Structural Causes of Stagnant Labor Productivity and Firm-Size Gaps, and Policy Alternatives

The government has launched the “Roadmap Task Force for the Reduction of Actual Working Hours,” involving labor, management, and government, and is now moving in earnest to introduce a 4.5-day workweek. Although it emphasizes “autonomy and support” rather than legal coercion, the real issue is not working hours but improving labor productivity. If working hours are to be reduced while maintaining the same wages and employment levels, productivity gains are essential; otherwise, weakened corporate competitiveness and increased cost burdens will be unavoidable.

Korea’s hourly labor productivity remains at only 70–80% of the OECD average and has been stagnant over the past 10 years. Although working hours have declined, the ability to generate value added per unit of time has not improved, constraining wages, corporate competitiveness, and the nation’s overall growth potential. Productivity cannot be improved through simple reductions in working hours or wage policy alone; the root causes lie in a lack of institutional flexibility and structural constraints in the labor market.

Therefore, discussion of the 4.5-day workweek should not be approached merely as a matter of “reducing working hours,” but as labor system reform centered on productivity. For shorter working hours to lead to a better quality of life and greater economic vitality, a policy foundation that enhances the quality, efficiency, and flexibility of labor must first be put in place. The key issue is not “how much less we will work,” but “how much better we can work in the same amount of time.”

Looking at the quantitative status of labor productivity in terms of the number of jobs, the number of jobs at large firms by workforce size rose steadily from 4.287 million in 2016 to 4.917 million in 2023, but over the past 10 years it did not increase significantly and remained largely stagnant. Jobs at large firms showed a steady upward trend by both workforce size and sales-based criteria, but still amounted to less than 30% (one-third) of jobs at SMEs.

Looking at the qualitative status of labor productivity, hourly labor productivity rose continuously from $40.2 in 2014 to $51.1 in 2023. Over the past 10 years, however, hourly labor productivity increased by only about $11, showing a pattern of stagnation when adjusted for inflation. By firm size, in the manufacturing sector, labor productivity at large firms fluctuated within a relatively wide range from a minimum of about KRW 3.3 billion to a maximum of about KRW 4.54 billion between 2011 and 2023. In contrast, labor productivity at SMEs ranged from a minimum of about KRW 1.21 billion in 2013 to a maximum of about KRW 1.44 billion in 2022, remaining at less than one-third of the level of large firms.

Compared with major countries, Korea’s hourly labor productivity has shown a steady but slight increase, yet chronic stagnation persists, and its level remains significantly below that of major OECD countries. Compared with the United States at $97.05 and Germany at $93.72, Korea stands at $54.64—roughly half the level—and about 77% of the OECD average.

The causes and problems behind chronic labor productivity stagnation can be summarized as follows: 1) dependence on working hours and limits to technological diffusion, 2) labor market rigidity and institutional inefficiency, 3) rigid personnel and wage systems, 4) weakness in the service sector and imbalances in the industrial structure, 5) structural limitations of SMEs, and 6) the wage-distorting effects of organized unions. These factors cause labor market polarization and labor concentration in certain sectors, ultimately leading to stagnant employment at large firms and weakened competitiveness at SMEs. The causes and problems behind labor productivity gaps by firm size can be summarized as: 1) the entrenchment of structural disparities in job quality as a result of the dual structure of the labor market and gaps in innovation capacity, 2) inefficiency in SME support policies, 3) the survival of marginal firms and industrial distortions, and 4) widening wage-productivity gaps.

Korea’s chronic labor productivity stagnation stems from a combination of factors involving working hours, technology, institutions, and industrial structure. In particular, labor market rigidity and the structural inefficiency of SMEs are negatively affecting not only productivity improvement but also job quality, wage gaps, and overall industrial competitiveness.

Accordingly, future discussions on reducing working hours should proceed in parallel with institutional reforms aimed at boosting productivity, including labor market flexibility, performance-based wage systems, and industrial restructuring. First, institutional design should focus less on reducing working hours and more on improving performance and productivity. This requires the transition to and expansion of flexible work arrangements and job- and performance-based wage systems.

Second, restructuring marginal firms and strengthening innovation at SMEs are necessary. The continued survival of low-productivity firms lowers total factor productivity. Similar and overlapping SME support policies should be streamlined, and institutional reforms are needed to facilitate the exit and transition of marginal firms. Selective R&D tax support and technology finance should be expanded for technology-innovative SMEs, while job-based education and training and skills-transfer programs should be strengthened.

Third, labor market flexibility must be enhanced to raise productivity. Labor flexibility is a prerequisite for efficient resource allocation. Overprotection of regular workers should be eased, and the market for job changes, career transitions, and reemployment should be activated to promote labor mobility. This is similar to the Danish and Dutch-style flexicurity model. In addition, diversification of work arrangements—such as discretionary, selective, and flexible working-hour systems, as well as remote work and project-based work systems—should be institutionally guaranteed. The reduction of working hours should be approached not as a matter of rights, but as a means of improving performance. Moving away from policies centered on public training, Korea should revitalize a privately led vocational training market and provide tax and financial incentives for individuals’ investment in retraining.

In conclusion, what is required is a shift toward a “market centered on performance and mobility,” not “job security.” Strengthening labor flexibility does not mean weakening protection; it means enhancing productivity by expanding labor mobility and workers’ freedom of choice. Korea’s labor policy should move away from a focus on conversion to regular employment or job sharing and toward a competition-based labor market in which compensation is tied to performance and mobility is free. Discussion of the 4.5-day workweek must likewise be premised on such institutional reform, and it should be made clear that “greater performance and flexibility,” rather than “employment stability,” is the key to improving productivity.

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

II. Analysis of the Current State of Labor Productivity

1. Quantitative Status of Labor Productivity

2. Qualitative Status of Labor Productivity

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

III. Causes and Problems of Labor Productivity Stagnation and Gaps by Firm Size

1. Causes and Problems of Chronic Labor Productivity Stagnation

1) Complex Factors Behind Chronic Labor Productivity Stagnation

2) Labor Productivity Stagnation Due to Rigid Employment and Labor Institutions

3) Productivity Weakness Centered on SMEs and the Service Sector

4) Excessive Wages and Labor Productivity Stagnation Caused by the Bargaining Power of Militant Unions

2. Causes and Problems of Labor Productivity Gaps by Firm Size

1) Deepening Link Between Labor Productivity Gaps by Firm Size and Gaps in Job Quality

2) Deepening Productivity Gaps by Firm Size Due to Weakened Productivity and Competitiveness of SMEs

3) Widening Wage-Productivity Gaps

IV. Strategies and Policy Recommendations for Raising Labor Productivity

1. Transition to Productivity- and Performance-Oriented Labor Policies and Institutions

2. Restructuring Marginal Firms and Improving Productivity Through Technological and Workforce Innovation at SMEs

3. Easing Labor Market Rigidity and Raising Labor Productivity Through Labor Flexibility

4. Conclusion: Not “Job Security” but “Expanded Performance and Flexibility” Is the Key to Raising Labor Productivity

References

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Original title: 노동생산성의 정체와 기업규모별 격차의 구조적 문제와 정책대안

Author: Gwang yong Go

Date: 2025-10-16

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=report&pn=1&idx=28202