Small Businesses Are Lowering South Korean Fertility

A lack of large company jobs prevents young South Koreans from settling down

If its leaders are to be believed, South Korea is facing national extinction. Not just the usual kind from the North, mind you, but from a cratering fertility rate that has yet to find its floor.

With just 0.68 children per woman expected in 2024, South Korea’s population is on track to halve by the end of the century. Within 50 years, half of Koreans may be over the age of 65. The economic calamity of such a scenario should be easy enough to grasp. As a super-aging society with a dearth of taxpayers, South Korea will face a significant shortfall in pensions and healthcare in the coming decades. Innovative companies like Samsung that drive Korea’s growth will increasingly find the human capital wanting in a republic of octogenarians.

For foreign observers, the geopolitical consequences of a vanishing Korea should equally raise concerns. South Korea happens to be surrounded by an increasingly integrated block of authoritarian regimes keen on expansion. While the Biden administration is pleading with Yoon’s government to restrict chip exports to China today, a whithering South Korea would find it increasingly difficult to resist the orbit of a neighbor desperate for expertise in South Korea’s biggest exports. And a Korea that answered to Beijing would, of course, be nothing more than a reversion to the five-century norm of the Joseon Dynasty.

Need we start with the risks from the North? Kim Jong-Un weeps from his nation’s own fertility woes, but at current rates, North and South Korea’s populations—and manpower—are converging. North Korea, it should be noted, formally abandoned its longstanding goal of reunification this year, while opting to identify South Korea as its principal enemy.

The stakes, it may be said, are high. Yet the response has been quite tepid. True, South Korea has spent over $270 billion on subsidies to boost fertility since 2006, but since the same date, the nation’s fertility rate has continued its descent to new lows. Worse still, the speed of the collapse has hastened in the past decade: since 2015, fertility has declined every year, after some initial change of course in the late aughts. For a country that has seemingly mastered the collective action problem, this is a poor showing.

Last month’s South Korean midterm elections did not inspire confidence that tactical changes are afoot. At a time when South Korea needs more than half measures, both the conservative People Power Party (PPP) and liberal Democratic Party Korea (DPK) put up proposals that read like more of the same—the liberals advocating for public housing and greater subsidies, and the conservatives making paternal leave mandatory. For voters, anyway, the elections were much more about striking doctors, green onions, and luxury handbag bribes.

The most radical proposal may still be in the works: a whopping $73,000 cash subsidy for new parents. While the figure is impressive, it is only the latest instantiation of what has long been apparent: South Korea’s government would like to solve its birth rate woes through precision nudges that uphold the status quo. Surely that is the dream of President Yoon, a childless Seoul National University graduate who has been served well by the Confucian Olympics. Prime Minister Han Duck-soo, a Harvard PhD equally bereft of progeny, likely feels much the same.

But as South Korea’s government inevitably finds it cannot pay its way out of its demographic collapse, it must turn its attention to the structural causes of its particularly low fertility rate. Among them is the most warped labor market in the developed world.

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South Korea’s youth are not alone—young people across the world are opting out of starting families at unprecedented rates. This reflects a more general cultural shift toward careerism and personal autonomy that cannot be fixed by any conceivable government policy. It is indeed what unites East Asia with the Middle East with the Americas. Save some religious communities, waning interest in family formation is as universal as microplastics and Taylor Swift.

But the extremity of South Korea’s collapse demands special attention. Neighboring Japan, among the first countries to reckon seriously with population decline, currently boasts a 75 percent higher fertility rate. Both countries share a Confucian legacy and grueling work cultures, yet South Korea, despite being late to development, is racing past its long-time rival in its demographic collapse.

So forget the question of why the developed world more generally has stopped having kids for a moment. Instead ask: what makes South Korea the world leader in this modern pathology? There are a number of cultural features that don’t sit well with South Korea’s current status—its reputation for conservatism and unusually high rates of Christianity among them. (Did I mention the childless President Yoon is a Roman Catholic?)

