## _wp14137

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---

### I. Introduction
- Overall unemployment rate declined from about 4½ percent in 2000 to about 3 percent in 2012.
- Youth unemployment decreased from about 11 percent to about 9 percent between 2000 and 2012.
- Korean unemployment rates are among the lowest in OECD countries, but labor market duality (including the high share of non-regular workers) and underemployment among youth and women are important challenges, contributing to lower potential growth.
- Paper objective: analyze key labor market challenges to foster growth and quantify potential gains from comprehensive structural reforms.

### II. Boosting Female Labor Force Participation — Key Findings
- Female participation increased from about 50 percent in 1990 to 59 percent in 2011.
- Male participation rates remain 22½ percentage points higher than female participation rates in Korea.
- Gender gap particularly high—above 35 percent—for age groups 25–29, 30–34 and 35–39.
- Female participation in Korea is among the lowest in the OECD and almost 20 percentage points below the best performing countries (Iceland and the Nordic countries).
- Policy distortions that inhibit female participation reduce aggregate income, welfare, and exacerbate inequality; removing these distortions can increase labor supply and potential output.

### III. Empirical Analysis of Determinants of Female Labor Force Participation (panel: 30 OECD countries, 1985–2011)
- Estimation approach:
  - difference-in-difference panel regression with country fixed effects and time fixed effects; variables treated as deviations from Korea’s values.
- Explanatory variables included:
  - tax wedges between second earners and single individuals (ratio of the tax on second earners to the average tax rate of a single individual with the same gross income),
  - childcare benefits (increase in household disposable income from childcare benefits),
  - tax incentives to part-time work,
  - public spending on pre-primary education,
  - public expenditure on families,
  - female and male unemployment rates,
  - wage gaps between males and females,
  - employment protection legislation (EPL),
  - numbers of children per woman (ratio of children aged 0–14 years to women aged 15–64 years),
  - female tertiary education rates,
  - logs of GDP per capita.
- Omitted variables due to data limits: child subsidies and paid parental leave.

Major empirical results (selected coefficients preserved as reported)
- Tax second earner (tax wedge) has a negative and statistically significant effect on female participation (baseline coefficient: -0.182; robustness columns show values such as -0.339***, -0.230**).
- Childcare benefits have a positive and statistically significant effect on female participation (baseline coefficient: 0.389**; robustness values include 0.448**, 0.467**, 0.559***).
- Tax incentive to part-time shows a positive effect in some specifications (baseline: 0.281*), though significance varies across robustness checks.
- Male unemployment (log) negatively impacts female participation (baseline: -0.030**; other columns show -0.041***, -0.046***).
- Public spending on pre-primary education and public expenditure on families do not show significant impacts in Korea compared to other countries in most specifications.
- Results are robust to Instrumental Variable regression and various controls; endogeneity checks reported.
- Caveat: large portion of cross-country variation is captured by country fixed effects, indicating socio-cultural and institutional factors play major roles beyond policy variables.

Age-group heterogeneity (selected coefficients)
- Policies generally do not significantly affect participation for age group 55–64.
- Tax wedge and childcare benefits affect female participation across most age groups.
- Part-time regulations significantly affect participation mainly for women aged 25–39.
- Selected coefficients (by age group) as reported:
  - 15–24: Tax second earner -0.955***; Childcare benefits 2.603**.
  - 25–39: Tax second earner -0.151*; Childcare benefits 0.474**; Tax incentive to part time 0.462*.
  - 40–54: Tax second earner -0.289**; Childcare benefits 0.523*.
  - 55–64: Tax second earner -0.457 (not significant); Childcare benefits -0.472*.

