The number of self-employed workers in Korea is declining sharply amid population decline and sluggish domestic demand. According to Statistics Korea, the number fell to 5.5 million in January 2025, the lowest level since January 2023, toward the end of the Covid-19 pandemic. The photo shows a shop selling secondhand commercial kitchen equipment in Hwanghak-dong's kitchenware district in Jung District, central Seoul.YONHAP
Kwon Nam-hoon
The author is the president of the Korea Institute for Industrial Economics and Trade.
Korea's economic performance looks impressive. In July, the government raised its growth forecast from 2 percent to 3 percent, while the Organisation for Economic Cooperation and Development (OECD) subsequently lifted its projection to 3.7 percent.
Yet semiconductor-driven growth has not fundamentally strengthened the economy. First quarter GDP grew 3.8 percent on year, with information and communications technology industries expanding 16.2 percent while other industries grew just 2.2 percent. The Korea Development Institute estimates potential growth at only around 1.5 percent.
Exports are also generating fewer jobs. According to the Bank of Korea, exports worth 1 billion won created five jobs in 2024, down from 6.6 in 2020. Equivalent consumer spending generated 9.7 jobs.
Manufacturing employment fell by 73,000 last year, while job gains concentrated in health care and welfare services. Advanced manufacturing increasingly relies on capital and technology rather than labor.
More than 70 percent of Korean workers already work in services. The problem is low productivity.
In 2023, service sector labor productivity was only 49.4 percent of manufacturing productivity, compared with an OECD average of 95.7 percent. Korea's ratio had declined from 57 percent in 2015.
Measurement difficulties and exceptionally productive manufacturing partly explain the gap. But structural weaknesses also matter.
Productivity in information and communications services is nearly four times that in accommodation and food services. Businesses employing at least 100 workers are three times as productive as those employing fewer than five.
Korea ranks near the OECD bottom for investment in intangible assets, including software, data and brands. Services accounted for just 10.4 percent of corporate research and development spending in 2019, the lowest among 35 OECD countries.
Policy has reinforced these weaknesses. Manufacturing has traditionally been treated as an engine of growth and exports, while services have been viewed primarily as livelihoods requiring protection.
Tax incentives favor equipment investment and manufacturing. Licensing and professional restrictions limit competition in transportation, legal services, taxation, real estate and health care.
Restrictions on large retailers' holiday operations have persisted for 14 years despite studies finding little benefit for traditional markets. Proposals allowing early-morning deliveries remain stalled amid opposition from small merchants.
The result is a cycle in which regulation discourages innovation and expansion, perpetuating the small scale that supposedly justifies protection.
Digitalization has removed geographical barriers. According to the World Trade Organization, digitally delivered service exports reached $5.259 trillion in 2025, representing 15.2 percent of global goods and services exports.
Software, consulting, finance, design and content can cross borders and be sold repeatedly without proportionate increases in costs.
Yet Korea ranks eighth in merchandise exports but only 17th in digitally delivered services. Domestic sales account for 98 percent of knowledge-service companies' revenue.
Services also determine manufacturing competitiveness. Research, design, software, logistics, finance, marketing and maintenance increasingly shape products. Automakers are becoming mobility and software companies, while machinery manufacturers increasingly sell maintenance and solutions.
AI makes this relationship more important. Its economic value emerges when businesses apply it to production, distribution, finance, medicine, law and education. Software, data and professional services enable that transformation.
American productivity accelerated in the late 1990s partly because retail and financial services adopted information technology. Europe, which lagged, fell further behind.
If Korean service companies fail to adapt their operations and business models, much of the return on domestic AI investment could flow to foreign platforms and software providers.
Warnings are emerging: Korea's knowledge-intensive services deficit reached a record $10.2 billion last year.
The institutional framework remains inadequate. The Framework Act on Service Industry Development, first proposed in 2011, has remained stalled for 15 years. Four bills await parliamentary subcommittee consideration.
Lawmakers agreed in March to hold public hearings and begin reviewing provisions individually. They should finally deliver results.
One law cannot resolve everything. Sector-specific regulations have legitimate purposes. Nevertheless, coordinated national planning, research support, work force development, export assistance and reliable statistics would provide essential foundations.
Health care could be excluded, as already proposed. Remaining disputes over ministerial authority require coordination rather than indefinite delay.
Four priorities should guide reform.
First, treat digital and professional services as export industries, strengthening financing and overseas expansion support.
Second, encourage larger, more productive businesses through standardization and digitalization while protecting workers displaced during restructuring.
Third, integrate manufacturing with software, subscriptions, maintenance and data services to generate additional value beyond product sales.
Fourth, establish competitive markets allowing entry, expansion and exit, resolving conflicts between incumbents and newcomers according to consumer welfare.
Time is running short. Statistics Korea projects that the working-age population will decline by approximately 500,000 annually during the 2030s. With fewer workers, productivity gains are indispensable. AI and robotics will also accelerate job displacement and labor reallocation.
Korea has established itself as a manufacturing powerhouse. It must now strengthen the services surrounding manufacturing. The semiconductor boom offers an opportunity to finance that transformation.
The next obstacle to growth may lie outside factories rather than inside them.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