But where South Korea measurably exceeds Japan—and indeed, the rest of the developed world—is in its inflexible working conditions for women, extreme geographic concentration around its capital, and overinvestment in education.

On the first front, South Korea consistently ranks last in the OECD for women’s working conditions. Retrograde corporate cultures often force women to choose between career advancement and motherhood, leaving South Korea with the highest wage inequality between men and women among OECD countries. Faced with a job market that makes few allowances for motherhood, just a quarter of South Korean women in their 20s say that marriage is “something one should do” as recently as 2022. Simply put, given the choice between a family and a career, more South Korean women are choosing the latter.

Density, though causally more ambiguous, also demands attention. During the last decade, 600,000 South Koreans in their 20s have moved to the Seoul area from their hometowns, and between 2015 and 2021, 78.5 percent of new arrivals to the Seoul area were young adults. While other cities such as Busan and Daegu face stagnant or shrinking populations, the greater Seoul area continues to swell.

The result is that half of South Korea’s 50 million people now live around a single city, where apartment-centric dwellings and an expensive housing market may make family formation difficult. Today, young adults in Seoul rent at higher rates than ever, abandoning traditional Jeonse arrangements, which though flawed, are more conducive to family formation. Seoul today has just a 0.55 fertility rate, yet it is worth noting that all South Korean cities have extremely low fertility. (Tokyo Prefecture, for the record, had a fertility rate of just over 1 in 2022.)

Apartments in Seoul

Lastly, South Korea’s outsized investment in education makes South Korea the most expensive place to raise a child, potentially forming an effective tax on fertility. Such investment starts early, with over 80 percent of 5-year-olds receiving private tutoring in recent years. Tutoring emphasizes English education and, later, preparation for South Korea’s grueling, nine-hour college admissions exam—more like the MCAT than the SAT. It is not uncommon for ambitious parents to move to an English-speaking country to improve their children’s language skills.¹ (Japan, it should be noted, has no such infatuation with weird Germanic languages.)

Perhaps South Korea’s troubles along these three dimensions are just a case of cultural differences—maybe Japan’s salarymen are a little less chauvinistic and keen on education. It is certainly true that while Japan and Korea are superficially similar, Korea is notably more collectivistic. Communal eating, and a linguistic tendency to swap “my” for “our” when discussing everything from relatives to housing, are just a few manifestations of one of the world’s most tight-knit cultures. On a peninsula bereft of arable land (it is mostly crags, usually cold) and hemmed in by some of the world’s most formidable empires, community is, to be fair, a very good strategy.

Keeping up with the Joneses may be part of the story. So too may be a growing rancor between men and women. But here we should consider structural differences between South Korea and its peers. And it turns out, South Korea’s economic history has produced a unique labor market, placing unusually high pressure on young workers.

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Before we get to the weirdness of South Korea’s labor market today, let’s start with the story of how South Korea was built. South Korea today registers as prosperous and mostly liberal (freedom of the press is a work in progress), yet it has the most tumultuous recent history of any East Asian nation. It is indeed a miracle that of the three major East Asian nations today, South Korea is the wealthiest despite being repeatedly colonized and razed by the other two.

Such a state of affairs could have hardly been anticipated after the 1953 Korean Armistice Agreement, when South Korea, fresh off a half-century of Japanese occupation and a Cold War bloodletting, was poorer than much of Sub-Saharan Africa. As North Korea grew swiftly under a Soviet-backed development campaign (yes, really), South Korea’s first president, the US-backed Syngman Rhee, did little to improve his own nation’s economic prospects over twelve feckless years in power. The North set up steel mills with Soviet assistance—business leaders in the South siphoned off US aid without improving the nation’s industrial capacity.

With some Koreans opting to immigrate north out of frustration with their side’s dismal state—and the threat of another invasion from the north looming ever larger—the stakes in South Korea’s politics were especially high in the early 1960s. Into this backdrop stepped the man who would spark perhaps the greatest growth project in world history—the Japanese collaborator, one-time communist, and abortifacient survivor Park Chung-hee.

