Chapter 1. Introduction


The discussion of weak self-employment relates to contemporary considerations of inclusive and income-driven growth, which are seen as strategies for fairly sharing the benefits of economic production across Korean society. Relevant issues impacting and being impacted by the self-employment sector: Can minimum wage laws can be implemented without undermining the self-employment sector and the livelihoods of those working in the self-employment sector? Are conditions of over-competition in self-employment hindering the contribution the self-employment sector should be making in the broader Korean economy? What can be done to significantly improve the competitiveness and productivity of services and the self-employment sector?

Weakness is not adequately addressed in previous studies of the Korean self-employment sector. Namely, the existing literature 1) does not clearly define Korean self-employment weakness, 2) does not put forth a theory-based approach to identify and measure self-employment weakness, and 3) is unable to recognize the financial and economic impacts of weak self-employment.

This study attempts to fill these gaps and provide a more robust basis on which to connect problems of weak self-employment with broader social concerns.

Section 1. Research gap

Research on Korean self-employment began in earnest approximately twenty years ago in the aftermath of the Asian foreign exchange crisis. From the beginning, researchers have concluded that the self-employment sector is weak (Ryoo JW and Choi HY 1999; Keum JH and Cho JM 2000; Ryoo JW and Choi HY 2000; Ryoo JW 2004; Kim WY and Kim EK 2001; Cheon BY 2003; Keum JH et al. 2003; Sung JM and Ahn JY 2004; Keum JH et al. 2006). Even a generation later, the issues surrounding self-employment weakness remain unresolved. Earnings and working conditions of self-employed workers have deteriorated relative to wage-and-salary workers (Lee SR 2018a; Joint Public Agencies 2018a), and polarization of income and other self-employment sector indicators continue to worsen (Lee BH et al. 2016; Lee SR 2018a). Over the years, it has become more difficult for weak self-employed workers to overcome business weakness, and the relative average education level of Korean self-employed workers has fallen steadily (Kim WY 2009; Lee BH et al. 2016). Conditions in the Korean self-employment sector are not keeping pace with general economic growth of the nation (Ryoo JW and Choi HY 1999; Ryoo JW 2004; Lee CW et al. 2017). Thus, although problems of overall weakness in the self-employment sector have been evident for at least a generation (Ryoo JW and Choi HY 1999; Kim WY 2009; Special SME Committee 2005), policies to resolve these problems have proven ineffective, and approaches that previously failed are still being prioritized (Lee SR 2018a; Joint Public Agencies 2018a).

The self-employment rate in Korea is significantly higher than in most other advanced economies, where smaller self-employment sectors are associated with entrepreneurship, innovation, and economic growth through competition. If we assume that a high self-employment rate is the result of a weak self-employment sector, we might conclude that the difficult self-employment conditions in Korea could be improved by reducing the self-employment rate. This reasoning suggests that lower self-employment rates would lead to more innovative, entrepreneurial self-employment activity, which in turn could contribute to economic growth.

As it turns out, the Korean self-employment rate has declined significantly since the early 2000s. Why then are conditions in the self-employment sector not improving despite the long-term drop in the Korean self-employment rate? There are other questions that need answers, too. From an international perspective, why is the Korean self-employment rate so high, and why is it out of step with Korea’s development level? Why have past predictions about self-employment rate trends failed to materialize in key Korean service industries (Ryoo JW and Choi HY 1999)? The author believes the absence of satisfactory answers to these questions demonstrates that Korea’s high self-employment rate is not a direct cause of the sector’s weakness and that the recent drop in the Korean rate of self-employment points to worsening self-employment weakness.

While other authors have provided useful insights into conditions in the Korean self-employment sector, this study holds that the research gap described above remains unresolved. Answering the following research questions can shed new light on weak self-employment in Korea.

1) What is self-employment weakness?

Self-employment weakness is commonly discussed in the context of the push/pull hypothesis. According to this approach, there are two types of self-employed workers: those who enter the self-employment sector in pursuit of good opportunities (non-weak self-employed workers; the pull hypothesis) and those who enter because they are unable to obtain good wage-and-salary jobs (weak self-employed workers; the push hypothesis). Nevertheless, the extant literature on self-employment motivation sometimes reaches contradictory conclusions because of inadequacies in the push/pull hypothesis.

