Chapter 2. Self-employment and self-employment weakness


Over recent decades, the Korean self-employment rate has seen a substantial decline. Nevertheless, the self-employment rate in Korea is still relatively high compared to other countries, and self-employed workers in Korea are especially concentrated in traditional service-based businesses. Various indices indicate that the weak self-employment sector in Korea is very weak, and that weak self-employed make up a large share of the total self-employment sector. Businesses with a high concentration of weak self-employed are associated with low economic results. Upon examining the existing literature on self-employment weakness, we find that factors of self-employment weakness can be divided into three categories: individual factors, structural factors, and miscellaneous factors. The findings in this chapter suggest that the Korean self-employment sector is characterized by the following interrelated and overlapping weaknesses: 1) lack of self-employed workers who are innovative and productive; 2) excessive competition in businesses with high concentrations of weak self-employed workers; and 3) focus on services with limited innovation potential.

Section 1. Self-employment rate

Lucas (1978) postulates that average business entity size increases as an economy develops. This is the result of growing economic concentration as large companies achieve economies of scale in the process of national growth. Accordingly, wage levels rise and human resources in small businesses find new opportunities in larger corporate organizations. In other words, small firms are acquired by large firms and people formerly working independently or in small organizations discover better jobs working for bigger companies.

Viewing the self-employment sector through the lens of Lucas’ theory, economic growth leads to a fall in the self-employment rate as people who were engaged in self-employment transition salary-and-wage jobs (Ryoo JW and Choi HY 1999).[1] Table 2.1.1 reveals that the Korean self-employment rate has dropped over the past twenty years. This decline is evident using different self-employed category definitions. Fig. 2.1.1 shows the self-employment rate trends in individual OECD nations and Fig. 2.1.2. illustrates the correlation between national income level, as measured by per-capita GDP, and the self-employment rate. It is notable that the Korean self-employment rate has been declining steadily for approximately fifty years. But relative to per-capita GDP, this rate is still much higher than other OECD countries. The Korean self-employment rate of 25.1% in 2018 was much higher than the self-employment rates in Japan, the United States, and the EU. While this is 11.7% lower than the 36.8% rate in 2000, it is still the fourth highest in the OECD (OECD 2019).

Table 2.1.1. Self-employment rate

Note: Share: percentage of all job holders; Persons: units of 1,000 people

Source: Statistics Korea, Economically Active Population Survey; Lee BH et al. (2016)

Note: The self-employed sector here includes the agricultural sector.

Source: OECD (2020)

Fig. 2.1.1. Self-employment rate trends

Note: Per-capita GDP is shown as logged values.

Source: OECD (2020)

Fig. 2.1.2. Correlation between national income levels and self-employment rates

The overall self-employment rate in Korea is high, but this is not true for all service industries. In 2014, the Korean self-employment rate in professional, scientific, and technical services was 15.9%, while in business facilities management and business support services it was 10.2% (Korea Labor Institute, Korea Labor and Income Panel Study). Unlike other advanced economies with substantial self-employment in advanced industries, the Korean self-employment sector is largely made up of traditional service businesses which have not seen experienced productivity gains (Baumol 1967; Ministry of Knowledge Economy 2012; OECD 2015c; Statistics Korea, National Accounts and Economically Active Population Survey; OECD, National Accounts at a Glance). Table 2.1.2 shows that self-employment rates were particularly high in wholesale and retail trade, transportation and storage, accommodation and food service activities, and other service activities (including personal services).[2]

Table 2.1.2. Self-employment rates for individual countries and business types

Note:1) As of 2018; International Standard Industrial Classification of All Economic Activities (ISIC) Rev. 4

2) OECD Labour Force Statistics 2019

The Korean service sector is weak on many levels. In Korea, the service sector is not only relatively small compared to other OECD countries, but productivity is lower in both traditional services and knowledge-based services. Even at these low levels, productivity growth in services continues to lag behind manufacturing. In fact, due to service sector weakness, the Korean manufacturing sector is increasingly relying on imported services, including high-technology services from overseas. Most Korean self-employed workers are engaged in the service sector, suggesting that strengthening conditions in the self-employment sector could help address service sector weakness.

Section 2. Self-employment weakness

2.2.1. Overall self-employment sector weakness

In Korea, self-employment is primarily a means of earning a living, not a way to improve quality of life. As discussed in Chapter 1, most Korean self-employed workers are concentrated in a few service businesses with lower productivity and innovation than other industries. A new Korean self-employed worker’s business strategy typically involves opening a store in a local neighborhood to exploit existing consumer demand, rarely seeking to create new demand (Bahn SS et al. 2013b). The self-employment sector contributes to job creation, but does not make a positive impact on job quality, productivity growth, or innovation. Instead, it acts as a burden on the Korean economy (Small Enterprise Development Agency 2013; Suh GH, Suh CS, and Yoon SW 2013).