Park Chung-hee. He was apparently as humorless as he looked.

Ideologically, Park is difficult to square—he was nearly executed for being a communist in the 1940s but was spared due to his potential as a military officer. Yet Park maintained an affinity for central planning, even being dubbed “Parkov” upon his ascent in the early 1960s. His saving grace was a strong Japanese influence from his days fighting in Manchukuo. Park—or at least the Western-trained economists he hired—seemed to grasp early on that Japan’s supremacy owed largely to its export-driven development during the Meiji Restoration (less a restoration, more a Westernization) when the nation rapidly modernized through forays into light industry such as textiles. (Kim Il-Sung, by contrast, built his reputation as a liberator from the Japanese, perhaps owing to the North’s unwillingness to heed the basic economic dictates born out by its occupier.)

Park toppled the ailing Rhee government with a military junta in 1961 before being narrowly elected president in 1963. In one of his first actions as head of state, Park arrested the nation’s complacent business leaders—the very progenitors of the chaebols (family-run conglomerates) that lord over South Korea today—and demanded that they submit to his manufacturing-forward development vision. Knowing resistance was futile, businesses fell in line, agreeing to pursue Park’s favored industries in exchange for cheap credit from Korea’s increasingly nationalized banking sector.

What made such a centralized model work was an obsession with exports. In some sense, this was an inversion of what communist countries had done—pursuing self-sufficiency at the cost of global competitiveness à la juche. Yet Park’s economists understood that competing in global markets was essential to development. Businesses had to meet ambitious export targets if they wanted the Park government’s subsidies, which in turn meant foreigners had to want the stuff Samsung and other chaebols were selling—Hyundais, not Yugos. Unlike in much of the developing world, where governments merely enabled rent-seeking through import substitution—making natives buy crappy native products—South Korea complemented its protections on native industries with a hearty shove into the deep end.

The other part of what made such a model work—and the reason why if you write Park Chung-hee’s name on the board in a Korean girls’ school, students will shudder—was ruthless authoritarianism. One Roman Catholic priest aptly observed in 1974 that Park’s model looked much like Stalin’s industrialization campaign. To meet the targets of Park’s own five-year plans, unions were suppressed to keep wages low, and 11-year-olds could work nearly 80 hours a week to make ends meet. A police state was created to keep a check on Communist influence, while rows of apartments grew overnight throughout the slums of Seoul to house South Korea’s budding Stakhanovites.

Alas, no one gets to be a global leader in steel production with European holidays and minimum wage laws. But the results were incontestable: with Park’s government acting as “entrepreneur-manager,” South Korea sustained a GDP growth rate of over 9 percent for almost all of Park’s 18 years in power.

Through Park’s system of sticks and carrots, South Korea’s distinctive economic structure thus began to take form. For companies like Samsung—once a purveyor of dried fish—success in one industry begot success in others, leading to a vast network of subsidiaries in industries ranging from petrochemicals to marine insurance. Soon, chaebol families were making forays into technologically intensive industries. With the tech rivalry between the US and Japan coming to a head in the 1980s, Samsung and SK would seize on a US-backed entry into semiconductors, giving them a sizeable share in the world’s most important industry today.

But Park would not get to see South Korea’s rise in semiconductors. In an anticlimactic ending to his 18 years in power, he was assassinated at a dinner banquet in 1979 by the head of South Korea’s central intelligence agency, whom Park had chided earlier that night for not violently suppressing student protests enough. It is unclear whether the attack was planned.

Park’s death was met with ambivalence, and his reputation only declined further following the democratization that came with the 1987 June Uprising. But Park’s government may be credited with South Korea’s status as a wealthy country. Truly, there was nothing spontaneous about a nation of rice paddies steeped in a Confucian appreciation of the arts transforming itself into an industrial bulwark. Park was a tyrant who, unlike Stalin or Kim Il-sung, heeded the lessons of Meiji-era Japan.