Self-employment weakness can also be understood through an entrepreneurial perspective. Based on the assumption that the notion of entrepreneurialism has been correctly defined, if weak self-employed workers do not exhibit entrepreneurial characteristics, then they can be classified into the weak part of the self-employment sector. In many cases, however, it is not valid to simply assume that self-employed workers lack entrepreneurial characteristics. Specifically, since definitions found in the literature do not provide clear criteria for assessing entrepreneurial behavior, entrepreneurial characteristics in an economy can be interpreted differently depending on what is being measured and the respective economy’s development level. Consequently, weak aspects of the self-employment sector are often overlooked and contradictory results are sometimes obtained using indicators that measure entrepreneurialism (Gartner 1989; Bosma and Kelley 2019; Lee CW et al. 2017; Acs 2006).

Due to the lack of clear definitions, many studies of Korean self-employment do not address the weak self-employment subsector directly. Studies of this type generally emphasize weakness in the self-employment sector but do so from a broad perspective. In other words, these studies use the self-employment rate and other indices of self-employment sector weakness to reach conclusions about self-employment sector weakness in the aggregate, without focusing explicitly on the weak components of the self-employment sector. However, this approach assumes an unrealistic degree of sectoral homogeneity and fails to provide a nuanced understanding of weak self-employment.

Lucas (1978) predicts that the self-employment sector will become more heterogeneous as an economy develops. Henrekson (2004) states that we must examine self-employment heterogeneity before determining whether self-employment is too high or too low. According to Cheon BY (2003), there are limits to understanding the self-employment sector without also considering sectoral heterogeneity. Some studies have addressed diversity in the self-employment sector by applying income level, business size, business type, and other criteria to isolate the weak parts of the sector. These studies individually contribute to an understanding of the weak self-employment subsector, but they are not based on a unifying analytical, theoretical framework. Consequently, they present a somewhat muddled picture that does not lead directly to a comprehensive understanding of weak self-employment. They sometimes also reach contradictory conclusions. Thus, even as the difficulties workers face in the Korean self-employment sector have intensified and become important political, social, and economic issues, the analytical framework for understanding the causes of those difficulties remains undeveloped. The authors believe the first step in finding solutions to these challenges is to develop clear and consistent criteria and definitions of weakness in the self-employment sector.

2) How should weakness in the self-employment sector be measured? And what are the current conditions in the sector?

Many studies point out that the Korean self-employment rate is too high and that a large section of the self-employment sector is weak (Joo H et al. 2010; Noh HB et al. 2009; Ryu DH, Goh S, and Baek SH 2015; Bammel and Seo HJ 2017; Bammel and Seo HJ 2019). Equating the high self-employment rate with self-employment weakness in Korea, various studies compare the actual Korean self-employment rate to the rate that would be predicted under conditions measured across countries. This technique regards the difference between predicted and actual rates as a proxy for the degree of weakness (Suh GH, Kim SH, Suh CS 2019; Joo H et al. 2010; Moon SU and Jun IW 2011; Ryu DH, Goh S, and Baek SH 2015; Noh HB et al. 2009; Suh GH, Suh CS, and Yoon SW 2013; Jeon IW and Choi SH 2006; OECD 2014a). However, this approach is based on four questionable assumptions: 1) The correlations between the Korean self-employment rate and leading indicators of the Korean economy are similar to the correlations between the self-employment rates of other OECD nations and their economic indices. 2) The mean self-employment rate of OECD nations determined using this approach can accurately be regarded as an optimal self-employment rate. 3) The concept of optimal self-employment rate is meaningful in itself. 4) The self-employment rate and self-employment sector weakness are directly linked.

Moon SU and Jun IW (2011) assert that appropriate indicators are needed for the study of self-employment weakness. However, no such indicators have been developed through a theory-based, structured approach. As a result, past studies have estimated widely diverging sizes of the weak self-employment subsector in Korea.

3) What are the economic effects of weak self-employment?

Prior studies find insufficient evidence to indidate that activity in the self-employment sector contributes to economic growth (Blanchflower 2004; Jeon IW and Choi SH 2006; Kim WH 2017). On the other hand, studies still declare that some parts of the self-employment sector contribute positively to economic growth (Acs 2006; Kim WH 2017). Likewise, most of the Korean literature concludes that weak self-employment acts negatively on economic performance. Even without considering heterogeneity, Suh GH, Suh CS, and Yoon SW (2013) put forth that the high self-employment rate in Korea has a negative effect on the economic growth rate. Using organizational size as a standard of weak self-employment, Kim WH (2017) reports that the higher the proportion of self-employed workers without employees, the greater the negative effect of self-employment on the growth rate of the national economy. At present, very little research has been conducted using a consistent theoretical framework to address the economic impact of the weak self-employment subsector.