Self-employment income relative to wage-and-salary income fell steadily following the foreign exchange crisis at the end of the 1990s (Lee SR 2018b). According to Statistics Korea’s Survey of Household Finances, financial debt of self-employed workers in 2011 was 159.2% of disposable income, approximately double the 78.9% figure for regular employed workers (Ko GY and Lee GT 2012). Compared to developed countries, Korean self-employed workers work more hours per week, have lower incomes, and report less satisfaction with life than wage-and-salary workers. Furthermore, self-employed workers engage in activities that are more unhealthy and dangerous than those of wage-and-salary workers (Ryoo JW and Choi HY 1999; Suh JM 2011; Korea Federation of SMEs 2012; Small Enterprise Development Agency 2013; Suh GH, Suh CS, and Yoon SW 2013; Cho DH 2013; Park CG 2016; Lee SR 2018b). This is due in part to the high heterogeneity within business types, which leads to a greater income distribution of self-employed workers than that of wage-and-salary workers (Lee SK 2006). Income risk in self-employment is greater than in wage-and-salary work, as workers are likely to suffer from low income, no income, or even negative income. Self-employment income reflects both earnings directly attributable to work performed by the self-employed business owner, as well as the return on the owner’s invested capital. Therefore, it is difficult to compare mean earnings between self-employment and wage-and-salary work. However, Table 2.2.1 reveals that the gap in the standard deviation of education between the self-employment and wage-and-salary work sectors is relatively small, the gap in the standard deviation of income is large. This indicates that self-employment is a riskier option, as the standard deviation of income is much higher.

Table 2.2.1. Standard deviations of income and education for self-employed workers and wage-and-salary workers by age bracket

Note:      Education level indicated using numbers: 1 – not yet attending school, 2 – unschooled or did not complete elementary school, 3 – completed elementary school, 4 – completed middle school, 5 – completed high school, 6 – degree from two-year college/technical school, 7 – degree from four-year college, 8 – master’s degree from university, 9 – doctorate degree from graduate school; values within parenthesis have been calculated individually for males (left side) and females (right side); monthly income: 10,000 KRW units; age: years

Source:      Korea Labor and Income Panel Study, Korea Labor Institute, wave 17 (2018).

Although the literature on self-employment in Korea generally views the self-employment sector as an extension of the labor market, transitions between the two groups appear one-directional, with little movement of self-employed workers to regular employment jobs (Ryu JS et al., 2000). Weakness can be further inferred from the likelihood that self-employed workers will later become unemployed or employed in non-regular job positions (Ryoo JW and Choi HY 1999).[3]

2.2.2 Weakness in the weak self-employment subsector

In line with Lucas’s (1978) prediction, the Korean self-employment rate has declined as the economy has developed. Lucas’s theory further foresees that economic growth will lead to greater heterogeneity in the self-employment sector. Blau (1987) assumes that economies of scale and labor specialization are possible only in relatively large organizations. Accordingly, if the self-employment sector is stratified into high-ability, mid-level ability, and low-ability workers (based on business management competence), workers of mid-level ability will increasingly be hired into the wage-and-salary work sector. They will be able to produce and earn more in such organizations than they would have produced and earned in self-employed jobs. On the other hand, many high-ability self-employed workers will remain in the sector to reap the full economic benefits of their successful endeavors. Low-ability workers will also remain due to being unable to compete effectively for good wage-and-salary work jobs.  As a result, high-ability and low-ability self-employed workers will come to predominate and the self-employment rate will fall. These outcomes impact weak self-employed workers, weak self-employment, and the weak self-employment subsector in various ways.

Table 2.2.2 presents descriptive statistics on sosanggongin, a class of worker defined under Korean law that typically shares characteristics with weak self-employed workers, as defined in this study.[4] The mean number of workers per business, mean annual operating profit per business, mean annual operating profit per worker, and mean annual wages per worker in 2010 were all smaller in sosanggongin-crowded business types (businesses with high concentrations of sosanggongin) than in sosanggongin-uncrowded business types (businesses without high concentrations of sosanggongin). These business types overlap with service industries that suffer from chronic low productivity due to lack of potential for economies of scale and innovation, but where employment still continues to rise in step with economic development (Baumol 1967).

Table 2.2.2. Comparison of service business types based on sosanggongin share

Source: National Survey of Business Enterprises (Statistics Korea, 2010) and Economic Census (Statistics Korea, 2010) data, as organized by the Korea Federation of SMEs (2012)

The data in Fig. 2.2.1 reveals a negative correlation between the mean annual pay per worker and the share of sosanggongin to total workers; the higher the share of sosanggongin, the lower the mean annual pay per worker in the respective business type.[5]

Note: Based on divisions of the Korea Standard Industrial Classification, Rev. 9.

Source: National Survey of Business Enterprises (2010) data, as organized by the Korea Federation of SMEs (2012).

Fig. 2.2.1. Correlation between sosanggongin share and annual mean wages and salary

Section 3. Factors of self-employment weakness

Moon SU and Jun IW (2011) divide factors promoting or inhibiting self-employment into economic and non-economic categories. Henley (1999) proposes four categories of influence: inherited entrepreneurial capital factors, availability of financial capital/financial constraint factors; human capital availability factors; and periodic factors that fluctuate according to economic cycles and public policy. Blau (1987) suggests that technological factors, industrial structure factors, tax level factors, and social safety net factors have all played a part in lifting self-employment rates in advanced countries over recent decades. Aquilina, Klump, and Pietrobelli (2006) point to technological changes, deepening globalization, evolving labor characteristics, shifting consumer preferences, deregulation, the burgeoning importance of innovation, and other factors that bolster the effects of small business on the economy. According to Bin BS and Park JK 2002, factors of entrepreneurial success can be categorized broadly into four main types: individual characteristics, business item selection, start-up capital financing, and management/administration.

