The Peninsula

Are foreign workers a solution to Korea’s demographic challenge?

Korea has faced persistent labor shortages since the late 1980s, centered on small and medium-sized enterprises (SMEs), which tend to pay low wages for low-skilled, non-regular jobs. SMEs have faced increasing difficulty in replacing retiring workers with young people, given the large education gap between generations. In 2021, 69% of the population aged 25 to 34 had a tertiary education, the highest proportion in the OECD, compared to less than one-fifth of the 55-64 age group. Over the decade 2005-15, the number of young people without a tertiary education fell 65%, the largest decline among OECD countries, reflecting the combined effect of shrinking youth cohorts and higher educational attainment. Consequently, young people are a poor fit for the jobs being vacated by retiring older people. Korean youth prefer to work in large companies and the public sector and avoid SMEs, which account for more than 80% of employment in Korea. A 2021 government survey found that less than 5% of young people want to work in an SME. The mismatch between the labor market and the education system has created a large demand for foreign labor.

In addition, Korea faces strong demographic headwinds. The working-age population (15-64) has been falling since 2016 and the total population peaked in 2020. With the world’s lowest fertility rate (0.78 in 2022), Korea’s population is projected to fall by more than one-third to less than 34 million by 2075. Moreover, the elderly dependency ratio would rise to 79%, the highest among OECD countries (Figure 1). This implies that the number of working-age persons per elderly would drop from 4.5 in 2020 to less than 1.3 persons in 2075. Such rapid population aging would have significant economic, social and fiscal impacts, including a heavy burden to provide health and long-term care for older persons.

Meeting Korea’s demographic challenge requires a comprehensive strategy: i) raising productivity to offset the shrinking number of workers; ii) mitigating the decline in labor inputs by increasing the employment rates of groups with low participation – women, young people and older persons; iii) raising the fertility rate; and iv) making greater use of foreign workers.

In 2008, Korea’s First Basic Plan for Immigration Policy proclaimed an “open-door” policy to enhance Korea’s global competitiveness by attracting a more highly-skilled foreign workforce while accepting low-skilled labor only where necessary. It also encourages the entry of overseas ethnic Koreans through easy conditions for entry and employment. Finally, the plan pledged to pursue a “multicultural society where other cultures and races are well received and can co-exist” (Ministry of Justice, 2009).

Korea’s Employment Permit System

The Industrial Trainee System in 1991, which had allowed low-skilled foreign workers to enter Korea, was replaced in 2004 by the Employment Permit System (EPS), which aimed to reduce labor shortages in specific areas. The EPS included two main components. First, it allows SMEs (primarily in the manufacturing sector) to hire workers from 16 other Asian countries that have a bilateral agreement with Korea (Bangladesh, Cambodia, China, East Timor, Indonesia, Kyrgyzstan, Laos, Mongolia, Myanmar, Nepal, Pakistan, Sri Lanka, Thailand, the Philippines, Uzbekistan and Vietnam). Eligible employers choose from a list of candidates who have passed certain tests, including in the Korean language. Foreign workers, who must be between 18 and 39 years old, could initially work for up to three years under an E-9 visa; later changes extended the maximum duration to almost ten years for certain EPS workers. The overall admission quota is set below employers’ demand for foreign workers, reflecting the goal of limiting the entry of low-skilled workers. The System has proved to be popular; since 2008, about 10% of employers with more than five employees had foreign workers. At the end of 2022, there were 276,000 workers with an E-9 visa, 95% of the pre-COVID19 peak.

Second, the special EPS allows overseas ethnic Koreans to work in Korea for three years with an H-2 visa. Migrants under this program tend to be older and less educated than those with E-9 visas. In addition, ethnic overseas Koreans have more access to jobs in services and construction. For example, service-sector companies with six or more workers can hire overseas Koreans for up to 30% to 40% of their domestic workforce. At the end of 2022, there were 106,000 workers with the H-2 visa, though this is significantly less than in the past as it is relatively easy for overseas Koreans to obtain permanent residence. The EPS has enabled Korea, which experienced significant outward migration during the 20^th century, to become a net immigrant country following the introduction of the EPS (Figure 2).

