for job creation should be allowed to outcompete those with weaker potential. Lastly, flexibility should be increased in the labor market to accommodate rapid structural changes in the economy.

Summary

KDI FOCUS Employment Effect of Minimum Wage Increase

□ The objective of a minimum wage increase is to improve the quality of low-wage jobs and to narrow wage gaps. The sharp minimum wage increase in 2018 has so far produced no significant declines in employment. However, if drastic increases continue in the next two years, the level of the minimum wage as a ratio to the median wage will exceed those in other advanced economies and employment growth will likely exhibit a large drop distorting the wage structure. Thus, an adjustment in the pace of minimum wage increases is required.

- The purpose of theminimum wage increase isto guarantee the wagelevel of the low-paid, thenumber of which isgrowing as personalservice jobs increase.

- The share of below-minimum wage workers was 7.6% in the MOEL's 2016 Wage Survey and 13.4% in Statistics Korea's 2017 Economically Active Population Survey.

- Other than cutting employment, there are several options available to employers to respond to the minimum wage increase such as raising prices, shortening working hours, reducing employee benefits/allowances and strengthening labor intensity.

- Unlike individual companies facing their wage increase, a rise in the legislated minimum wage applies to the overall economy, meaning that companies can adjust prices to spread out the impact.

- The majority of job loss resulting from an increase in the minimum wage is observed in the manufacturing industry while the impact has been weak in services sectors.

- The higher the minimum-to-median wage ratio, the smaller the impact from the minimum wage increase. In 2016, the ratio marked 35% for the US and 50% for Korea.

- Hungary raised the minimum wage by 60% in 2000-2004 in real terms, commensurate with Korea’s planned increase. The employment of wage workers retreated by approx. 2%.

- If Hungary’s estimate is applied, Korea is estimated to see a decrease of 84,000 in employment after the minimum wage increase in 2018. If the US’ is applied, the decrease is estimated to be 36,000. As such, Korea’s decline in employment is expected at between 36,000 and 84,000.

- Growth in employment in April 2018 was smaller by 180,000 than January, but the decrease was more influenced by January’s high growth, slowing population growth and manufacturing restructuring than by the minimum wage increase.

- If the sharp increase in the minimum wage is repeated in the next two years, the share of minimum wage workers will rise and impact on employment will grow.

- The employment effect of the minimum wage increase is estimated to be a decrease of 96,000 in 2019 and 144,000 in 2020, when the effects of the job stabilization fund is not considered.

- France experienced other side effects with a very high minimum wage such as disruption of the wage order, etc. Accordingly, France ceased additional minimum wage hikes after reaching 60% of the median.

- Germany adjusts its minimum wage level every two years, as evaluation of the impact of the hike takes two years.

- Measures must be sought to minimize the unexpected negative impact while efforts are made to maximize the positive.

Summary

Policy Study KOR An Empirical Analysis of Households’ Inequality in Korea

This paper examines the link between income and consumption inequality in Korea. Specifically, we employ the model suggested by Blundell, Pistaferri, and Preston (2008) to analyze the transmission of income risk to consumption based on the households’ income and expenditure data(KLIPS). Although preliminary, we find that the variance of transitory income shock decreased between 2001 and 2008. For the period after the Global Financial Crisis, we find that the variance of permanent shocks has decreased. We also find almost full insurance of transitory shocks after the crisis.

Summary

KDI FOCUS Changes in the Relative Importance of the Minimum Wage, Income Support and Employment Support Programs

□ Because there is a significant mismatch between low wage and low income, policies tackling the poverty issue must focus on low income households rather than low-wage workers and emphasize the EITC or labor market policies that support low income households rather than the role of the minimum wage system that supports low-wage workers.

- Household income is determined by the number of employed members, wage, market income other than earned income, and government transfers. The presence of an employed member is critical to the conditions of falling into poverty.

- Only 21.7% of low-wage workers are poor.

- 30.5% of the below-minimum wage workers are poor, and 69% of the below-minimum non-poor workers were found to live above the poverty line due to other household members’ earned income.

- In order for a four-member household with a single minimum-wage worker not to fall into poverty, the wage needs to be raised by 53.6% while the addition of an extra income earner working three hours a day could help them stave off poverty if the EITC coverage expands slightly.

- Unemployed members in the low income class are mostly seniors and the less educated. The higher income the household has, the lower the age of its unemployed member and higher its education level is.

- Among the able-bodied poor, only 9.4% participated in employment support programs, while 68.2% benefited from income support.

- Concrete targets are important when designing a combination for the minimum wage program and EITC for income security, for example ‘to secure the income of households with 1.5 income earners with two children to help them stay above the poverty line.’

- Anti-poverty policy for households with the ability to work should focus on enhancing their economic activities.

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