On the other hand, due to the significant heterogeneity in the self-employment sector and the uniqueness of economic conditions in Korea, merely considering factors impacting the self-employment rate or entrepreneurial success may not adequately address weakness in the Korean self-employment sector. Carree et al. (2002) categorizes factors causing the self-employment sector to deviate from the most efficient and robust conditions—i.e., failure to maintain a long-term balance in the self-employment rate—into cultural factors, institutional factors, and economic factors. Park CG (2016) associates the transitional characteristics of Korean self-employment with changes in the industrial structure, demographics, and labor market structure and contends that these transitional characteristics are factors of self-employment weakness in Korea. The current study examines the weaknesses in the Korean self-employment sector by considering individual factors, structural factors, and miscellaneous factors.

2.3.1 Individual factors Demographic variables

Studies have confirmed that the mean age of Korean weak self-employed workers is higher than that of ordinary workers (Keum JH et al. 2006; Park CG 2016; Ryoo JW 2004). Keum JH and Cho JM (2000) posit that Korean self-employed workers under 30 years or over 50 years of age perform relatively poorly. Retirement by baby boomers—a process well underway in Korea—is hastening aging within the self-employment sector (Kim WH 2017; Ko GY and Lee GT 2012; Joint Government Agencies, 2016; Joint Public Agencies 2018a). Women are more closely associated with self-employment weakness than men (Keum JH et al. 2006; Keum JH and Cho JM 2000; Lee SR et al. 2009; Keum JH and Yi IS 2011). Numerous studies have also verified that low educational attainment is a factor of weak self-employment (Keum JH et al. 2006; Kim WY 2009; Keum JH and Cho JM 2000; Park CG 2016; Ryoo JW and Choi HY 1999; Lee SR et al. 2009; Ryoo JW 2004; Sung JM and Ahn JY 2002; Poschke 2010; Cho DH 2013; Lee YH 2014). Within the weak self-employment subsector in Korea, the mean age is higher, the proportion of women is greater, and the level of education is lower than that of self-employed workers as a whole (Keum JH et al. 2006; Keum JH and Yi IS 2011; Bammel and Seo HJ 2017). Financial factors

Launching a business with sufficient capital enables a business entity to innovate through the growth stage and reach maturity to generate sustainable profitability. Self-employed workers’ innovative activities may be related to the availability of financial capital (Park JG 2002). Weak self-employed workers are burdened with relatively high household debt and low income (Park CG 2016). Blanchflower and Oswald (1998) discover that most small business entities are established with capital from personal assets, rather than bank loans, and that the difficulty of securing capital is the greatest concern of those considering starting a business. Weak self-employed workers (defined as self-employed workers without employees) earn less income from assets than self-employed workers with employees (Ryoo JW 2004). Suh YG and Kim SK (2012) emphasize that lack of funds, large debt, high rent, and other related factors are causes of high self-employment failure. Low housing assets is also correlated with low rates of self-employment success (Taylor 1996). While lax bank credit may also lead to weakness in the self-employment sector (Ko GY and Lee GT 2012), many self-employed workers lament that lack of start-up funds is a major impediment to achieving successful business operations (Lee SR et al. 2009). Weak self-employment businesses are characterized as having small organizations and low income due to inadequate financial resources (Keum JH et al. 2006; Poschke 2010; Keum JH and Cho JM 2000). Human and social capital

Low education is employed in various studies as a proxy for the low ability of weak self-employed workers. Nevertheless, low education is an imperfect indicator of aptitude, particularly in the self-employment sector (Cheon BY 2003). Human capital is sometimes used instead of education to represent the ability of self-employed workers (Henley 1999). In the context of human capital, Lee SK (2006) concludes that the more social relationships a self-employed worker has and the greater the relative importance of those relationships, the more beneficial the impact on the worker’s income. Poschke (2013) confirms that the variable “wages in previous job” expresses well a self-employed worker’s human capital. Cheon BY (2003) recommends using “lifetime employment history” as a proxy for human capital. People for whom self-employment was their first job and those who have been in their own business for a short time are more likely to be weak self-employed workers (Keum JH and Cho JM 2000; Keum JH et al. 2006). However, this does not apply to self-employed workers with previous non-self-employment work history who recently started a business (Kim WY 2000; Sung JM and Ahn JY 2002). Job leavers possess both specific human capital (specialized skills) and general human capital (broader knowledge). Those with high specific human capital and low general human capital are most likely to be pushed into self-employment (Keum JH and Cho JM 2000). Weak self-employed workers are thought to have limited opportunities to leverage their human capital in wage-and-salary work (Lee SR 2018a). Evans and Leighton (1989) report that unemployed laborers, workers with low wages, and men who frequently switch jobs have low human capital and a high likelihood of being weak self-employed workers.

