Quantifying the Impact of Aging Workforce on Labor Productivity in South Korea

As of the second quarter of 2024, workers aged 65 and older comprise nearly a quarter of South Korea's workforce, reflecting the country’s rapidly aging labor force. This study examines the impact of an aging workforce on aggregate labor productivity using a quadratic ordinary least squares regression analysis. The results reveal a non-linear relationship between the share of older workers and labor productivity, as evidenced by the quadratic regression model. Initially, an increase in the share of workers aged 65 and over is associated with higher productivity. However, diminishing returns set in, with a one percentage point increase in the share of older workers eventually leading to a 1.93 percentage point decrease in labor productivity at higher levels. These findings highlight the challenges posed by workforce aging, compounded by low fertility rates limiting the entry of younger workers, and highlight the urgency of developing policies to mitigate its economic impact.