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Park’s “entrepreneur-manager” approach may have made South Korea wealthy, but it also had the effect of concentrating productivity and innovation in the handful of chaebols that enjoyed government favor. And even as the government has reduced the formal ties between the state and businesses in recent decades, South Korea remains a nation whose economic prospects depend on a short list of firms, and where the line between industry and government blurs. This has large implications for the kinds of jobs young South Koreans seek out.

Living in Korea, it becomes apparent that companies like Samsung and Hyundai have penetrated so many domestic markets that it’s impossible to stray from their reach. A morning survey of The Korea Times reveals that Hyundai—widely known as an auto manufacturer in the West—has issued an apology for defects at a new apartment complex in Muan County. Scroll further and learn that SK Networks—through which I get my cellphone plan—posted solid Q1 earnings thanks to a recovery in its hotel business. The good news doesn’t end there, though, as the sister company SK E&S just completed the world's largest liquefied hydrogen plant.

With such scope, revenue at the ten largest chaebols has amounted to more than two-thirds of South Korea’s GDP in recent years. Innovation in South Korea’s major export industries is almost entirely dependent on these megafirms as well—Samsung’s spending on R&D exceeds that of India as a whole.

Even with the liberal reforms of the late 20th century, then, it should not be surprising that surreptitious ties between the state and big business persist. As recently as 2017, the now-pardoned President Park Geun-hye accepted bribes to the tune of $38 million from the Samsung CEO in exchange for the approval of a merger. Perhaps it is worth mentioning that Park’s father was none other than Park Chung-hee himself. (Something about apples and trees.)

But this episode was only truly striking since it implicated the sitting president: executives from Samsung, Hyundai, Lotte, and SK have all faced charges for corruption in the past decade, with many receiving swift clemency for their crimes. Little wonder it is that the heads of chaebols continue to form a part of the president’s coterie, even traveling with the head of state to visit other nations.

The results of this collusive relationship manifest in financial markets. While limits on foreign ownership of chaebols have been raised since the Park era, it has long been observed that South Korean stocks face the “Korea discount”—they are systematically undervalued. But in understanding that chaebol interests and government interests are inseparable, this is rational. The hedge fund Elliott Investment Management was no doubt dismayed when the South Korean Ministry of Justice blocked its collection of a $700 million judgment stemming from collusion between the government and Samsung over a merger. Collusion begets collusions because the whole system was designed to be collusive.

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Given their suspicious dealings with the government and outsized market power, chaebols are a frequent target of scorn today. Some might suspect that any kinks in South Korea’s labor market are due to the anticompetitive practices of these would-be monopolists.

But for all their documented malfeasance—a bit of price fixing here and there— chaebols mostly deliver: they are South Korea’s most productive businesses and remain at the cutting edge in the nation’s export-driven economy. Companies like Samsung cannot sit back and collect rents even domestically, as evinced by the growing popularity of the iPhone in Korea.

For workers, chaebols’ dominance within the Korean economy also makes them the most lucrative places to work. Younger generations have taken note: today, the ratio of young workers at large businesses is 1.5 times larger than at small and medium enterprises (SMEs). In the last two decades, graduates of Korea’s top universities, who once favored law and civil service, have increasingly pursued jobs at top chaebols like Samsung.

And while chaebols are known for martial work cultures, they remain better than the alternative. As one job-seeker put it, “you will work overtime in every company anyway, so it’s better to stick with ones that actually pay you for overtime.”

Chaebols have also shown they are more adaptive to the needs of younger workers than smaller firms. In response to the nation’s fertility woes, companies like Samsung are adopting more Western corporate practices that offer more flexibility for would-be parents. Two years of maternity leave is now standard at the largest chaebols, exceeding even the government’s requirements.

South Korea’s relationship with chaebols, then, may be said to be a love-hate one—no different than the American who can’t resist the Walton family’s Great Value or Bezos’ two-day logistical feat. But the biggest problem with chaebols, it turns out, is not collusion or anticompetitive practices—it’s that there aren’t enough of them.