2.3.2 Structural factors Economic development level and structure

In developmental economics, economies can be categorized into factor-led, efficiency-led, and innovation-led types. Self-employment weakness is linked to the less-developed factor-led and efficiency-led types (Acs 2006; Bahn SS et al. 2014; Suh GH, Kim SH, Suh CS 2019; Jeon IW et al. 2005; Jeon IW and Choi SH 2006). As capital per worker increases with economic development, wage-and-salary work become more productive than self-employment, resulting in fewer workers in the self-employment sector (Suh GH, Suh CS, and Yoon SW 2013; Lucas 1978). However, the Korean self-employment rate remains exceptionally high despite the country’s innovation-led classification, suggesting that the size of the Korean self-employment sector does not match the country’s development level as expected (Ryoo JW and Choi HY 1999; Ryoo JW 2004; Lee CW et al. 2017). In the same vein, Poschke (2010) finds that weak self-employment is more prevalent in non-OECD nations than in OECD nations, and Park CG (2016) asserts that the transitional nature of the Korean self-employment sector in services contributes to self-employment weakness. Kang CH and Yoo GY (2018) reveal that, among OECD nations, government policy to alleviate self-employment weakness is effective at a statistically significant level in Korea; but other than Korea, only in low-income nations. Lee YH (2014) contends that Korean self-employment is weak largely due to the microbusiness sector’s destruction during the Korean War in the early 1950s. Korean self-employment weakness has also been attributed to unique aspects of the country’s economic development, especially the unusually rapid industrialization and economic growth focused on large export-oriented business groups (Shin DJ and Choi PK 2018). Suh GH, Kim SH, and Suh CS (2019) note that polarization between the outward-facing export-led and domestic demand-dependent sectors of the Korean economy has exacerbated self-employment weakness.

A self-employed worker’s income is partially determined by the dynamics of the industry in which the worker operates (Lee SK 2006; Taylor 1996), and most weak self-employment is concentrated in traditional service business types, such as wholesale and retail trade, personal services, repairs, and hospitality (Bammel and Seo HJ 2019; Keum JH et al. 2006; Hipp, Bernhardt, and Allmendinger 2015). Self-employed workers in agriculture, accommodation, and food service activities generally earn less than those in other businesses (Kim WY 2000). In many business types with severe self-employment weakness, the barriers to entry are low, and the potential for entrepreneurs to achieve economies of scale and differentiation is inherently constrained (Joint Public Agencies 2016; Special SME Committee 2005; Bammel and Seo HJ 2019; Thurik et al. 2008; Baumol 1967; Blau 1987; Kang JS, Chun HB, and Cho JH 2017). Socio-economic trend factors

Structural changes in the economy can cause self-employment weakness (Acs 2006). Shin DJ and Choi PK (2018) posit that weakness in the Korean self-employment sector began with de-industrialization in the early 1990s. In the process of de-industrialization, Korean manufacturers relocated production facilities to China and elsewhere overseas, resulting in the hollowing out of the Korean manufacturing sector and forcing many newly unemployed workers into self-employment (Lee SR et al. 2009; Lee JH 2012). Shin DJ and Choi PK (2018) demonstrate that financial liberalization, which began in the late 1990s, provided better conditions for self-employment in the short term, but at the cost of self-employment sector health in the long term. The process of economic restructuring and corporate bankruptcies at the time weakened the Korean self-employment sector (Special SME Committee 2005; Ryoo JW and Choi HY 2000; Ryoo JW and Choi HY 1999). Broader economic events in the late 1990s caused particularly strong upheaval in the self-employment sector in the early 2000s (Lee JH 2012; Bammel and Seo HJ 2020). As competition in international markets intensified in the 2000s, large previously export-focused Korean companies turned their attention to the domestic market, which had been traditionally dominated by the self-employment sector. Servitization, another process that accompanied general economic development, saw large companies entering the service sector, bringing a new level of competition to the domestic market and threatening the livelihoods of many weak self-employed workers (Kim CM and Shin SM 2015; Keum JH et al. 2006; Joint Public Agencies 2016; Poschke 2010). Modern corporate practices of enhancing internal efficiency contributed to downsizing, outsourcing, and other flexible workforce practices, resulting in jobless growth and less employment security, both of which are associated with weak self-employment (Kim WH 2017; Dennis 1996; Hughes 2003). One resulting class of self-employed workers, dubbed “false self-employed workers” or “workers in special types of employment,” currently constitute up to 30% of those classified as weak self-employed workers. False self-employed workers are self-employed workers operating as independent contractors, usually of a former employer, and who bear the ultimate responsibility for their business results without having full control over their own business activities (Seo JH and Park KH 2016; Dennis 1996; Hipp, Bernhardt, and Allmendinger 2015).

Amidst this general economic restructuring, technology has further reduced market transaction costs, capital costs, and barriers to entry, and accelerated corporate downsizing and outsourcing (Schuetze 2000; Henrekson 2004). Despite opening up new market opportunities, technology also compels self-employed workers to rely more on online platforms, saddling them with higher costs and intensifying over-competition (Kim CM and Shin SM 2015; Hong MG and Oh SB 2018).

Self-employed workers also face other pressures. Real estate prices have risen, driving up rents and other fixed costs and encouraging opportunistic behavior from building landlords (Joint Government Agencies, 2016; Joint Public Agencies 2018a). The labor cost burden is growing due to the rising minimum wage and other costs of employment (Lee BH et al. 2016; Joint Public Agencies 2018a; Kang CH and Yoo GY 2018). Credit card and other fees remain a persistent drain on the income of self-employed workers (Joint Public Agencies 2016).

Shifting consumer tastes and lifestyles have a profound impact on the weak self-employment subsector, both creating new opportunities and hastening business obsolescence (Lee JH 2012). Deteriorating work environments, job stress, and unstable conditions in the wage-and-salary work sector drive workers into self-employment (Hughes 2003). Consumer spending as a proportion of total household spending has been declining due to uncertainty about the future, rising real estate prices, changes in demographics and family composition, and other factors, squeezing the self-employment sector (Lee BH et al. 2016).

