Frozen Domestic Demand, the Reality of Consumption Cliff
Consumers Close Wallets Due to High Inflation and High Exchange Rates
At the end of 2025, a bitter cold wind is blowing in the South Korean domestic market. As households with reduced real income due to prolonged high inflation close their wallets, a ‘Consumption Cliff’ is becoming a reality.
The Consumer Composite Sentiment Index (CCSI) for December, announced by Statistics Korea, fell well below the baseline of 100, clearly revealing pessimistic consumer sentiment. Not only food prices but also overall living costs such as public utility bills and service charges have continued their high march, causing a sharp contraction in the purchasing power of ordinary people.
On top of this, the high exchange rate trend, with the won/dollar exchange rate hovering around the 1,400 won range, stimulates import prices, repeating a vicious cycle of fueling inflation anxiety. Sales growth rates of department stores and large hypermarkets are marking time or recording negative figures, and the alleyway commercial districts felt by self-employed people have entered an ice age.
Companies Cite ‘Domestic Demand Slump’ as Biggest Risk
The sense of crisis felt by companies has also reached its peak. According to the ‘2026 Management Outlook’ surveyed by the Korea Chamber of Commerce and Industry on domestic manufacturing and service companies, the majority of respondents cited ‘domestic consumption slump’ as the biggest risk for next year’s management. This shows that sluggish demand in the domestic market is threatening corporate survival more than external factors such as global supply chain instability or high interest rates.
If domestic demand does not revive, companies have no choice but to choose conservative management strategies such as reducing investment and cutting employment, as sales decline leads to inventory increase and operation rate decline. In particular, the sense of crisis in life-friendly sectors such as distribution, food, and clothing, which have high dependence on domestic demand, is even more serious.
Domino Closures of Self-Employed and Collapse of Commercial Districts
The direct hit of the domestic demand slump fell first and most painfully on the self-employed. The closure rate of self-employed businesses in 2025 is expected to renew its all-time high. While fixed cost burdens such as interest burdens due to high interest rates, rent, and labor costs have increased, sales have plummeted, forcing self-employed people driven to the edge to choose serial closures.
Even in key commercial districts like Myeong-dong and Gangnam in Seoul, empty stores with ‘For Rent’ signs can be easily found, and the hollowing out phenomenon of local commercial districts is even more serious. The collapse of self-employment is raising serious concerns in that it can become a detonator leading to the insolvency of household debt and the recession of the local economy beyond simple individual failure.
Although the government is coming up with various financial support measures, it is pointed out that without a fundamental recovery in sales, it is merely ‘peeing on frozen feet’ (a stopgap measure).
Beyond ‘Jobless Growth’ to ‘Bad Jobs’
The Bare Face of Employment Hidden Behind Statistical Illusions
The employment rate and unemployment rate indicators announced by the government do not look bad on the surface. Modifiers like ‘all-time high employment rate’ appear. However, behind these numbers lies the uncomfortable truth of ‘Qualitative Deterioration of Employment.’ This, combined with the household debt problem, becomes a major factor reducing the vitality of the macroeconomy.
Most of the increased jobs are short-term public jobs created by the government injecting finances, such as jobs for the elderly, or temporary and daily jobs centered on platform labor such as delivery and courier services. On the other hand, jobs for the 30-40s generation, the backbone of the economy, and quality jobs such as manufacturing and regular positions are continuously decreasing.
This causes a statistical illusion, preventing policy authorities from properly diagnosing the crisis in the job market. The numbers are abundant, but the employment cold wave actually felt by the public is fiercer than ever.
Deepening Polarization of Jobs Between Large Corporations and SMEs
The problem of the dual structure of the labor market has become more entrenched in 2025. The gap in wages and working conditions between a small number of regular workers in large corporations and the majority of workers in SMEs and non-regular positions is hardly narrowing.
Large corporations are strengthening the tendency to select a small number of elites centered on experienced workers while reducing the scale of new recruitment by switching to occasional recruitment. On the other hand, SMEs are suffering from chronic labor shortages, yet the ‘Job Mismatch’ phenomenon where young people avoid them due to poor treatment is deepening.
A contradictory situation is unfolding where young people delay entering the labor market saying, “I would rather prepare for employment longer than go to an SME,” while SMEs scream, “We can’t run the factory because we can’t find people.”
