[Productivity Diagnosis] In Korea, Seniority Trumps Ability—Leaving Productivity and Innovation at Rock Bottom

Fossilized Labor Markets in Korea and Japan
Korea’s Labor Productivity Ranks Lowest in the OECD
Wages Up 4%, Productivity Barely 1.7%

Concerns are mounting that Korea’s rigid labor market is stifling the nation’s economic growth. While major economies are pursuing labor productivity reforms, Korea remains trapped in a cycle of declining productivity, weighed down by high wages and excessive employment security. The main factor distorting Korea’s labor market is its entrenched seniority-based pay system. When employees doing the same work are paid up to three times more simply based on tenure, a decline in productivity is inevitable. Despite rising labor costs, productivity has failed to keep pace, raising alarm over an impending cycle of deteriorating competitiveness, shrinking profitability, and capital flight.

Cracks in Japan’s Seniority System, but Productivity Still Lags

According to Nikkei and other local media on the 7th, Japan’s deeply rooted seniority system is beginning to show cracks. Younger workers are increasingly drawn to foreign companies where performance and ability are rewarded. A recent survey by consulting firm Macromill of Japanese workers aged 22 to 25 found that 34% preferred seniority-based pay structures, while 42% favored merit-based systems. Although 40% still hoped to remain at their current jobs “until retirement,” 39.5% said they would change jobs “if a better opportunity arises.”

Beyond shifting perceptions among younger workers, declining productivity is also fueling the push to dismantle the seniority system. Japan ranks 29th among the 38 OECD countries in labor productivity. According to data from the Japan Productivity Center, the number of unicorn companies—private startups valued at over $1 billion—remains in the single digits, compared to more than 700 in the United States as of September. The innovation capacity that once propelled Japan’s global dominance in the 1980s has effectively vanished under the weight of stagnant productivity.

Although more Japanese corporations—including apparel giant Uniqlo, financial institution Sumitomo Mitsui Banking Corporation, and electronics manufacturer Sony—are shifting from seniority-based to performance-based systems, most reforms are proceeding slowly due to resistance from older employees. Japan’s financial sector has previously attempted to pay higher salaries to talented younger workers. As early as 2011, the Japan Business Federation (Keidanren) warned that Japan’s seniority system had failed to respond to intensifying global competition and prolonged deflation. Yet such attempts have often collapsed under resentment typified by complaints like “It’s unacceptable for a junior employee to earn more than a manager.” As a result, Japan’s traditional heavy industries and their vast networks of subcontractors remain deeply entrenched in seniority-based hierarchies.

Korea’s Labor Productivity Near the Bottom, Rising Social Costs Loom

The situation in Korea is even more alarming. According to research by the Korea Chamber of Commerce and Industry’s Sustainable Growth Initiative (SGI), since 2018 wage growth has outpaced productivity gains, significantly weakening labor productivity. From 2000 to 2017, wages and productivity rose in tandem at an average annual rate of 3.2%. But between 2018 and 2023, wages rose 4.0% per year while productivity increased by only 1.7%.

Korea’s productivity levels fall far short of countries that have adopted four-day workweeks, such as Belgium ($125,000) and Iceland ($144,000). They also lag behind France ($99,000), Germany ($99,000), and the United Kingdom ($101,000), which are piloting similar systems. Researchers attribute Korea’s weakened labor competitiveness to steep wage hikes amid economic stagnation—driven by both seniority-based pay and rapid increases in the minimum wage. Korea’s annual labor productivity stands at $65,000, placing it 34th among the 38 OECD members, just 67% of the OECD average of $97,000.

In Korea, employees with 15–19 years of tenure earn 3.33 times more than those with less than one year of experience, and those with over 30 years earn 4.39 times more. This wage gap far exceeds that of other nations. In manufacturing, the wage ratio between employees with 20–30 years of service and those with less than one year is 2.83 times—higher even than Japan’s 2.55, where seniority remains deeply embedded. In comparison, Germany (1.88) and the U.K. (1.5) report much smaller gaps. In practice, once hired in Korea, dismissal before the retirement age of 60 is almost impossible without extraordinary cause—particularly in large corporations. According to the Ministry of Employment and Labor, as of 2022 the average tenure at firms with over 500 employees was 11.2 years, double the 5.8 years seen at firms with 5–29 workers, underscoring the higher job security enjoyed by large-company employees.

This rigidity driven by seniority-based pay has also slowed Total Factor Productivity (TFP). OECD data show that Korea’s TFP growth, which had hovered around 3%, has plunged to around 1% since 2011. Experts note that TFP depends less on technological advances per se and more on an economy’s ability to absorb organizational, institutional, and labor-market innovation. Despite decades of heavy investment in IT and technology development, Korea’s TFP decline reflects the drag from delayed labor reforms that have hindered the diffusion of innovation across industries. The stagnation in labor reform has spawned “zombie firms,” misallocating capital and preventing resources from flowing to high-productivity startups and innovative enterprises—creating a vicious cycle of “slower innovation diffusion → weaker TFP.”

Breaking Seniority, Introducing Performance-Based Pay

Japan’s postwar seniority-based pay structure once supported corporate stability and long-term growth, and Korea adopted the same model during its rapid industrial expansion in the 1970s and 1980s. With a favorable demographic structure, the system encouraged long tenures and served as a mechanism for human-capital accumulation.

But with today’s demographic shift toward low birthrates and an aging population, experts say the seniority model has become obsolete. Maintaining long-term wage contracts under these conditions could jeopardize corporate management and, in turn, burden taxpayers through increased social costs. The Korea Labor Institute estimates that if current trends in productivity and population persist, Korea will face social costs equivalent to roughly 7% of GDP.

As wages rise without matching productivity gains, the rigid labor market is accelerating capital outflows rather than attracting investment. The Korea Development Institute (KDI) recently concluded that productivity stagnation has become a key factor undermining domestic investment and driving capital overseas. The KDI found that a 0.1% drop in productivity corresponds to a 0.15% decline in GDP. With sluggish manufacturing productivity translating into fewer youth employment opportunities, and both capital and jobs leaving the country, sporadic rebounds in certain industries will not be enough to restore economic vitality.

Experts unanimously stress the urgency of dismantling labor rigidity and increasing both wage and employment flexibility. In the age of artificial intelligence, where productivity is paramount, the current wage system is unsustainable. Leading global corporations such as GE, IBM, Google, and Amazon—and even Chinese giants operating under socialist structures like Huawei, Xiaomi, and Tencent—have already adopted job-based pay systems. Across Europe, job-based or hybrid systems combining role and competency assessments are the norm; in the U.K., roughly 80% of companies pay wages based on job classification. As job-based pay becomes the global standard, Korea risks being left behind.