Korea's Rapid Aging Doesn’t Have to Be Economic Destiny

IMF News, April 3, 2025

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Article authored by Rahul Anand, Diaa Noureldin, Zexi Sun, and Xin Cindy Xu, dated April 3, 2025.
The IMF’s Article IV report and a new joint selected issues paper with the Bank of Korea, “Transforming the Future: The Impact of Artificial Intelligence in Korea,” form the basis of the analysis.
The analysis assessed how demographic aging, labor market reforms, resource reallocation, and AI adoption could affect Korea’s potential growth.

Aging could shrink the labor force by more than a quarter by 2050, according to the Article IV report.
Aging was projected to lead to an average annual decline of 0.67 percentage point in potential growth.
Strong economic fundamentals and sound macroeconomic policies had helped the Korean economy through multiple shocks, but potential growth had slowed more quickly than in other major advanced economies.

Labor market reforms (drawing on experiences in other advanced economies):
- Assumed increase in participation rate for older workers by 3 percentage points.
- Assumed the gender gap for female participation would decrease by half.
- Such improvements would offset about one-fifth of the aging impact by 2050.
Better allocation of resources across firms:
- A reform scenario assuming a smaller productivity gap between the top and bottom performing firms could raise average annual potential growth by 0.22 percentage points.
- That increase was equal to about one-third of the aging impact.
Combined reforms:
- The combined effects from a higher labor force participation rate, more efficient allocation of resources, and expanded AI adoption could more than fully offset the economic drag from aging.

The new paper identified three channels through which AI could affect the economy:
- Labor displacement, in which AI replaces people in some jobs, increasing productivity but reducing labor demand.
- Labor complementarity, where AI complements people in some roles, increasing productivity without eliminating their jobs.
- Overall productivity increase, or AI boosting productivity across all jobs, in turn raising overall labor demand.
AI adoption across all three channels could increase average annual potential growth by as much as 0.44 percentage point, according to the new paper.

Increasing labor force participation, especially among female and older workers, was recommended to limit the decline in the supply of available workers.
Reforms to improve resource allocation were recommended, including:
- Reducing barriers to opening or closing a business.
- Enhancing access to finance.
- Removing distortive subsidies.
Accelerating reforms was recommended to:
- Deliver growth gains early.
- Earn more support from the public.
- Help defend against potential shocks.
- Increase room in the government budget for adapting to an aging society.