Surge in ‘Just Resting’ Population and Giving Up Job Seeking
The ‘Just Resting’ population, who do not engage in job-seeking activities even though they have the ability to work, is surging. In particular, the increase in ‘Just Resting’ among the 20-30s youth generation, who are beginners in society, is noticeable. This is not simply due to laziness, but a result reflecting the loss of will to seek jobs because they cannot find quality jobs at the desired level, or frustration due to repeated employment failures.
Also, there are many cases where women whose careers were interrupted due to childcare or nursing care cannot return to the labor market and remain as the non-economically active population. The fact that the working-age population does not participate in economic activities and remains as idle manpower is a loss of human capital for the entire country and a major cause eating away at the potential growth rate.
The Collapse of Local Economies and the Vicious Cycle of Talent Outflow
Crisis of Regional Metropolises like Busan
The self-deprecating joke “Only old people and the sea remain in Busan” has become a painful reality in 2025. Survey results showing that more than 74% of Busan citizens evaluate the local economic situation negatively clearly show how serious the recession of the local economy is.
As the concentration in the metropolitan area accelerates, local companies relocate to the metropolitan area or close their doors because they cannot find talent, and in regions where jobs have disappeared, an ‘Exodus’ where young people leave for the metropolitan area again is repeating. The Gross Regional Domestic Product (GRDP) growth rate is below the national average, and the crisis of local extinction has now arrived as a reality before our eyes, not a warning for the future.
Youth Outflow Caused by Lack of Quality Jobs
The core cause of the collapse of local economies is the ‘Lack of Quality Jobs.’ Even if one graduates from a local national university, finding a job within the region that provides wages and welfare at the level of a large corporation is like picking stars from the sky. Although balanced development policies such as the relocation of public institutions were promoted, the effect was limited as voluntary investment by private companies did not follow.
As high-tech industrial clusters concentrate in the southern metropolitan area like Pangyo, regions are becoming fixed in a low-value-added industrial structure centered on simple manufacturing or service industries. Young people turning their backs on their hometowns has become an inevitable choice for survival, which accelerates the aging of the region and further reduces the vitality of the local economy.
Absence of Special Measures to Stop Regional Extinction
Although every administration has shouted for balanced regional development, the unipolar system of the metropolitan area has rather solidified. Various ideas such as creating mega-cities and designating opportunity development zones were presented, but achievements leading to actual corporate attraction and job creation were minimal.
Rather than uniform support from the central government, it is urgent to foster specialized industries tailored to the characteristics of each region and create a virtuous cycle ecosystem where local talents can get jobs at local companies and settle down by linking local universities and companies. However, as of 2025, the clock of local extinction is turning fast without finding a clear solution.
Limits of Income-Led Growth and Worsening Distribution
Decrease in Real Wages and Stagnation of Household Income
Prices are rising, but wages are not rising as much, so the phenomenon of decreasing real wages continues. According to Ministry of Employment and Labor statistics, the real wage growth rate of workers in 2025 recorded a negative figure. This is because companies are suppressing wage increases citing poor performance, and high-wage regular jobs have decreased.
The decrease in real income is the main culprit weakening the purchasing power of households and deepening the domestic demand slump. The complaints of office workers that “everything went up except my salary” are close to screams appealing to the threat to livelihood, not simple complaints.
Deepening Income Inequality Driven by Asset Gap
While labor income stagnates, volatility in asset markets such as real estate and stocks increases, and the ‘Asset Gap’ is further deepening income inequality. Even in a period of high interest rates, cash-rich people increase their assets, while ‘Young-kkeul’ investors who invested with debt or ordinary people without assets suffer double trouble due to interest burdens and asset value decline.
As Piketty’s warning that asset income increases faster than labor income becomes reality in Korean society, the phenomenon of the ladder between classes being cut off and the inheritance of wealth becoming entrenched is becoming distinct. This is creating side effects of increasing social deprivation and lowering the will to work.
Economic Pain Transferred to Vulnerable Groups
The pain of economic recession always cuts off the weak links first. Economic vulnerable groups such as temporary and daily workers, small self-employed people, and low-income families are taking a direct hit from the domestic demand slump and job crisis. Those placed in the blind spots of the social safety net are driven to a livelihood cliff in case of job loss or business closure.