### IV. Policy Simulation — Medium-term Effects and Scenarios
- Simulation method:
  - convergence of Korea’s policy indicators toward benchmark countries (those with lowest restrictions) using estimated parameters from Table 1.
  - formula used: gains g_i = beta_i * (s_Korea - s_benchmark) where beta_i is the estimated parameter for each indicator.
- Limitations noted:
  - sensitivity to uncertainties in estimated effects;
  - assumes separability and ability to disentangle specific reforms; ignores complementarities and sequencing concerns;
  - financing requirements and general equilibrium effects (e.g., tax changes elsewhere) are not accounted for.
- Simulated gains (chart highlights and narrative):
  - Average participation gain from reform in tax treatment of second earners is about ½ percentage point.
  - Reform of the tax incentives to part-time work would result in an increase of about 2 percentage points.
  - Reforms closing the gap with benchmark countries in childcare benefits would result in an increase of about 4 percentage points.
  - Combining scenarios (tax treatment of second earners, childcare benefits, part-time work) suggests a comprehensive set of reforms would lead to an increase in female participation rates of about 8 percentage points over the medium term, implying a reduction of the gap between male and female participation of about 33 percent.
  - Policies aimed at reducing unemployment would lead to an increase in participation (positive gain reported; exact numeric gain for unemployment not restated in the excerpt).

### V. Implications and Policy Recommendations
- Prioritize reforms that:
  - reduce tax wedges on second earners;
  - expand childcare benefits;
  - improve incentives for part-time work to raise female labor force participation.
- Combine demand-side measures (reducing unemployment) with supply-side reforms (tax and childcare) to maximize medium-term gains.
- Address socio-cultural and institutional barriers alongside policy reforms, given the strong country fixed effects.
- Consider targeted policies by age cohort (noting stronger responsiveness of 25–39 age group to part-time incentives).
- Policy recommendations summarized in the Conclusions:
  - increase investment in public childcare and childcare benefits;
  - improve the work-life balance by facilitating more part-time work opportunities;
  - make the tax treatment of second earners in households more neutral compared with that of single earners;
  - address labor market dualism to improve job opportunities for women.

### Youth employment and labor-market mismatch
- Youth participation rate in Korea declined from about 37 percent in 1994 to around 26½ percent in 2012; the average youth participation rate in the OECD is about 47½ percent.
- Decline partly driven by increasing tertiary enrollment and military conscription, and by labor market mismatch pushing young graduates to withdraw from the labor force.
- Skill Mismatch Index (SMI) construction:
  - SMI = sum_j |S_j - M_j| / 2, where skills are proxied by educational attainment: 1=low, 2=semi, 3=high.
  - Skill supply (S_j) measured by population share with corresponding educational attainment; supply interpolated between census years.
  - Skill demand (M_j) measured by share of employees in industries with skill intensity j using KSIC two-digit industry codes (base year 2006) and an occupation-based alternative using nine KSCO occupations grouped as in Autor et al. (2003).
- Empirical findings:
  - The indicator of mismatches decreased considerably immediately after the Asian crisis but leveled off since 2005.
  - The mismatch indicator is strongly associated with the youth employment rate (YSMI2 in charts).
  - A 10 percent decrease in labor market mismatches could increase employment rates by about 6 to 14 percentage points over the medium term.
  - Policy actions bringing skill mismatches back onto a downward path before 2005 can increase employment rates substantially.
  - Quantified youth employment projection: policy actions—including targeted educational policies and retraining programs—bringing skill mismatches back onto a downward path before 2005 can increase youth employment rates by 0.6 percentage points per year, which would boost the youth employment rate back to its pre-Asian crisis level within 10 years.
- Policy recommendations to reduce mismatch:
  - improving social dialogue to identify gaps between school curricula and business needs;
  - enhancing technical vocational education and training, including apprenticeships;
  - introducing mechanisms for early identification of potential labor force leavers to encourage access to employment, education or training opportunities;
  - including job-search techniques in school curricula;
  - improving young people’s access to information on career opportunities.