High-skilled foreign workers

Korea has long welcomed highly qualified individuals. Foreign professional workers with specialized knowledge, such as university professors, experts in a specific field, researchers, and English teachers, can work in Korea (E1~E7 visas). However, Korea’s high educational attainment and an oversupply of qualified young people limit the demand for highly skilled foreign workers. Indeed, inflows of skilled workers to Korea is very low, both in absolute terms and relative to population. At the end of 2022, there were 49,000 workers with this visa status.

Nevertheless, the Third Basic Plan for Immigration Policy (2018-22) aimed to reduce the proportion of low-skilled foreign workers and attract more higher-wage, higher-skilled migrants; “Despite the efforts to attract foreign skilled workers, the majority of foreigners with working visas work as low-skilled workers.” Korea’s strategy for attracting highly-skilled foreign workers includes numerous programs aimed at workers involved in export activity, foreign direct investment and knowledge transfers.

Measures to improve and expand the inflow of foreign workers

The share of Korea’s population from foreign countries increased from 0.5% in 2000 to 3.7% in 2021 (Figure 3), with about half holding long-term stay permits. Korea’s foreign population had an employment rate of 67% in 2021, matching the native-born population. Foreign workers thus accounted for about 3% of employment in Korea in 2021, up from 1% in 2000, according to the Korea Statistics. Moreover, their share in manufacturing has risen to around 10%. The EPS, including overseas Koreans employed in Korea, accounted for nearly half of foreign workers, with high-skilled workers, students and permanent residents making up most of the remainder.

With Korea, Japan and China experiencing extremely low birth rates and shrinking and aging populations, competition to attract foreign talent will likely intensify. Despite the EPS, the supply of foreign workers has not matched the demand. Between 2008 and 2017, between 10% and 33% of firms’ requests for foreign workers were not met. In addition, some issues remain:

• Limited job mobility has been a point of contention as EPS workers are expected in principle to stay with their initial employer and moving to another sector is not allowed. Such constraints reduce incentives for employers to improve working conditions and suppress wage growth. Allowing more mobility for EPS workers and authorizing more employment permits to firms than available workers would improve conditions for EPS workers.
• EPS workers are not allowed to bring their families. Most OECD countries allow temporary workers to bring family members, especially if they stay more than one year (OECD, 2019). While this was less problematic when their contracts were limited to three years, the length was extended to four years and ten months in 2008 and to almost ten years for some workers in 2010, as noted above.
• Many OECD countries offer much more generous possibilities for temporary labor migrants to acquire permanent residence status. Many EPS workers acquire specialized skills in Korea and about a one-fifth already hold higher education degrees in their home country. Employers wish to retain the most talented foreign workers. Further expanding opportunities for ESP workers to change their status to an E-7 visa, which is indefinitely renewable and allows family reunification and a pathway to permanent residence, would help retain productive workers.
• While they are covered by four types of social insurance, foreign workers (except those belonging to a household that includes a Korean citizen), do not have access to the Basic Livelihood Security Program and the Earned Income Tax Credit, the primary sources of income support for low-income households. Attracting high-quality foreign workers with their families in the long run will require increasing their coverage by the social safety net.
• The EPS is focused on providing workers to SMEs to promote their survival rather than increase productivity. However, promoting the survival of low-productivity firms has negative implications for economic growth.

The main obstacle to attracting high-skilled talent to Korea is the highly competitive labor market for tertiary-educated workers and a challenging professional environment. Such obstacles are not easily overcome by relaxing immigration requirements. Instead, Korea has scope to improve its quality of opportunities, where it ranked as one of the lowest in the OECD indicator (Figure 4). International students graduating from Korean universities may be one potential source of high-skilled foreign labor. In a 2017 government survey, 24% of international students said that they wanted to work in Korea after graduation. However, less than 6% of students found full-time employment in Korea, reflecting weak connections between universities and firms. Strengthening such links would support the employment of international students. Relaxing regulations on the employment of accompanying family members would also be beneficial. In sum, increasing the inflow of foreign workers has an important role to play in coping with Korea’s demographic challenge.

Randall S. Jones is a Non-Resident Distinguished Fellow at the Korea Economic Institute of America. The views expressed here are the author’s alone.

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