The emergence of franchising in Korean services is a major development having a significant impact on the self-employment sector. Franchising gives self-employed workers access to technology, brand image and marketing, production know-how, financing, and a business network, thus lowering barriers to entry to the self-employment sector (Kim ST, Kim MG, and Im BI 2014; Lee MH, Kim KJ, and Park KY 2014). Yet, these factors entice people without prior business experience to enter the self-employment sector (Lee MH, Kim KJ, and Park KY 2014). Franchising pits non-franchised self-employed businesses against franchised competitors backed by corporate brands, even as those franchised competitors become ever more dependent on their corporate backers (Lee BH et al. 2016). Lee WJ (2017) suggests that franchising can also drive innovation out of the market. Franchisees enjoy higher sales than non-franchisees, but their operating margins are much lower. Franchises have smaller store sizes than non-franchises, pay their employees less, and employ a smaller proportion of full-time workers (Kim ST, Kim MG, and Im BI 2014). Conflicts of interest between franchisors and franchisees can be a persistent meance to self-employed workers due to the franchisee’s abovementioned dependence on large corporations (Jang JY et al. 2014; Kim MK, Kwon KJ, and Chung KI 2014; Kim ST, Kim MG, and Im BI 2014). Public policy and institutions

In 1999, the government launched sosanggongin centers to give a helping hand to the self-employed in Korea (Jeon IW and Jeong WS 2014). Article 1 of the Act on the Protection of and Support for Micro Enterprises outlines that the purpose of public policy toward sosanggongin is “to foster free corporate activities, devise strategies for achieving management stability and growth, enhance the social and economic standing of sosanggongin, and contribute to balanced growth of the national economy.” In the Comprehensive Plan for Weak Self-Employed Workers, public policy for the first time recognized the self-employed as workers, based on labor market theory (Special SME Committee 2005). Government efforts have encouraged self-employed workers to purchase employment and other public insurance and equipped them with education and information to boost business results (Lee SR 2018a). Consequently, past support to the self-employment sector has mainly centered on the tax system, financial support, and business start-up training (An SB and Shin YJ 2017). Nevertheless, these efforts have not significantly improved conditions, and the outcomes have been underwhelming (Lee SR 2018a; Lee SR 2018b).

Self-employment weakness is linked to labor market inflexibility (Keum JH et al. 2006; Blau 1987; Kim WY 2009; Kim CM and Shin SM 2015; Hipp, Bernhardt, and Allmendinger 2015). Institutional, economic, and social rigidities impede the self-employment process from the time people enter the sector and until they exit it (Jeon IW et al. 2005). Self-employment weakness worsens when the economy is not creating enough wage-and-salary work jobs (Acs 2006). Unfavorable labor market institutions raise transaction costs and weigh on labor market efficiency, prompting outsourcing to the self-employment sector where labor contracts are unregulated and employment is not secure, thus exacerbating self-employment weakness (Henrekson 2004). Some proposals suggest exploring ways for self-employed workers to transition into innovative business types and cultivating flexible labor market conditions so that older workers can remain longer in the labor market for wage-and-salary work (Kim WY 2009; Lee SR 2018b).

The Korean government has long sought to create more self-employment jobs (Jeon BM 2005). Nevertheless, public policy that views self-employment as an alternative to unemployment is also a source of self-employment weakness (Kim WY 2009). Such policies help people establish their own businesses, which alleviates unemployment in the short term. However, a weak self-employment sector lacking innovative and creative business models and practices cannot contribute to improved macroeconomic performance (Ryoo JW 2004; Stephens et al., 2011; Blanchflower 2004). As illustrated in Appendix Fig., the size of the self-employment sector scarcely changed even as the number of wage-and-salary workers declined during the Korean corporate sector restructuring of the 1997–1998 foreign exchange crisis. This reconfirms the role the self-employment sector plays as a cushion against unemployment (Ryoo JW and Choi HY 1999; Gweon WH et al. 2014). Roughly half of the escalating share of self-employed workers without employees during the foreign exchange crisis of 1997–1998 stemmed from fresh self-employment activities. The other half resulted from weak employers letting go of employees to adjust to the deteriorating business environment (Ryoo JW and Choi HY 1999). This demonstrates how encouraging the unemployed to join the self-employment sector can weaken the self-employment sector. As in the aftermath of the foreign exchange crisis of the 1990s, public policy that motivates self-employed businesses to remain open when market logic would indicate otherwise can hasten conditions of oversupply (Shin DJ and Choi PK 2018; Jeon IW et al. 2005; Bammel and Seo HJ 2017). Such policy also leads to a positive-feedback loop where recurrent government support engenders yet more self-employment weakness (Jeon IW et al. 2005). Current public policy does not sufficiently reflect the need for self-employed workers to leave the self-employment sector, or the need to treat weak self-employed workers as ordinary wage-and-salary workers (Lee SR 2018a; Lee SR 2018b).