### Reducing labor market dualism: status, causes, and policy levers
- Current status and characteristics:
  - Regular workers account for less than 50 percent of total employees in Korea.
  - Among non-regular workers (temporary, daily, self-employed, unpaid family), the largest proportions are temporary workers and the self-employed.
  - The share of non-regular workers with tertiary education is about 30 percent, compared to that of more than 50 percent for regular workers.
  - Social insurance coverage: about 40 percent of non-regular workers are covered by employees’ pension schemes and health insurance, compared to about 80 percent for regular workers.
  - Mandatory retirement ages averaged 57 years in 2010.
  - Working hours are currently among the highest in OECD countries.
- Economic costs of dualism:
  - A lower share of regular workers (i.e., high share of non-regular workers) makes the labor market more resilient to demand shocks but reduces investment in on-the-job training and human capital for a large share of employees, thereby reducing productivity.
  - High dualism increases inequality and may reduce macro-stability and prospects for sustained high potential growth.
- Policy recommendations to reduce dualism:
  - reduce the relatively high degree of employment protection for regular workers, lowering firms’ incentives to hire non-regular workers;
  - increase the age set by firms for mandatory retirement and re-modulate the seniority-based wage system to reduce incentives for firms to push workers into early retirement and non-regular contracts;
  - improve social coverage for non-regular workers to reduce the labor cost gap between regular and non-regular workers and increase job security;
  - broaden access to training opportunities for non-regular workers, including targeted educational policies and measures to promote transitions to regular employment;
  - policies aimed at reducing working hours could facilitate acceptance of reductions in employment protection.

### Key quantitative and policy conclusions
- Female participation: comprehensive reforms (tax neutrality for second earners, childcare benefits, facilitating part-time work) could increase female participation by about 8 percentage points over the medium term and reduce the male–female participation gap by about 33 percent.
- Youth employment: reversing skill mismatches to pre-2005 paths can increase youth employment by 0.6 percentage points per year, restoring pre-crisis levels within 10 years.
- Labor market mismatches: a 10 percent decrease in mismatches could raise employment rates by about 6 to 14 percentage points over the medium term.
- Labor market duality: reducing dualism is expected to boost employment for youth and women and increase sectoral (mostly services) and aggregate productivity.
- Government agenda cited:
  - target to boost the employment rate to 70 percent by 2017 through the “70 Percent Roadmap,” shifting job creation focus toward females, services and SMEs, increasing youth and aged employment, cutting long working hours, expanding social insurance (including subsidizing low-income employees of SMEs), eliminating discrimination for non-regular workers, and increasing mobility between regular and non-regular workers.

### Appendix I. Skill Intensities of Industries in Korea (selected entries and summary statistics)
- KSIC 50 — Sale of Motor Vehicles and Motorcycles ; Retail Sale of Automotive Fuel — 2.255M
- KSIC 51 — Wholesale Trade and Commission Trade, Except of Motor Vehicles and Motorcycles — 2.424H
- KSIC 52 — Retail Trade, Except Motor Vehicles and Motorcycles — 2.243M
- KSIC 55 — Hotels and Restaurants — 2.024L
- KSIC 60 — Land Transport ; Transport Via Pipelines — 1.899L
- KSIC 62 — Air Transport — 2.677H
- KSIC 72 — Computer and Related Activities — 2.778H
- KSIC 73 — Research and Development — 2.780H
- KSIC 80 — Education — 2.690H
- KSIC 85 — Human Health and Veterinary Activities — 2.243M
- Mean — 2.237
- Std Dev — 0.276
- Mean+0.67*Std Dev — 2.422
- Mean-0.67*Std Dev — 2.053

*Source: IMF staff calculations.*

### References .............................................................................................................

### _wp14137 - References

### I. Introduction
- Overall unemployment rate declined from about 4½ percent in 2000 to about 3 percent in 2012.
- Youth unemployment decreased from about 11 percent to about 9 percent between 2000 and 2012.
- Korean unemployment rates are among the lowest in OECD countries, but labor market duality (including the high share of non-regular workers) and underemployment among youth and women are important challenges, contributing to lower potential growth.
- Paper objective: analyze key labor market challenges to foster growth and quantify potential gains from comprehensive structural reforms.

### II. Boosting Female Labor Force Participation — Key Findings
- Female participation increased from about 50 percent in 1990 to 59 percent in 2011.
- Male participation rates remain 22½ percentage points higher than female participation rates in Korea.
- Gender gap particularly high—above 35 percent—for age groups 25–29, 30–34 and 35–39.
- Female participation in Korea is among the lowest in the OECD and almost 20 percentage points below the best performing countries (Iceland and the Nordic countries).
- Policy distortions that inhibit female participation reduce aggregate income, welfare, and exacerbate inequality; removing these distortions can increase labor supply and potential output.