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Between the Hyundai apartments and Samsung theme parks, South Korea certainly looks like a nation of big business. But looks can be deceiving: peak beneath the hood and you find that the Republic of Samsung is a nation awash in shitty small businesses.

With just 14 percent of jobs at companies with over 250 employees, South Korea has the lowest proportion of jobs at big companies of any nation in the OECD. Contrast this with the U.S., where 58 percent of jobs are at such companies.

Source

Small businesses aren’t always bad for employees—maybe you get more autonomy and fewer shrill HR managers. But South Korea’s small businesses are distinctively unproductive and retrograde in their work cultures, making them far less attractive employment options.

While SMEs are rarely as productive as large ones, it is truly striking how unproductive South Korea’s small businesses are compared to those in Western nations. The OECD, for example, found small service sector firms in Korea are 30 percent as productive as larger firms with over 250 workers. In the Netherlands and Germany, that figure is 84 and 90 percent, respectively. Similarly, the Asian Development Bank found that in 2010, small Korean firms with five to 49 workers were just 22 percent as productive as firms with over 200 workers.

And extremely low productivity manifests just how you might expect: in very low wages. The disparity between pay at small and large businesses in South Korea is accordingly higher than in any other OECD nation.

Source (2019)

In a culture where norms have traditionally centered on grinding yourself into a nub, work cultures at SMEs in South Korea also tend to lag behind those of their larger peers. Only 50.8 percent of small businesses hiring from 10 to 29 workers said any of their workers can take childcare leave freely. At large companies hiring 300 or more workers, the ratio is around 95 percent, with chaebols like Samsung offering the most expansive benefits.

And here we arrive at the crux of the problem: given their low wages and outdated corporate cultures, SMEs in South Korea hold little appeal for younger workers—so little that many young Koreans would rather sit and wait for chaebol jobs than work for an SME. Yet their overabundance means that even the most educated South Koreans are unlikely to find themselves working for a big firm.

It should be easy to see how this two-tiered job market exacerbates South Korea’s fertility woes. Landing jobs at top firms—forget about Samsung, just any large business—requires an immense upfront investment that detracts from family formation. Yet opting out of the rat race means resigning to a job that may well not afford workers—and especially women—much room to have a child.

The contrast with the US here is drastic. Consider that less than 40 percent of Americans even have a college degree. With more than half of job openings at large companies—and a smaller gap between pay at small and large firms to boot—this creates abundant opportunities for young college graduates and even non-graduates. By contrast, 70 percent of Koreans have a tertiary degree, and these graduates are forced to compete for a tiny pool of desirable jobs that pay the lion’s share of wages. As much as any value system, this creates a society where no one can take their foot off the gas.

But the question remains: how did South Korea end up with so many small businesses? Why does the job distribution in one of the world’s most advanced economies look like that of Greece, Italy, and Latvia instead of Japan, France, and the US? And why are these businesses so unproductive?

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The story of South Korea’s ingenious use of corporate subsidies, it turns out, has been oversold. South Korea’s government in fact shells out lots of money keeping unproductive small businesses afloat, with little in the way of economic gain to show for it.

The corporate tax rate for small businesses, for example, is up to 63 percent lower than for large businesses. Banks are also pressured to lend to small businesses at astronomical rates. In 2012 78 percent of bank lending went to SMEs, compared to about 25 percent in the U.S., while 79 percent of loans were collateralized or guaranteed by the government. The government further maintains more than 1000 small business support programs.

In short, small businesses are the beneficiaries of extreme corporate welfare. Yet unlike Park’s chaebols, which took subsidies in exchange for meeting export targets—remember, Hyundais, not Yugos—these are domestic operators with no such discipline. Samsung gets subsidies to build semiconductors for global markets, while small businesses get cheap credit and tax breaks to cover the next payroll. The incentives are quite different.