In the context of today’s aging society, many studies conclude that an inadequate public social safety net contributes to self-employment weakness among older self-employed workers (Joint Public Agencies 2016; Lee BH et al. 2016; Lee SR 2018b; Park CG 2016; Hipp, Bernhardt, and Allmendinger 2015; Ryoo JW 2004; Ko GY and Lee GT 2012). Without a robust system of unemployment insurance or other aspects of social welfare, wage-and-salary workers under threat of unemployment view the self-employment sector as a refuge. This lack of social support drives workers into low barriers-to-entry businesses that do not require advanced skills and know-how, especially wholesale and retail trade, accommodation and food service activities, and transportation (Gweon WH et al. 2014; Suh GH, Suh CS, and Yoon SW 2013).  Moreover, it is becoming increasingly difficult for wage-and-salary workers to transition to new jobs in other industries due to structural economic inflexibilities, leading many to choose and remain in self-employment in spite of over-competition and low rates of return. Conversely, Kang CH and Yoo GY (2018) reveal that greater government spending on social support programs reduces weak self-employment and leads to a lower self-employment rate.[6]

Some workers find self-employment more appealing due to the greater opportunities for tax avoidance in self-employment than in wage-and-salary work. Thus, high income tax levels can lead to a higher self-employment rate (Hipp, Bernhardt, and Allmendinger 2015). On the other hand, the share of weak self-employed workers among the self-employed may shrink under high income tax rates (Keum JH and Cho JM 2000; Blau 1987). Still, high income taxes can exacerbate self-employment weakness by discouraging self-employed workers from participating in social insurance programs, which necessitate income disclosure. On the other hand, policies that close tax loopholes enhance the efficiency of income tax collection and provide resources to bolster the social safety net, potentially resulting in fewer weak self-employed workers (Lee BH et al. 2016; Kang CH and Yoo GY 2018).

In Korea, government economic growth strategies that prioritize large corporations have led to inadequate support for the self-employment sector (Kim CM and Shin SM 2015). However, even limited government assistance to smaller firms can impede the growth of market-based finance (OECD 2015c). Government support for entrepreneurship does not sufficiently target high-value added sectors (Ko GY and Lee GT 2012). SME and social welfare policy that focuses on financing start-ups leads to an overabundance of supply, discouraging healthy self-employment (Special SME Committee 2005).

Acs (2006) argues that countries with weak self-employment sectors should strengthen their domestic entrepreneurship systems. Bahn SS et al. (2014) highlights the feeble structural conditions in Korea, such as knowledge and networking substructures, business and services infrastructure, financial environment, and training and education. Lee SR (2018b) recommends encouraging more participation in the newly legislated system of cooperatives as an institutional way to address weakness in the self-employment sector.

The lack of high-quality data on self-employment hinders understanding of the sector (Hipp, Bernhardt, and Allmendinger 2015). In Korea as well, the issue of poor-quality data caused the National Microenterprise Survey to remain unpublished for several years (Ministry of SMEs and Startups 2019), and the results of the GEM survey in Korea display huge and unexplained fluctuations from year to year, undermining the survey’s credibility. As a result, research on Korean self-employment has been overly dependent on the Korean Labor and Income Panel Study (KLIPS) database. Excessive competition

Schumpeter (1942) predicts that overcompetition leads to low innovation and growth. Many studies on Korean self-employment demonstrate supply saturation, with too many people entering the sector. This results in self-employed businesses operating below optimal size, diminishing efficiency and income (Carree et al. 2002; Joint Public Agencies 2016; Henrekson 2004; Special SME Committee 2005). Lee YH (2014) contends that the unstable market structure associated with the Korean self-employment sector leads to a market failure of “relative competition.” The scarcity of viable employment opportunities and an inadequate social safety net not only motivates workers to enter the self-employment sector, but also deters those who wish to leave. This dampens productivity, innovation, and positive entrepreneurial activity in the market (Moon SU and Jun IW 2011; Bammel and Seo HJ 2017; Poschke 2010; Henrekson 2004).[7] Overcompetition-induced self-employment failures can have a damaging impact on the economy as a whole, resulting in decreased consumption, productivity, employment, and real estate prices (Park CG 2016).

2.3.3 Other factors Economic circumstances

Research by Suh GH, Suh CS, and Yoon SW (2013) uncovers an inverse relationship between the economic growth rate in Korea and the overall self-employment rate. Ryoo JW (2004) proposes that self-employment expands during economic stagnation, while Shin DJ and Choi PK (2018) assert that the self-employment rate drops in response to domestic market malaise. Considering only the weak self-employment subsector, a sluggish economy is a factor of self-employment weakness (Kim WH 2017; Keum JH et al. 2006; Kim CM and Shin SM 2015; Ghatak, Morelli, and Sjostrom 2007). Economic torpor reduces consumer wealth, hindering self-employment success and dissuading people from entering the self-employment sector (Thurik et al. 2008). The Special SME Committee (2005) has observed that recessions not only burden the income of existing self-employed workers, but also intensify income polarization in the self-employment sector, contributing to self-employment weakness. Nevertheless, this polarization also encourages the weakest self-employed workers to leave self-employment, decreasing their share in the sector (Shin DJ and Choi PK 2018). Korean self-employment is largely service-based, making domestic demand more relevant to self-employment weakness than international economic circumstances (Shin DJ and Choi PK 2018; Ko GY and Lee GT 2012; Joint Public Agencies 2018a).