### III. Empirical Analysis of Determinants of Female Labor Force Participation (panel: 30 OECD countries, 1985–2011)
- Estimation approach: difference-in-difference panel regression with country fixed effects and time fixed effects; variables treated as deviations from Korea’s values.
- Explanatory variables included:
  - tax wedges between second earners and single individuals (ratio of the tax on second earners to the average tax rate of a single individual with the same gross income),
  - childcare benefits (increase in household disposable income from childcare benefits),
  - tax incentives to part-time work,
  - public spending on pre-primary education,
  - public expenditure on families,
  - female and male unemployment rates,
  - wage gaps between males and females,
  - employment protection legislation (EPL),
  - numbers of children per woman (ratio of children aged 0–14 years to women aged 15–64 years),
  - female tertiary education rates,
  - logs of GDP per capita.
- Omitted variables due to data limits: child subsidies and paid parental leave.

Major empirical results (Table 1 highlights)
- Tax second earner (tax wedge) has a negative and statistically significant effect on female participation (baseline coefficient: -0.182; robustness columns show values such as -0.339***, -0.230**).
- Childcare benefits have a positive and statistically significant effect on female participation (baseline coefficient: 0.389**; robustness values include 0.448**, 0.467**, 0.559***).
- Tax incentive to part-time shows a positive effect in some specifications (baseline: 0.281*), though significance varies across robustness checks.
- Male unemployment (log) negatively impacts female participation (baseline: -0.030**; other columns show -0.041***, -0.046***).
- Public spending on pre-primary education and public expenditure on families do not show significant impacts in Korea compared to other countries in most specifications.
- Results are robust to Instrumental Variable regression (Table 2) and various controls; endogeneity checks reported.

Age-group heterogeneity (Table 3)
- Policies generally do not significantly affect participation for age group 55–64.
- Tax wedge and childcare benefits affect female participation across most age groups.
- Part-time regulations significantly affect participation mainly for women aged 25–39.
- Selected coefficients (by age group):
  - 15–24: Tax second earner -0.955***; Childcare benefits 2.603**.
  - 25–39: Tax second earner -0.151*; Childcare benefits 0.474**; Tax incentive to part time 0.462*.
  - 40–54: Tax second earner -0.289**; Childcare benefits 0.523*.
  - 55–64: Tax second earner -0.457 (not significant); Childcare benefits -0.472*.

Caveat
- Large portion of cross-country variation is captured by country fixed effects, indicating socio-cultural and institutional factors play major roles beyond policy variables.

### IV. Policy Simulation — Medium-term Effects and Scenarios
- Simulation method: convergence of Korea’s policy indicators toward benchmark countries (those with lowest restrictions) using estimated parameters from Table 1. Formula used: gains g_i = beta_i * (s_Korea - s_benchmark) where beta_i is the estimated parameter for each indicator.
- Limitations of simulations noted:
  - Sensitivity to uncertainties in estimated effects.
  - Assumes separability and ability to disentangle specific reforms; ignores complementarities and sequencing concerns.
  - Financing requirements and general equilibrium effects (e.g., tax changes elsewhere) are not accounted for.
- Simulated gains (chart highlights):
  - Average participation gain from reform in tax treatment of second earners is about ½ percentage point.
  - Policies aimed at reducing unemployment would lead to an increase (chart indicates a positive gain though exact numeric gain for unemployment not restated in text excerpt).
- Aggregate policy package findings (from narrative):
  - Comprehensive reforms—making tax treatment of second earners more neutral relative to single earners; increasing childcare benefits; facilitating more part-time work opportunities—could increase female participation rates by about 8 percentage points over the medium term, reducing by one-third the gap between male and female participation rates.

### V. Implications and Policy Recommendations
- Prioritize reforms that reduce tax wedges on second earners, expand childcare benefits, and improve incentives for part-time work to raise female labor force participation.
- Combine demand-side measures (reducing unemployment) with supply-side reforms (tax and childcare) to maximize medium-term gains.
- Address socio-cultural and institutional barriers alongside policy reforms, given the strong country fixed effects.
- Consider targeted policies by age cohort (noting stronger responsiveness of 25–39 age group to part-time incentives).

