August 8, 2011

KOREA: A demographic dilemma for Korea

Korea has witnessed major population, infrastructure, and political changes since this photo was taken 100 years ago. (Source: Population Change and Development in Korea - Asia Society)________________________________________________________________________

SEOUL, Korea / Korea JoongAng Daily / Business / Economic Policy / August 8, 2011

By Lee Chan-Young

Korea’s population is aging at the fastest rate in the world. Last year, Korea’s birth rate was 1.22, the lowest among OECD nations. By 2018, Korea is expected to be an “aged society” with 14 percent of the nation being elderly.

The 18 years in which Korea is expected to take in shifting from an aging society to an aged society contrasts starkly with the time it took France (115 years), the United States (73 years) and Japan (24 years) to do so.

This rapid aging can cause three problems in the labor market: labor shortages; productivity shrinkage; and job competition between generations.

The first two concerns are fast approaching, but the third is being played out now, stoking worries about long-term youth unemployment, which has been stubbornly high the last several years.

The shrinking labor force will likely dilute potential growth. Korea’s economically active population, or the entire national labor force, is projected to climb to 26.68 million in 2018 from 25.82 million in 2010, and then begin a decline in 2019.

This would exacerbate potential growth that is forecast to sink by 0.4 percent in 2011-2018 from 4.1 percent in 2000-2010. In addition, the nation’s labor force is expected to decline by 0.7 percent annually from 2019-2030, which will drag down potential growth by 1.1 percentage points in the same period compared to 4.1 percent in 2000-2010.

The core productive population, the main drivers of economic activity, which refers to people aged 25-49, started to fall in 2009, and the pace of decline will likely accelerate. Accordingly, the size of the core productive population will drop to 14.25 million in 2020 and then to 11.98 million in 2030, or 90 percent and 76 percent of the 2010 size, respectively.

In contrast, the proportion of those aged 50 and above in the nation’s labor force is expected to increase sharply in the next decade. Many older workers lack knowledge and technological savvy, and are typically are less adept at updating their capabilities. Thus, the explosive growth in the 50-plus labor population would likely blunt national productivity.

According to an analysis of data, from 2000 to 2010, a 1 percentage point increase in the proportion of workers in their 50s and above eroded the nation’s labor productivity by 0.21 percent.

Since the proportion of workers in their 50s and above is expected to decline by 8.9 percentage points in 2010-2020 and 6.4 percentage points in 2020-2030, labor productivity will likely fall by 1.8 percent and 1.3 percent, respectively.

As for the job competition between generations, it began to appear in 2005. According to an empirical analysis, the employment rate for those in their 20s fell by 0.5 percentage points when that for those in their 50s increases by 1 percentage point.

This is because baby boomers started to turn 50 in the mid-2000s and work sharing during the global financial crisis maintained the existing workforce, reducing room to hire new employees.

In short, the productivity shrinkage stemming from the falling core productive population and job competition between generations will emerge as major issues in the next decade. From 2019, the labor shortage will become real as the nation’s total working population starts to drop. However, the labor shortage and retirement of most baby boomers by 2019 will mean better job prospects for young adults.

To tackle these demographic challenges, response strategies should be set up in stages and customized to each issue. Greater support for vocational training will help maintain productivity. Wider adoption of work sharing and a wage peak system, which keeps seniors employed but at lower pay, will help free up work space and budgeting to hire more young adults.

While the shrinkage of the entire labor force is unavoidable, the impact can be mitigated by a greater accommodation of women, young adults and seniors, currently not employed, in the workplace.

Lee Chan-Young is a research fellow in Macroeconomics Dept. at the Samsung Economic Research Institute. For more SERI reports, please visit http://www.seriworld.org/.

Copyright by JoongAng Ilbo
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