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.

Korea’s skilful management of the COVID-19 pandemic protected its people and economy. GDP per capita surpassed the OECD average for the first time in 2020 on the back of one of the smallest GDP contractions among OECD countries, followed by a strong export-led rebound in 2021 and early 2022 ().

Sound health management and supportive policies helped Korea emerge swiftly from the pandemic, with economic growth boosted by strong semiconductor exports. The recovery is set to continue as pandemic-era restrictions on contact-intensive services are shelved, despite the Russia-Ukraine war raising inflation and highlighting the need for supply chain resilience. Fiscal policy support will need to be scaled back to finance rapid population ageing. Spending should focus less on supporting firm survival in an SME sector with chronically low productivity and more on supporting people and business dynamism. The productivity gap between small and large, highly productive companies is reflected in labour market dualities of income, job quality and social protection. It spurs fierce competition among young men and women to enter prestigious universities and good jobs and slows down youth’s labour market entry and family formation. Record low birth rates reflect that combining motherhood and a career is difficult, and raising children and investing in their education is expensive and time-consuming. Korea is well-placed for a green transition, with a functioning emissions trading scheme and popular support. Reforms to reduce productivity gaps and improve business dynamism would help Korea achieve ambitious cuts in greenhouse gas emissions, with a smoother and less painful structural reallocation of capital and jobs.

Social protection in Korea is designed around traditional forms of employment, and excludes a substantial share of workers in non-standard employment. The resulting social protection gaps compound income inequality and undermine financial sustainability. Furthermore, Korea’s tax and benefit system may discourage taking up or returning to low-paid work from social assistance or unemployment benefits. Expanding the reach of employment insurance while redesigning the tax and benefit system could boost work incentives and reduce inequality and poverty. The elderly poverty rate is persistently high, partly because public pensions and social insurance were introduced relatively recently. Better targeting the means-tested Basic Pension could reduce elderly poverty considerably. Lengthening working lives is essential to ensure pension sustainability and adequate retirement income for future retirees. Shifting from a severance pay system to a corporate pension would help improve retirement income and lower employers’ incentives to push for early retirements. Reducing inequalities in health and long-term care will require expansion of primary care and affordable quality home-based care. This will also help address the overreliance on hospitals and cope with the surging demand for health and long-term care.

Korea’s low youth employment rate has negative consequences for the young people concerned and the economy as a whole. Raising youth employment is a priority, particularly as Korea faces the most rapid population ageing among OECD countries. Low youth employment is due to a mismatch between education and the labour market, reflecting a large skill gap between highly-educated youth who race for credentials to secure attractive careers and older workers retiring from jobs that require less human capital. The share of university graduates among young Koreans is the highest in the OECD, but their employment rate is relatively low even as small firms confront serious labour shortages. Dualism in the labour market (between regular and non-regular workers) and the product market (between small and large firms) encourages young people to queue for jobs in large firms and the public sector to avoid low-wage precarious jobs. Raising the youth employment rate requires breaking down dualism while reforming the education system. Vocational education in secondary schools, which has shrunk while becoming another route to tertiary education, should be improved to make it a direct path to employment. Expanding the approach of Meister schools and the work-learning dual programme would help in that regard. Tertiary education should become more flexible and responsive to the demands of employers. Active labour market policies should focus less on direct job creation and more on job placement and training.