_Italic: Source: IMF staff calculations; OECD._

### 1.4 percentage points. Reform of the tax

### _wp14137 - 1.4 percentage points. Reform of the tax

### Female labor force participation: projected impacts and drivers
- Reform of the tax incentives to part-time work would result in an increase of about 2 percentage points.
- Reforms aimed at closing the gap between Korea and the benchmark countries in terms of childcare benefits would result in a significant increase in participation of about 4 percentage points.
- Combining scenarios (tax treatment of second earners, childcare benefits, part-time work) suggests a comprehensive set of reforms would lead to an increase in female participation rates of about 8 percentage points over the medium term, which would imply a reduction of the gap between male and female participation of about 33 percent.
- Policy recommendations summarized in the Conclusions:
  - increase investment in public childcare and childcare benefits;
  - improve the work-life balance by facilitating more part-time work opportunities;
  - make the tax treatment of second earners in households more neutral compared with that of single earners;
  - address labor market dualism to improve job opportunities for women.

### Youth employment and labor-market mismatch
- Youth participation rate in Korea declined from about 37 percent in 1994 to around 26½ percent in 2012; the average youth participation rate in the OECD is about 47½ percent.
- The decline in youth participation is partly driven by increasing tertiary enrollment and military conscription, but also by labor market mismatch, which pushes young graduates to withdraw from the labor force.
- Skill Mismatch Index (SMI) construction:
  - SMI = sum_j |S_j - M_j| / 2, where skills are proxied by educational attainment: 1=low, 2=semi, 3=high.
  - Skill supply (S_j) measured by population share with corresponding educational attainment; supply interpolated between census years.
  - Skill demand (M_j) measured by share of employees in industries with skill intensity j using KSIC two-digit industry codes (base year 2006) and an occupation-based alternative using nine KSCO occupations grouped as in Autor et al. (2003).
- Empirical findings:
  - The indicator of mismatches decreased considerably immediately after the Asian crisis but leveled off since 2005.
  - The mismatch indicator is strongly associated with the youth employment rate (YSMI2 in charts).
  - A 10 percent decrease in labor market mismatches could increase employment rates by about 6 to 14 percentage points over the medium term.
  - Policy actions bringing skill mismatches back onto a downward path before 2005 can increase employment rates substantially.
  - Policy recommendations to reduce mismatch:
    - improving social dialogue to identify gaps between school curricula and business needs;
    - enhancing technical vocational education and training, including apprenticeships;
    - introducing mechanisms for early identification of potential labor force leavers to encourage access to employment, education or training opportunities;
    - including job-search techniques in school curricula;
    - improving young people’s access to information on career opportunities.
- Quantified youth employment projection:
  - Policy actions—including targeted educational policies and retraining programs—bringing skill mismatches back onto a downward path before 2005 can increase youth employment rates by 0.6 percentage points per year, which would boost the youth employment rate back to its pre-Asian crisis level within 10 years.

### Reducing labor market dualism: status, causes, and policy levers
- Current status and characteristics:
  - Regular workers account for less than 50 percent of total employees in Korea.
  - Among non-regular workers (temporary, daily, self-employed, unpaid family), the largest proportions are temporary workers and the self-employed.
  - The share of non-regular workers with tertiary education is about 30 percent, compared to that of more than 50 percent for regular workers.
  - Social insurance coverage: about 40 percent of non-regular workers are covered by employees’ pension schemes and health insurance, compared to about 80 percent for regular workers.
  - Mandatory retirement ages averaged 57 years in 2010.
  - Working hours are currently among the highest in OECD countries.
- Economic costs of dualism:
  - A lower share of regular workers (i.e., high share of non-regular workers) makes the labor market more resilient to demand shocks but reduces investment in on-the-job training and human capital for a large share of employees, thereby reducing productivity.
  - High dualism increases inequality and may reduce macro-stability and prospects for sustained high potential growth.
- Policy recommendations to reduce dualism:
  - reduce the relatively high degree of employment protection for regular workers, lowering firms’ incentives to hire non-regular workers;
  - increase the age set by firms for mandatory retirement and re-modulate the seniority-based wage system to reduce incentives for firms to push workers into early retirement and non-regular contracts;
  - improve social coverage for non-regular workers to reduce the labor cost gap between regular and non-regular workers and increase job security;
  - broaden access to training opportunities for non-regular workers, including targeted educational policies and measures to promote transitions to regular employment;
  - policies aimed at reducing working hours could facilitate acceptance of reductions in employment protection.