The primary purpose of this study is to provide a research framework for self-employment weakness in Korea that answers the three research questions presented above. The survey period of the Korea Labor & Income Panel Study (KLIPS) database used in this study overlaps the approximately twenty years of active research of the Korean self-employment subsector. Therefore, a secondary purpose of this study is to review past research into weak self-employment and provide an up-to-date overview of weak self-employment in Korea.

Section 2. Composition of the study

Organizational composition

This study begins with literature reviews and data analyses describing self-employment conditions in Korea (Chapter 1, Section 1; Chapter 2; and Chapter 3, Section 1). It then switches to a conceptual discussion of self-employment weakness, weak self-employment, and self-employment congestion, which are the key concepts of this study (Chapter 3, Sections 2–3). Empirical perspectives are again presented with descriptive statistics in Chapter 3, Section 4; and Chapter 4, and with two panel regression analyses in Chapter 5. Chapter 6 summarizes the content and results of the study.

Rhetorical composition

Chapter 1 frames the study by first proposing the research gap and the three research questions. Chapter 6 winds up by explaining how the research questions were answered, deriving implications of the study, and presenting ideas for future investigation. The middle portions of the study fill out the treatment of the subject: Chapter 2 provides a description of Korean self-employment sector weakness and the factors causing that weakness. Chapter 3 identifies the weakness introduced in Chapter 2 by presenting operational definitions for the key study concepts: weak self-employment and self-employment congestion. Chapter 4 looks at trends in the self-employment sector, and Chapter 5 analyzes the negative economic effects of self-employment congestion. Thus, the study seeks to provide a comprehensive perspective on Korean self-employment weakness.

Sequential composition

Chapter 1 identifies the research gap through a critical review of the prior literature and proposes how the current study intends to fill this gap. Chapter 1, Section 1 presents three research questions, Section 2 (the current section) summarizes the composition of the paper, and Section 3 discusses the study’s contribution.

Chapter 2 reviews the overall circumstances of the Korean self-employment sector and emphasizes weakness using the conventional perspective, which does not address self-employment heterogeneity directly. The theoretical discussion in Section 1 is centered on changes in the self-employment rate and considers the connection between changes in and magnitude of the self-employment rate and conditions in the Korean self-employment sector overall and in individual industries. Section 2 focuses on overall weakness of Korean self-employment and on the weak subsector of the self-employment sector. The literature review in Section 3 reviews potential factors of weakness in the Korean self-employment sector and Section 4 sums up the preceding analysis by presenting three general ways in which the Korean self-employment sector is weak.

Having discussed the self-employment sector broadly in the previous chapter, Chapter 3 investigates the core topic of this study, proposing criteria, concepts, and definitions for weak self-employment. Specifically, the literature review in Section 1 derives four criteria of self-employment weakness, estimates the size of the Korean weak self-employment subsector from the literature using these criteria, and explores definitions of weak self-employment. Section 2 considers the meaning of weak self-employment based on the results of the prior review, and Section 3 proposes the concept and definition of self-employment congestion, linking self-employment congestion to the theory of zombie congestion in the corporate sector proposed by McGowan, Andrews, and Millot (2017). The same section subsequently proposes that the self-employment congestion rate is a good measure of self-employment congestion and suitable to serve as the main indicator of analyses throughout the remainder of the study. Section 4 summarizes the characteristics of the Korean self-employment sector through the lens of the self-employment congestion rate and then compares results about the self-employment sector which have obtained using the self-employment rate and self-employment congestion.

Chapter 4 focuses on trends in the weak self-employment subsector over the twenty-year study period using variables available in the Korea Labor & Income Panel Study dataset. Section 1 looks at changes in the overall size of the weak self-employment subsector accrording to the four self-employment criteria presented in Chapter 3 and compares these results to the sizes and changes observed using the self-employment congestion rate. Section 2 subdivides the self-employment congestion rate into its component parts to reveal nuanced changes in composition of the weak self-employment subsector. Finally, Section 3 analyzes how the financial performances of individual subgroups of the weak self-employment subsector have differed from the financial performances of wage-and-salary workers and non-weak self-employed workers during the twenty-year study period. This analysis also integrates a comparative analysis based on patterns of innovation.

