Trapped in K-shaped economy

Is Korea trapped in a K-shaped economy? Likely so. While a few sectors, most notably semiconductors, are experiencing euphoria from record-high profits, a far greater number of sectors are witnessing plunging profitability and stagnant job growth. The structural problems within the Korean economy are deepening socioeconomic polarization and driving a distinct K-shaped growth pattern.

As of July 2026, Korea's economic growth forecast for the year has been revised upward significantly on the back of strong growth in the semiconductor, IT and shipbuilding sectors. The Ministry of Economy and Finance projected this year's growth rate at 3.0 percent, while the IMF upped it to 2.6 percent from its April forecast of 1.9 percent. Investment banks such as Goldman Sachs and JPMorgan raised it to 3.2 percent and 3.8 percent, respectively. It is a significant jump from the growth rate of 1.1 percent in 2025 and 2.2 percent in 2024. Driven by robust exports, the country is posting a current account surplus of 5.6 percent, one of the largest among major economies, next to Taiwan’s 18.1 percent.

However, the strong growth is not commensurate with job creation, resulting in jobless growth due to the weak job creation capacity of the semiconductor and IT sectors. The current growth pattern is also extremely vulnerable to the silicon cycle, as semiconductors account for almost 20 percent of Korea’s total exports. Furthermore, according to Korea’s Ministry of Data and Statistics, the employment inducement coefficient for semiconductors is less than half (2.4 persons per KRW 1 billion worth of demand as of 2023) of the overall manufacturing average of 4.85, highlighting the sector’s very low capacity to absorb labor.

Weaker job creation and labor absorption have hit youth employment the hardest. During the first seven months of the year, the unemployment rate for people ages 15-29 reached 7.2 percent, while the number of employed youth during the same period plunged by 18.6 percent, marking a decline continuing for 45 consecutive months. Alarmed, the government is set to announce a youth job recovery plan as early as this month which aims to produce 200,000 professionals in high-tech industries and youth-preferred fields such as AI, semiconductors, finance and content, while creating 300,000 jobs across the private, public and startup sectors by 2030.

The government plan should incorporate active labor market policies (ALMP) rooted in flexicurity — a state welfare model that seeks to combine flexibility and security for labor — to minimize the youth labor dropout rate. From an ALMP perspective, public-private collaboration is critical in program design and instructor selection, ensuring that trained youth secure direct placement opportunities within participating companies, countering the corporate preference for mid-career hires over entry-level candidates. Training or upskilling stipends serve as a more efficient mechanism than simple job-seeking allowances. These ALMPs must be integrated into comprehensive policy measures designed to address the labor-reducing downsides of the AI transformation, factoring in the characteristics of the Korean labor market where it is difficult to hire and fire.

Other acute factors are also pushing the Korean economy into a predicament. Sluggish domestic demand arising from inflationary pressures, high household debt and reduced disposable income is suppressing balanced economic growth.

Inflation affecting consumer prices remained high at 2.8 percent in July, down from 3.2 percent in June due to stabilizing yet highly volatile oil prices. However, core inflation, which excludes food and energy, stood at 2.6 percent, up from 2.5 percent in June.

The household debt-to-GDP ratio was 88.6 percent at the end of 2025, according to the Bank for International Settlements. The government targets reducing it to 80 percent of GDP by 2030. Despite surging house prices, household loan growth will be capped at 3 percent for this year, up from the initial 1.5 percent. Limiting the household loan growth has generated significant conflict between the government and citizens, serving as a major driver behind the president's sliding approval ratings.

A severe imbalance in housing supply and demand persists, particularly within Seoul. A series of meetings and negotiations between the central government and the Seoul Metropolitan Government is underway to secure land for housing development in the city. The parties concerned must strive to reach a reasonable solution at the earliest possible time, given mounting public frustration and anger.

Concurrently, policymakers must not overemphasize public rental housing for the young population, as young people also aspire to climb the property ladder toward outright homeownership. Market solutions should avoid overly suppressing basic human desires for homeownership in places of their choice.

Following the introduction of leveraged ETFs, many individuals jumped into stock investment, but widespread investment failure ensued due to excessive volatility. This has impacted a significant portion of the population, further depleting disposable incomes that were already strained by high housing prices, living expenses and education costs, which in turn continues to dampen consumer spending. To soothe the wounds of angry citizens, key policymakers must be held accountable. Otherwise, it will continue to drag down the president’s approval ratings.

Song Kyung-jin is senior fellow at Asiatic Research Institute at Korea University.