1. This paper estimates the potential growth of the Korean economy, taking into account the impact of the COVID-19 pandemic, demographic shifts, and structural changes in the labor market. Specifically, we revise our semi-structural models to reflect the increased volatility of macroeconomic variables during the pandemic. We also use household-level microdata to account for the heterogeneity of the labor force.

2. The results show that the potential growth rate of the Korean economy has been steadily declining. From around 5 percent in the early 2000s, it fell to the mid-3 percent range in the 2010s. It further declined to the mid-2 percent range between 2016 and 2020 and is estimated to reach around 2 percent between 2024 and 2026. This downward trend is attributed to slower growth in total factor productivity, capital, and labor force.

3. If this trend continues, the potential growth rate could decline further over the next 5 to 10 years. However, this is not inevitable and can vary depending on how we respond through structural reforms. The long-term projection and scenario analysis indicate that structural reforms aimed at (1) enhancing total factor productivity, (2) raising fertility rates, and (3) improving labor productivity among women and older workers can increase the potential growth rate in the late 2040s by 0.7 percentage points, 0.1–0.2 percentage points, and 0.1 percentage point, respectively, compared to the baseline projection.

4. To effectively raise the potential growth, it is necessary to improve productivity through structural reforms across the economy while preemptively addressing anticipated changes in future economic structures. Previous studies on structural reforms suggest that these efforts should focus on improving labor market efficiency, ensuring the efficient allocation of resources, and boosting overall economic productivity by enhancing business investment conditions and supporting innovative firms. Additionally, addressing the slowdown in the labor force caused by low fertility rates and an aging population requires proactive policies, such as easing the concentration in the Seoul Metropolitan Region and promoting work-life balance. It is also essential to implement multifaceted policy efforts to improve the productivity of women and the elderly.