This report was published with the goal of determining which policy most effectively pursues the objective of simultaneously stimulating the growth of the population and labor supply based on an examination of a variety of policies designed to promote childbirth and the labor supply.
□ The severity of population aging in Korea is widely known, as the country has one of the lowest birth rates and highest rates of population aging in the world.
○ The total fertility rate dropped from 4.53 in 1970 to 2.1 in 1980, below the replacement level, and became the world’s lowest when it reached 1.08 in 2005.
○ Declining birth rates accelerate population aging and impose heavy burdens on elderly care and service providers, such as the national healthcare and pension systems.
- The ratio of the working age population (ages 15 to 64) to the elderly population (age 65 or older) is expected to undergo drastic change, shifting from 8:1 in 2005 to 1.4:1 by 2050, foreshadowing a drastic hike in the age dependency ratio (proportion of working age population).
○ The main problem with the declining birth rate and population aging is that the young labor force is grievously insufficient to induce economic growth and mitigate the growing cost burdens of elderly care.
□ The role of the low fertility rate along with population aging in exacerbating the depletion of the workforce calls for policies that aim to induce the economic participation of women.
○ In order to combat population aging, it is urgent that Korea secure a firm basis for its workforce in the medium to long term.
○ Possible solutions include: employing the elderly and women, outsourcing and employing immigrant workers, and raising the quality of education to produce a higher-caliber workforce.
○ Policies that target both childbirth and the labor supply are imperative, as high fertility rates help secure a long-term source of human capital, and women’s participation in the workforce has numerous desirable outcomes (Korea’s female employment rate, which was 53.9 percent in 2004, falls far short of the average female employment rate of 60.1 percent among OECD countries, further highlighting the importance of encouraging women’s participation in the labor market.).
□ Such policy objectives were taken into account when analyzing how women choose between bearing children and entering the workforce and conducting simulations to see how various policies of developed countries would perform in Korea. The details of the compare-and-contrast analysis are as follows.
○ Child allowances: A monthly benefit of KRW 100,000 provided to families with children up to the age of five, regardless of the income levels or employment status of family members.
○ Conditional childcare subsidies: A monthly benefit of KRW 100,000 or child support services provided to families with children up to the age of five, as long as the mother of the family is employed.
○ Tax credit for children: A tax credit of three percent per child up to the age of five provided on the salaries of working mothers.
○ Parental leave: Mothers can take a paid leave that covers 20 percent of their salary for two years.
□ The simulations suggested that the provision of family support policies with the aim of inducing increased labor participation is less costly and achieves more positive outcomes than an unconditional support policy.
○ Child support with the aim of inducing greater labor participation is, overall, a good motivator and has an incredibly positive impact on the labor supply and birth rate.
○ Providing benefits to people in the workforce, in the form of tax credits or paid parental leave, can also prove cost-effective, as it increases the labor supply and encourages childbirth and economic participation.
○ Providing benefits without the premise of inducing labor activity is not an effective way of incentivizing people to participate in the labor market and therefore decreases the labor supply, causing a decline in income tax revenue.
□ Therefore, it is necessary to implement family-friendly policies in conjunction with labor-activity-inducing plans in order to expand the workforce, as these two approaches will effectively encourage childbirth and labor participation, both of which are key to offsetting the effects of an aging population and securing human capital.