Korea's Rapid Aging Doesn’t Have to Be Economic Destiny
Strong economic fundamentals and sound macroeconomic policies have helped the Korean economy through multiple shocks in recent years. However, potential growth has slowed more quickly than in other major advanced economies, and the economic expansion is likely to moderate this year.
The country also is aging more rapidly than almost all others. That’s likely to reduce the labor supply and weigh on investment demand, further lowering growth and diminishing living standards. Aging could shrink the labor force by more than a quarter by 2050, leading to an average annual decline of 0.67 percentage point in potential growth, according to our latest Article IV report.
The good news is that reforms would help address this adverse impact of aging in Korea.
Increasing labor force participation rates, especially among female and older workers, would help limit the decline in the supply of available workers. Drawing on experiences in other advanced economies, in a typical labor market reform scenario, the participation rate for older workers is assumed to increase by 3 percentage points and the gender gap for female participation is expected to decrease by half. Such improvements would offset about one-fifth of the aging impact by 2050.
Furthermore, improving the efficiency of resource allocation across firms within sectors could increase aggregate productivity growth. This could be achieved through reforms that help channel labor and capital toward fast growing firms with higher productivity. Such reforms include reducing barriers to opening or closing a business, enhancing access to finance, and removing distortive subsidies. In a reform scenario assuming a smaller productivity gap between the top and bottom performing firms, average annual potential growth could increase by 0.22 percentage points. That would be equal to about one-third of the aging impact.
Finally, better and broader use of artificial intelligence would help support potential growth. AI could impact the economy through three channels:
- Labor displacement, in which AI replaces people in some jobs, increasing productivity but reducing labor demand.
- Labor complementarity, where AI complements people in some roles, increasing productivity without eliminating their jobs.
- Overall productivity increase, or AI boosting productivity across all jobs, in turn raising overall labor demand.
Our new paper, published alongside the Article IV report, shows that AI adoption across all three of these channels could significantly increase average annual potential growth by as much as 0.44 percentage point.
Ultimately, the combined effects from a higher labor force participation rate, more efficient allocation of resources, and expanded AI adoption can more than fully offset the economic drag from aging. Accelerating reforms would deliver growth gains early, earn more support from the public, help defend against potential shocks, and increase room in the government budget for adapting to an aging society.