Stagnation of Labor Productivity and Structural Problems of Disparities by Firm Size, and Policy Alternatives

The government has launched a Tripartite Roadmap Task Force for Reducing Actual Working Hours, involving labor, management, and government, and is moving forward in earnest with the introduction of a 4.5-day workweek. While the policy emphasizes “autonomy and support” rather than legal mandates, the core issue is not working hours themselves but labor productivity. Reducing working hours while maintaining the same level of wages and employment inevitably requires productivity gains; without them, firms will face weakened competitiveness and rising cost burdens.

Korea’s hourly labor productivity remains at only 70–80% of the OECD average and has shown little improvement over the past decade. Although total working hours have declined, value added per hour has not increased accordingly. This stagnation constrains wages, corporate competitiveness, and the country’s long-term growth potential. Productivity cannot be improved through simple reductions in working hours or wage policy alone; rather, institutional rigidity and structural constraints in the labor market constitute the fundamental causes.

Accordingly, the debate over a 4.5-day workweek should not be framed as a matter of “working less,” but as part of a productivity-centered reform of the labor system. For shorter working hours to translate into higher quality of life and economic vitality, a policy foundation that enhances the quality, efficiency, and flexibility of labor must come first. The key question is not “how much less we work,” but rather “how much better we work within the same amount of time.”

Looking at the quantitative aspect of labor productivity (employment levels), the number of jobs in large enterprises (based on workforce size) rose from 4.287 million in 2016 to 4.917 million in 2023, but has largely stagnated over the past decade. While large-firm employment has shown a steady increase under both workforce-based and revenue-based classifications, it still amounts to less than 30% (one-third) of employment in small and medium-sized enterprises (SMEs).

From the qualitative perspective of labor productivity, hourly productivity increased from $40.2 in 2014 to $51.1 in 2023. Over the past ten years, productivity rose by only about $11, indicating stagnation once inflation is taken into account. By firm size, productivity in large manufacturing firms fluctuated significantly—from a minimum of approximately KRW 3.3 billion to a maximum of KRW 4.54 billion between 2011 and 2023—while SME productivity remained far lower, rising only from about KRW 1.21 billion in 2013 to KRW 1.44 billion in 2022, less than one-third of large-firm levels.

In international comparison, Korea’s hourly labor productivity has shown only modest improvement and remains chronically stagnant relative to major OECD countries. While the United States records $97.05 and Germany $93.72, Korea stands at $54.64—about half of U.S. levels and roughly 77% of the OECD average.

The causes and problems underlying Korea’s chronic productivity stagnation can be summarized as follows:

1. dependence on long working hours and limited diffusion of technology;

2. labor market rigidity and institutional inefficiencies;

3. inflexible personnel and wage systems;

4. weak service-sector productivity and industrial structural imbalance;

5. structural limitations of SMEs; and

6. wage distortions driven by organized labor unions.

These factors exacerbate labor market polarization and labor concentration, ultimately leading to stagnant employment in large firms and weakened competitiveness among SMEs. The causes of productivity gaps by firm size include:

1. entrenched disparities in job quality resulting from labor market dualism and innovation gaps;

2. inefficiencies in SME support policies;

3. persistence of marginal firms and industrial distortions; and

4. widening gaps between wages and productivity.

Korea’s chronic labor productivity stagnation stems from a complex interaction of working hours, technology, institutions, and industrial structure. In particular, labor market rigidity and the structural inefficiency of SMEs negatively affect not only productivity growth but also job quality, wage gaps, and overall industrial competitiveness.

Therefore, future discussions on reducing working hours must proceed in parallel with institutional reforms aimed at productivity enhancement, including labor market flexibility, performance-based wage systems, and industrial restructuring. First, policy design should prioritize performance and productivity gains over mere reductions in working hours. Expanding flexible working arrangements and transitioning toward job- and performance-based pay systems are essential.

Second, restructuring marginal firms and strengthening SME innovation are critical. The continued existence of low-productivity firms depresses total factor productivity. Overlapping and redundant SME support programs should be streamlined, while institutional reforms should facilitate the exit or transformation of marginal firms. Selective R&D tax incentives and technology finance should be expanded for innovation-driven SMEs, alongside stronger job-based training and skill-transfer programs.

Third, enhancing labor market flexibility to boost productivity is essential. Flexibility is a prerequisite for efficient resource allocation. Excessive protection of regular employment should be eased, while labor mobility through job changes, career transitions, and reemployment should be actively promoted. This approach resembles the flexicurity models of Denmark and the Netherlands. In addition, institutional guarantees should be provided for diverse work arrangements, including discretionary, selective, and flexible working hours, as well as remote and project-based work. Reducing working hours should be viewed not as a matter of rights, but as a means to improving performance. Policy should shift away from public-sector-centered training toward revitalizing a private-led vocational training market, with tax and financial incentives for individual investment in reskilling and upskilling.

In conclusion, a transition toward a market centered on performance and mobility rather than employment stability is required. Strengthening labor flexibility does not imply weaker protection, but rather higher productivity through expanded mobility and choice for workers. Korea’s labor policy should move away from regularization and job-sharing schemes and toward a competitive labor market that rewards performance and enables free movement. The discussion of a 4.5-day workweek must be premised on such institutional reforms, clearly recognizing that expanded performance and flexibility—not employment stability—are the core drivers of productivity growth.

Table of Contents

I. Introduction: Labor Productivity Stagnation and the Gap between Large Firms and SMEs

II. Analysis of Labor Productivity Trends

1. Quantitative Trends in Labor Productivity

2. Qualitative Trends in Labor Productivity

3. Global Comparison: Korea’s Position Relative to Major OECD Countries

III. Causes and Problems of Productivity Stagnation and Firm-Size Disparities

1. Causes and Problems of Chronic Productivity Stagnation

1) Multifaceted Factors Behind Chronic Stagnation

2) Rigid Employment and Labor Institutions

3) Productivity Weakness in SMEs and the Service Sector

4) Excessive Wages and Productivity Stagnation Driven by Strong Unions

2. Causes and Problems of Productivity Gaps by Firm Size

1) Deepening Linkages between Productivity Gaps and Job Quality Disparities

2) Weakening SME Productivity and Competitiveness

3) Expansion of the Wage–Productivity Gap

IV. Strategies and Policy Recommendations for Enhancing Labor Productivity

1. Transition to Productivity- and Performance-Based Labor Policies

2. Restructuring Marginal Firms and Promoting SME Innovation in Technology and Human Capital

3. Enhancing Labor Market Flexibility to Alleviate Rigidity and Improve Productivity

Conclusion: Expanding Performance and Flexibility as the Key to Productivity Growth

References

Korean version: https://www.cfe.org/20251016_28202