The Exit of Zombie Firms Marks the Beginning of Job Growth in Large Companies

Large-company job creation has come to a standstill. Over the past several decades, employment at major corporations has barely grown, while job growth has been concentrated in small and micro-sized firms, deepening imbalances in the labor market. Despite strong preference among young people, jobs at large companies account for only about 20 percent of total employment. This is not merely a matter of numbers; structural constraints lie at the heart of the problem.

Marginal firms are a key cause of stagnant large-company employment. Companies that should have exited the market continue to occupy space, preventing capital and labor from moving to high-productivity sectors. Firms that cannot even cover interest payments with operating profits survive by relying on government and financial-sector support, siphoning off investment and hiring capacity from healthy companies.

The excessive concentration of employment in small firms further aggravates the problem. More than 80 percent of total employment in Korea is generated by small and medium-sized enterprises, yet these firms show wide gaps with large corporations in productivity, wages, and job stability. As the large-company sector—which should lead growth in high value-added industries—shrinks, labor-market dualism becomes entrenched, and the absence of economies of scale undermines overall national competitiveness.

Government support policies for SMEs have intensified these distortions. Policy loans, credit guarantees, tax benefits, and R&D subsidies are repeatedly provided regardless of performance, allowing low-productivity firms to remain in the market for extended periods. This blocks the reallocation of resources toward high-performing firms and slows innovation across entire industries. Contrary to its intentions, the government has effectively become a “protective shield” for inefficient firms, eroding opportunities and resources for large companies to grow.

It is time to accelerate the exit of marginal firms. New jobs are created when capital and labor trapped in unviable companies move to highly productive large firms. Markets in which creative destruction fails to operate inevitably fall into stagnation and decline. Proactive restructuring and early-warning systems are needed to restore the hiring capacity of sound firms.

Support policies must be fundamentally restructured. SMEs should be supported selectively based on performance and innovation capacity, while systems that continuously accumulate inefficiency should be scaled back. A performance-based support framework should be introduced, and saved fiscal resources should be redirected toward high-efficiency R&D investment to enhance industrial dynamism. Expanding large-company employment requires a fundamental shift in how resources are allocated.

Securing labor-market flexibility is essential. Workers tied to low-productivity marginal firms must be able to move swiftly to more productive large companies. Rigid, regular-employment-centered hiring structures should be eased, and diverse forms of employment—such as project-based, contract, and part-time work—should be institutionally permitted. At the same time, retraining and job-transition support should be provided to workers displaced by firm exits, opening pathways for large companies to secure the talent they need.

Expanding large-company employment begins with structural reform. Korea needs an industrial ecosystem in which marginal firms exit quickly and a flexible labor market that allows skilled workers to move toward mid-sized and large companies. Only through such reforms can the job-creation capacity of large firms be restored and vitality returned to the Korean economy. We should aspire to a free and dynamic labor market in which high-quality jobs continue to grow.

Gyu-min Han
Research Fellow, The Center for Free Enterprise

Korean version: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=2&idx=28061