### Key quantitative and policy conclusions
- Female participation: comprehensive reforms (tax neutrality for second earners, childcare benefits, facilitating part-time work) could increase female participation by about 8 percentage points over the medium term and reduce the male–female participation gap by about 33 percent.
- Youth employment: reversing skill mismatches to pre-2005 paths can increase youth employment by 0.6 percentage points per year, restoring pre-crisis levels within 10 years.
- Labor market mismatches: a 10 percent decrease in mismatches could raise employment rates by about 6 to 14 percentage points over the medium term.
- Labor market duality: reducing dualism is expected to boost employment for youth and women and increase sectoral (mostly services) and aggregate productivity.
- Government agenda cited:
  - target to boost the employment rate to 70 percent by 2017 through the “70 Percent Roadmap,” shifting job creation focus toward females, services and SMEs, increasing youth and aged employment, cutting long working hours, expanding social insurance (including subsidizing low-income employees of SMEs), eliminating discrimination for non-regular workers, and increasing mobility between regular and non-regular workers.

*Source: IMF staff calculations.*

### Appendix I. Skill Intensities of Industries in Korea

### Appendix I. Skill Intensities of Industries in Korea

### Skill intensities by industry
- KSIC 50 — Sale of Motor Vehicles and Motorcycles ; Retail Sale of Automotive Fuel — 2.255M
- KSIC 51 — Wholesale Trade and Commission Trade, Except of Motor Vehicles and Motorcycles — 2.424H
- KSIC 52 — Retail Trade, Except Motor Vehicles and Motorcycles — 2.243M
- KSIC 55 — Hotels and Restaurants — 2.024L
- KSIC 60 — Land Transport ; Transport Via Pipelines — 1.899L
- KSIC 61 — Water Transport — 2.362M
- KSIC 62 — Air Transport — 2.677H
- KSIC 63 — Supporting and Auxiliary Transport Activities ; Activities of Travel Agencies — 2.265M
- KSIC 64 — Post and Telecommunications — 2.426H
- KSIC 65 — Financial Institutions, Except Insurance and Pension Funding — 2.421H
- KSIC 66 — Insurance and Pension Funding, Except Compulsory Social Security — 2.669H
- KSIC 67 — Activities Auxiliary to Financial Intermediation — 2.681H
- KSIC 70 — Real Estate Activities — 2.036L
- KSIC 71 — Renting of Machinery and Equipment without Operator and of — 2.312M
- KSIC 72 — Computer and Related Activities — 2.778H
- KSIC 73 — Research and Development — 2.780H
- KSIC 74 — Professional, Scientific and Technical Services — 2.591H
- KSIC 75 — Business Support Services — 2.120M
- KSIC 80 — Education — 2.690H
- KSIC 85 — Human Health and Veterinary Activities — 2.243M
- KSIC 86 — Social Work Activities — 2.276M
- KSIC 87 — Motion Picture, Broadcasting and Performing Arts Industries — 2.583H
- KSIC 88 — Other Recreational, Cultural and Sporting Activities — 2.253M
- KSIC 90 — Sewage and Refuse Disposal, Sanitation and Similar Activities — 1.895L
- KSIC 91 — Membership Organizations n.e.c. — 2.534H
- KSIC 92 — Maintenance and Repair Services — 2.067M
- KSIC 93 — Other Services Activities — 2.048L

### Summary statistics and thresholds
- Mean — 2.237
- Std Dev — 0.276
- Mean+0.67*Std Dev — 2.422
- Mean-0.67*Std Dev — 2.053

*Source: Appendix I. Skill Intensities of Industries in Korea*

---


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