Economic recession impacts the weak self-employment subsector through labor market insecurity, too (Kim WH 2017). Research often links the weak self-employed subsector to the weak wage-and-salary work sector. Hipp, Bernhardt, and Allmendinger (2015) classify self-employed workers without employees under “non-standard employment,” a category that also encompasses temporary workers and hourly wage-and-salary workers, and find that self-employed workers without employees are associated with conditions of job insecurity and labor market polarization. Other studies corroborate these findings, declaring that weak self-employed workers share commonalities with the unemployed, economically inactive, and other marginal laborers (Ryoo JW and Choi HY 2000; Kim WY 2009), low-income wage-and-salary workers (Evans and Leighton 1989), and retirees and non-job holders (Special SME Committee 2005). Self-employment instability is exacerbated by characteristics of personal and job mobility that weak self-employed workers have in common with other marginal laborers. Self-employed workers are unlikely to return to the wage-and-salary sector, or to regain their former levels of job stability and security in wage-and-salary jobs even if they do (Ryoo JW and Choi HY 1999). An individual’s competitive advantages can influence his or her decision for self-employment or wage-and-salary work. Nevertheless and ironically, studies demonstrate that wage-and-salary workers are more competitive than self-employed workers for self-employed work (Kim WY 2000; Henley 1999). People at the extremes of the ability distribution often opt for self-employment and this results in a heterogeneous self-employed population (Poschke 2013). Lower opportunity costs of launching a business are associated with higher self-employment rates. High unemployment rates can entice both those with competitive human capital in the labor market and those with inferior entrepreneurial qualities to become self-employed (Thurik et al. 2008). Studies show that when unemployment is high, self-employment rates and the proportion of weak self-employment also rise (Carree et al. 2002; Jeon IW et al. 2005; Jeon IW and Choi SH 2006; Suh GH, Suh CS, and Yoon SW 2013; Suh GH, Kim SH, Suh CS 2019). For instance, the foreign exchange crisis of the 1990s caused unemployment, which in turn weakened the self-employment sector due to increased push-type entrepreneurship (Ryoo JW and Choi HY 1999; Cheon BY 2003). Culture, society, individual attitude, and personal behavior

The predilection of a nation’s citizens for self-employment is a cultural factor influencing the size of the self-employment sector (Moon SU and Jun IW 2011) and Koreans possess a cultural inclination to become self-employed (Kim WY 2009). Ryoo JW and Choi HY (1999) point out that the Korean self-employment rate trended downward for a prolonged period before rebounding in the 1990s. This uptick may have been caused in part by the increased propensity of workers to become self-employed. Self-employment is frequently linked to entrepreneurship. Gartner (1989) maintains that the concept of entrepreneurialism is embedded in activities for constructing an organizational framework and that this the most appropriate basis on which to define entrepreneurialism. Acs (2006) reveals that a lack of entrepreneurial behavior hinders self-employed workers from transcending their weak positions. Lee SK (2006) ascertains that the income of self-employed workers unable to broaden their businesses is significantly lower than those who can. Kang JS, Chun HB, and Cho JH (2017) posit that the incapability to differentiate one’s product offering is a factor of weak self-employment. Despite a relationship between risk-taking and entrepreneurial success, surveys have demonstrated that Koreans tend to be averse to risk (Lee CW et al. 2017). Women and older workers sometimes resort to self-employment after encountering discrimination based on gender or age (Cunningham and Maloney 2001; Hughes 2003). Conversely, Schuetze (2000) proposes that women encroaching on the positions of men in the labor market is also associated with self-employment weakness. Considering cultural and social capital factors, Korea’s family-oriented culture, which emphasizes trust between friends, and the scope of social relationships and levels of trust can impact self-employment success. In other words, self-employed workers without the requisite cultural and social skills do not prosper (Lee SK 2006).

Achieving success as a self-employed individual requires the application of a range of business acumen. However, self-employed workers often lack necessary skills and fail to adequately prepare for success (Suh YG and Kim SK 2012; Special SME Committee 2005). Weak self-employed workers operate their businesses based on a traditional view of entrepreneurship, aiming for modest goals. Without innovative business models and a global outlook, they tend to concentrate solely on a single area of business. They are unable to escape markets which are already saturated with their goods and services (Bosma and Kelley 2019; Bahn SS et al. 2014; Poschke 2010; OECD 2015c; Kim WH 2017; Lee SK 2006). Korean self-employed workers lack market knowledge (Special SME Committee 2005) and ambition to expand (Lee CW et al. 2017).

Section 4. Characteristics of Korean self-employment weakness

Self-employment plays an important role in the economy. As production increases within the self-employment sector, consumer choice widens. Moreover, during times of economic hardship, self-employment can provide jobs and help to soften the impact of unemployment. The cumulative effect of these mechanisms may lead to higher standards of living. However, the following three related problems exist in Korea: 1) A significant portion of the self-employment sector in Korea consists of workers who do not demonstrate entrepreneurial behavior. Due to their inability to innovate and expand their businesses, these workers are unable to stimulate economic growth. They are qualitatively distinct from entrepreneurs operating their businesses according to entrepreneurial principles. The nature of these weak self-employed workers is more akin to that of weak salary-and-wage workers—or even unemployed workers—than to opportunity-type or professional self-employed workers. 2) Self-employment overcrowding characterizes conditions in many business types, resulting in market saturation and excessive competition. Overcompetition neutralizes innovative efforts, diminishing the income of self-employed workers. It thus acts as a major obstacle to development of the self-employment sector. 3) Self-employment overcrowding is particularly evident in services businesses where innovation and productivity gains are notoriously difficult to achieve. The concentration of self-employed workers in these business types further blocks innovation efforts and burdens development of both the service sector and the economy as a whole. Notably, while the Korean self-employment rate has dropped along with economic development over the past two decades, the share of weak self-employed workers within the sector has risen as non-weak self-employed workers have left the sector. In other words, the decline in the self-employment rate reflects the increase in wage-and-salary work employment (many of these positions having been filled by former non-weak self-employed workers), even as the number of weak self-employed workers has remained nearly constant. Seen in this context, the decline in the self-employment rate is not indicative of progress in the sector; rather, it suggests worsening self-employment conditions.