So why does South Korea spend so much money subsidizing poorly run small businesses? The simple answer may be that it is especially good politics in a nation where chaebols are met with suspicion over their ties to the government. Politicians can point to this “support” for small businesses as evidence that they are not in bed with firms like Samsung.

Yet the current system of subsidies for small businesses is to the benefit of chaebols—it keeps would-be competitors on a morphine drip that prevents them from trying to scale up. The incentives are to stay small and mediocre to sustain easy credit access and low taxes. Even as these subsidies seem to fly in the face of claims of chaebol bias, then, they serve the status quo.

A darker answer is that SMEs are disproportionately run by older generations, who face the highest rates of old-age poverty in the OECD. Due to South Korea’s rapid development, those raised in the wake of the Korean Armistice Agreement—when South Korea was still dirt poor—face puny pensions today. Subsidies for SMEs may be a way of compensating for their elderly owners’ limited financial support in old age. This accords with my impression that there are suspiciously many elderly produce vendors throughout Busan—much more like what you would expect to find in Mexico than one of the richest large economies in the world.

Whatever the exact reason, South Korea’s government has created a two-tiered economy in which a small list of megafirms compete globally while most businesses languish domestically. The result is a dearth of opportunity for South Korea’s youngest generations, who must fight tooth and nail for opportunities at the biggest firms before they can think about having kids. Given the numbers, most will not come out ahead.

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Asked about the nation’s fertility woes, President Yoon recently declared that South Korean culture is too competitive. In one sense, he is right—young people find themselves in a high-stakes game for vanishingly few jobs at the nation’s best firms.

But in another sense, he misses the mark: South Korea’s young people are suffering in large part from a lack of competition among firms. Extensive corporate welfare has produced a system in which businesses are paid to occupy different niches rather than evolving according to market incentives. Samsung is paid to be big and dynamic, and the rest of South Korea’s businesses are paid to stay out of the way. As a result, many businesses that should have foundered generations ago persist. For younger generations who have no interest in suffering corporate cultures and wages that date to the Park Chung-hee era, this is not a recipe for settling down.

Returning to the three dimensions where South Korea is anomalous—poor conditions for working women, concentration around a single city, and overinvestment in education—it should be easy to see how South Korea’s warped labor market fuels each.

For women, an overabundance of unproductive small businesses makes them less likely to find adequate support for having a child from employers. SMEs’ low productivity and small staff sizes offer less flexibility for employees who need time off or cannot spend their nights at the office, on top of worse wages. And given their age and complacency—their owners may well have been raised under Park’s five-year plans—they are also far less likely to adopt the more Westernized corporate practices of multinationals like Samsung.

In terms of density, South Koreans are concentrating around Seoul because that is where the handful of large companies worth working for are headquartered. Staying close to home means working for SMEs with drastically lower wages and outdated cultures, a prospect few wish to face when the capital is never more than four hours away.

In terms of investment in education, low wages at SMEs and a shortage of large company jobs mean attending an elite university generates greater financial rewards than in other nations. South Koreans’ immense investment in English education in particular is a rational response to the hiring practices of chaebols, which often use TOEIC scores to evaluate candidates.

Culture should not be discounted in understanding South Korea’s crisis—education fever goes back much further than the nation’s current infatuation with English, and relations between men and women are unusually strained. But the structure of South Korea’s labor market only works to exacerbate these trends. A zero-sum job market that produces such a clean split between winners and losers keeps everyone harried.

If South Korea wishes to get serious about its fertility crisis, it may start by learning to embrace the travails of a market economy, in which businesses succeed—and fail—according to market forces rather than government handouts. Younger generations should be allowed to take the lead in replacing last century’s work cultures, instead of being funneled into working for SMEs that still use fax machines. Alas, for a country still at war with a nuclear-armed neighbor, destruction of any kind is a hard sell.

1. Before I learned about this, I met a South Korean who mentioned they had lived in South Africa as a kid. When asked if one of his parents was a diplomat he looked confused.