Chapter 5 leverages the foregoing discussion to consider negative impacts of the weak self-employment subsector on the entire service sector, presenting two panel regression analyses of the effects of weak self-employment on the service sector. Section 1 investigates how self-employment congestion affects the income of self-employed workers and wage-and-salary workers in the Korean service sector. This analysis divides the self-employment sector into business types with high levels of self-employment congestion and business types with low levels of self-employment congestion. It then subdivides the analytical focus based on sales (self-employed workers) or organizational size (wage-and-salary workers) to obtain results on the effects of self-employment congestion. Section 2 discusses the effects of self-employment congestion on the financial results of business types classified by pattern of innovation, further subdividing the focus of analysis to innovation subgroups achieving both high and low financial performance. In the analyses under Sections 1 and 2, the results obtained using the self-employment congestion rate are compared against results obtained from the same analysis with the self-employment rate. Chapter 6 summarizes the study and its implications and limitations: discussion of the study results in Section 1, study implications in Section 2, and proposals for future research in Section 3. The appendices provide further related information to enhance the completeness of the study.

Fig. 1.2.1. Composition of the study

Section 3. Academic contribution of the study

The overall goals of this study are to provide a comprehensive understanding of self-employment weakness in the Korean service sector and propose a theory-based framework to serve as a platform for future investigation of the weak self-employment subsector in Korea.

This study is based in part on three previous studies. Bammel and Seo HJ (2017) presented the content updated and discussed in this study in Chapter 2, Section 1 (especially parts related to Figs. 2.1.1 and 2.1.2) and in Chapter 2, Section 2 (especially parts related to Table 2.2.2 and Fig. 2.2.1), linked the concept of self-employment congestion to the logic of McGowan, Andrews, and Millot (2017) for zombie congestion as described in Chapter 3, Section 3, considered the trends in self-employment congestion discussed in Chapter 3, Section 4 (especially parts related to Table 3.4.1), and first provided the panel regression analysis that was updated in Chapter 5, Section 1. Chapter 3, Sections 2–3 (especially the parts related to Formula 3.3.1) largely overlap the discussion in Bammel and Seo HJ (2019) about weak self-employment and self-employment congestion. Bammel and Seo HJ (2019) also exposited on the relationship between the self-employment rate and self-employment congestion rate as covered in Chapter 4 (especially the parts related to Fig. 3.4.1, Table 3.4.2, and Table 3.4.3) and presented the panel regression analysis updated in Chapter 5, Section 2. Bammel and Seo HJ (2020) included the literature review on the criteria of self-employment weakness in Chapter 3, Section 1 and the analysis updated in Chapter 4.

For the current study to make a unique and meaningful academic contribution, the content of the three studies was significantly developed, new content was added, and the overall composition of the content was reorganized. Through the critical review of prior literature in Chapter 1, Section 1, this study outlines a framework for studying the Korean weak self-employment subsector not found in unified form in the previous studies. Previous study content (especially Chapter 2, Sections 1–2 and Chapter 5, Sections 1–2) was updated to provide a more timely overview of Korean weak self-employment conditions. The new literature review of factors of weakness in Chapter 2, Section 3 makes the current study more complete. The discussion of weak self-employment and self-employment congestion in Chapter 3, Sections 2–3 of this study significantly supplements the similar content of the previous studies, clarifying the understanding of the core concepts. Chapter 6 summarizes the results of the previous and current studies and provides an expanded list of research challenges to be addressed in the future.

Furthermore, the appendices of the study contain new content related to the core subject matter of this study. Notably, the 27-Service-Business Classification that I developed and used in previous studies had not been explained in detail before the current study. Appendix 3.4.1 explains the development process for the 27-Service-Business Classification, grafting this approach onto the innovation-based sectoral taxonomy of Castellacci (2008) used in Chapters 4 and 5, as well as elsewhere in the study. Appendices 5.1.2 and 5.2.2 include previously unpublished results to support the robustness of the key conclusions of the study. The other appendices  address a variety of topics closely related to weak self-employment and the weak self-employment subsector, including concepts of entrepreneurship (Appendix 1.1.1), critical review of the analytical method of estimating optimal self-employment rate (Appendix 1.1.2), the relationship between services and self-employment weakness (Appendix 2.1.3), expanded discussion of self-employment heterogeneity from various theoretical perspectives (Appendix 2.2.1), a summary of English and Korean terminology related to this study (Appendix 2.1.1, Appendix 2.2.2 and a footnote in Chapter 3, Section 2), the informal sector (Appendix 2.2.3), sosanggongin (Appendix 2.2.5), innovation (Appendix 2.2.6), franchising system (Appendix 2.3c), self-employment types with significant issues of dependency (Appendix 2.3d), critical discussion of the GEM survey (Appendix 2.3g), and others.