[1] This study uses the available KLIPS data for 1998–2018, which is closely aligned with the period of active academic research on the Korean self-employment sector. To support this twenty-year perspective, it draws on both recent and older literature, reaching back to the late 1990s, and reveals that conditions in the weak self-employment sector have been largely unchanged over the respective period, and that academic perspectives of weak self-employment have also remained static. These conclusions bolster the study’s key assertion that a more robust framework is needed to gain a thorough understanding of the weak self-employment subsector in Korea, thus enabling constructive efforts to improve conditions. For reference, this study relies on relatively more authoritative research when citing early literature.

[2] Examining conditions in numerous other advanced countries, it has been acknowledged that self-employment activities have a beneficial effect on the economy, both in terms of innovation and job creation (Thurik et al. 2008; Stevens and Partridge 2011; Bahn SS et al. 2014). Since self-employed workers in these countries reported higher levels of job satisfaction and earned higher incomes than wage-and-salary workers (Dennis 1996; Taylor 1996; Hughes 2003), government policies for creating good jobs emphasize self-employment (Carree et al. 2002; Carmona, Congregado, and Golpe 2012; Poschke 2013). In advanced countries, the self-employment rate rebounded in the 1970s following a prolonged period of decline. This mirrored an increase in the preference of wage-and-salary workers for self-employment, government implementation of employment policies, and diffusion of information technology (Acs and Audretsch 1987; Blau 1987; Carree et al. 2002; Acs 2006). Nevertheless, the self-employment rates in most advanced countries remain within the 5–15% range, representing a relatively small portion of overall employment (OECD, Employment and Labor Market Statistics).

[3] Certain domestic literature does not view the high Korean self-employment rate as a sign of weakness. Kim WY (2009) argues that Koreans are culturally predisposed to self-employment and that the self-employment rate is likely to rise further. Kang JS, Chun HB, and Cho JH (2017) associate volatile conditions in the Korean self-employment sector with Schumpeterian creative destruction, rather than over-competition. Seong JM (2019) claims that Korea’s high self-employment rate is mainly due to successful self-employed workers staying in the sector.

[4] The Korean term translated here as sosanggongin is primarily used by the Korean government to identify the main entities targeted for public support in the self-employment sector (Lee YH 2014; An SB and Shin YJ 2017). Until the law was changed in 2020, the official definition of sosanggongin referred to business owners employing five or fewer regular workers in most service businesses (ten or fewer regular workers in transportation and storage). (“Regular workers” largely refers to full-time employees. But the legal definition is based on detailed criteria that do not align perfectly with the meaning of “full-time employee.”) Although the concepts of sosanggongin and self-employed worker are not identical, they have similar meanings. In addition to data on sosanggongin, Statistics Korea separately collects data related to self-employed workers, which can lead to confusion. Certain studies use sosanggongin data instead of self-employed worker data when comparing Korean and overseas conditions for self-employed workers and self-employment (Special SME Committee 2005; Suh YG and Kim SK 2012; Suh GH, Suh CS, and Yoon SW 2013; Bae JS, Park JW, and Yun HJ 2018). Refer to Appendix 2.2.5 for an in-depth analysis of sosanggongin data.

[5] The share of sosanggongin is calculated as the proportion of sosanggongin to the total number of business entities. In this study, sosanggongincrowded service business types are services where the share of sosanggongin is 80% or higher, while sosanggongin-uncrowded service business types are services where the share of sosanggongin is below 80%. Sosanggongin-crowded service business types include Wholesale and retail trade (G, 9), Transportation (H, 9), Accommodation and food service activities (I, 9), Real estate activities and renting and leasing (L, 9), Education (P, 9), Arts, sports and recreation related services (R, 9), and Membership organizations, repair and other personal services (S, 9). On the other hand, sosanggongin-uncrowded service business types include Information and communications (J, 9), Financial and insurance activities (K, 9), Professional, scientific and technical activities (M, 9), Business facilities management and business support services (N, 9), and Human health and social work activities (Q, 9). (English capital letters within parentheses signify sections under the Korea Standard Industrial Classification, and the number “9” indicates Rev. 9 (KSIC-9)).

[6] This conclusion is widely accepted in the Korean literature. However, the foreign literature reaches more complex conclusions. Refer to Appendix 2.3e for a discussion of the impact of the social safety net on self-employment weakness.

[7] Kang JS, Chun HB, and Cho JH (2017) is noteworthy a notable exception. The authors maintain that overcompetition does not prevail in the Korean self-employment sector. According to this study, the Korean self-employment sector is characterized by vigorous Schumpeterian competition and that policies attempting to impede the entry of new self-employed into weak business types actually contribute to self-employment weakness itself.