The Bank of Korea: "Decrease in Startups Leads to Lower Labor Productivity Growth Rate and Net Employment Creation Rate"

[Asia Economy Reporter Eunbyeol Kim] As the number of startups decreases, the recent labor productivity growth rate has fallen by more than 2 percentage points compared to the early 2000s, and the net employment creation rate has also dropped by more than 1 percentage point, according to a recent study.

According to the article "Decrease in Startups and Macroeconomic Impact" published in the July issue of the Bank of Korea's Survey and Statistics Monthly Report on the 29th, the proportion of domestic startups was 19.0% in 2002 but decreased to 11.7% in 2018. The share of startups in employment also declined from 11.1% to 6.1% during the same period.

The proportion of companies aged 8 years or older in total companies and employment has steadily increased since the early 2000s.

As the share of older companies increased, the labor productivity growth rate (6.3%) and net employment creation rate (1.4%) in 2017-2018 fell by 2.1 percentage points and 1.2 percentage points, respectively, compared to 2001-2002.

The Bank of Korea's research department identified demographic changes (slowing labor supply growth) and intensified international competition as major factors behind the decline in startups. The decrease in startups was also analyzed as potentially affecting the relationship between economic cycles and employment. Estimating the employment sensitivity to economic cycles showed that the employment elasticity of young companies aged 7 years or less was about 12 times higher than that of mature companies aged 8 years or more.

A Bank of Korea official said, "A decrease in startups can block the employment creation path of young companies during economic recovery periods, leading to a 'jobless recovery.'"

He added, "The increased uncertainty due to the novel coronavirus disease (COVID-19) is likely to prevent potential competitive companies from entering the market for a considerable period. Considering that Korea's product market regulations and entry barriers are among the highest in OECD countries, regulatory reform can be considered as a policy alternative."

This content was produced with the assistance of AI translation services.