Korean Labor Productivity Lags Behind Advanced Economies: "Improving Productivity Essential Before Reducing Working Hours"

South Korea's labor productivity remains significantly lower than that of major advanced economies. Experts warn that if working hours are reduced without improvements in productivity, the income gap with advanced countries will widen even further.

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According to a joint study released on September 22 by the Sustainable Growth Initiative (SGI) of the Korea Chamber of Commerce and Industry and Professor Park Jeongsu of Sogang University, South Korea's annual labor productivity (GDP per employed person) stood at $65,000, ranking 22nd out of 36 OECD countries as of 2023.

This figure is about half the level of Belgium ($125,000) and Iceland ($144,000), both of which have adopted a four-day workweek. It is also much lower than France ($99,000), Germany ($99,000), and the United Kingdom ($101,000), where four-day workweeks are being piloted.

SGI noted, "Shortening working hours can increase job satisfaction and boost consumption by expanding leisure time for workers." However, it also warned, "From the perspective of companies, reducing working hours without improving hourly labor productivity can lead to a decline in annual output and an increase in labor costs, thereby placing a greater burden on management."

The report also pointed out, "From 2000 to 2017, wages and labor productivity increased at nearly the same pace, maintaining a balance. However, since 2018, wage growth has far outpaced productivity growth, causing the gap to widen rapidly."

The report analyzed that from 2000 to 2017, annual nominal wage and labor productivity growth rates were both about 3.2% on average. However, from 2018 to 2023, annual wages rose by an average of 4.0%, while labor productivity increased by only 1.7%.

Professor Park Jeongsu explained, "Recently, the productivity growth rate of domestic companies has slowed due to the global economic downturn and weakened price competitiveness of key products. However, wages have continued to rise due to a seniority-based wage system, sharp increases in the minimum wage, higher overtime pay resulting from statutory working hour reductions, and rulings on ordinary wages, among other factors."

Additionally, the report noted that when labor costs rise faster than labor productivity, the impact on profitability is greater for labor-intensive industries and for small and medium-sized enterprises (SMEs). Comparing the return on assets (ROA) of companies from 2018 to 2022 with the period from 2011 to 2017, labor-intensive companies saw a 1.8 percentage point decline, which was more pronounced than the 1.1 percentage point drop for capital-intensive firms. During the same period, the ROA for SMEs fell by 1.5 percentage points, a much steeper decline compared to the 0.4 percentage point decrease for large corporations.

Kim Cheongu, a research fellow at the Korea Chamber of Commerce and Industry’s SGI, stated, "Large corporations can partially offset productivity issues through capital and technology investments, but SMEs find it difficult to pass on wage increases to prices and lack the capacity for research and development investment. As economic slowdown, rising labor costs, and limitations in productivity improvement coincide, this could lead to a management crisis for SMEs."

While the report agreed with the policy direction of improving work-life balance by reducing working hours, it emphasized that, given South Korea’s labor productivity is lower and its improvement rate is stagnant compared to advanced economies, improving the business environment should be the top priority. The report also proposed policy directions such as flexible application of working hours, labor market flexibility and workforce restructuring, and support for the growth of SMEs and mid-sized companies. Specific measures included exempting high-tech industries from the 52-hour workweek, restructuring the wage system to focus on roles and performance, and rationally improving procedures for changing employment rules.

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