The scenery where applications for basic livelihood recipients surge and lines at free soup kitchens grow shows the dark cross-section of Korean society in 2025. Inclusive growth policies for resolving polarization and protecting vulnerable groups are desperate, but support is insufficient due to lack of fiscal room.
Vicious Cycle of Low Corporate Vitality and Sluggish Investment
Entrepreneurship Crushed by Regulations and Cost Burdens
For companies to increase investment and create jobs, an environment where entrepreneurship can be displayed must be created. However, Korea’s corporate environment is still crushed by web-like regulations, high cost structures, and rigid labor-management relations.
Strengthened regulations such as the Serious Accidents Punishment Act have increased corporate management risks, and high corporate tax and inheritance tax burdens are dampening corporate enthusiasm. In a reality where it takes years to pass the regulatory sandbox even with innovative ideas, companies choose stability over adventure. This is a major obstacle reducing economic dynamism and blocking the creation of new jobs.
‘Cash Securing’ Strategy Due to Increased Uncertainty
The management buzzword for 2025 is ‘Survival.’ As internal and external economic uncertainties grow, major large corporations are taking conservative financial strategies to secure cash liquidity rather than aggressive investment. R&D investments or facility investments for future sustenance are being reduced or postponed.
As companies do not release money, the trickle-down effect disappears, and a chain recession effect where work for partner SMEs decreases is appearing. The phenomenon where corporate surplus funds do not lead to investment and only pile up in the storehouse is like arteriosclerosis blocking the blood circulation of the economy.
Companies Turning Eyes Overseas
As domestic investment attractiveness falls, companies are turning their eyes overseas. Large-scale factories of Korean companies are being built in the US, Vietnam, and India, but news of building factories in Korea is rare. Increasing foreign direct investment is necessary to pioneer global markets, but it is accompanied by side effects of domestic industrial hollowing out and job outflow.
‘Reshoring (return of companies that entered overseas to domestic)’ policies are being promoted, but companies returning are very few due to high labor costs and regulatory barriers. To leave quality jobs in Korea, fundamental constitution improvement to make a good environment for doing business must precede.
Structural Rigidity of the Labor Market and Delay in Reform
Overprotection of Regular Workers and Tears of Non-Regular Workers
One of the biggest problems of the Korean labor market is the dual structure of excessive protection for regular workers and poor treatment of non-regular workers. Rigid employment flexibility, where dismissal is almost impossible once hired as a regular worker, is a main factor making companies reluctant to recruit new employees.
To avoid employment burdens, companies use expedients of increasing non-regular workers or outsourcing services, which results in lowering the quality of employment. In a situation where the principle of ‘equal pay for equal work’ is not observed, non-regular workers suffer from the double trouble of employment instability and low wages.
Wage System Centered on Seniority and High Cost Structure
The seniority-based wage system, where wages rise according to years of service regardless of productivity, acts as a factor increasing corporate cost burdens and suppressing youth recruitment. Although extension of retirement age is being discussed in an aging era, retirement age extension without reorganization of the seniority system can be an unbearable labor cost bomb for companies.
Voices are high that reorganization of the wage system centered on job and performance is urgent, but social consensus is far off due to opposition from vested unions. A transition to the ‘Flexicurity’ model, which secures both flexibility and stability of the labor market, is desperate.
Drifting Labor Reform and Social Conflict
Labor reform tasks such as flexibilization of working hours and expansion of industries allowed for dispatch have been hovering on the table of labor-management-government dialogue for years or repeating disruptions. Even in 2025, labor reform has become a political issue and is trapped in camp logic, unable to move a single step forward.
A confrontation structure where labor unions counter with strikes if the government pushes unilaterally, and management adheres to the position that labor demands are unacceptable, is repeating. If old practices and systems of the labor market are not fixed, job creation suitable for the 4th industrial revolution era is impossible. The delay in reform is no different from holding the jobs of future generations hostage.
Demographic Structure Change and Shrinkage of Domestic Market
Entry into Super-Aged Society and Change in Consumption Patterns
In 2025, Korea entered a super-aged society where more than 20% of the population is over 65. The increase in the elderly population brings about structural changes in the consumer market. The elderly, whose income decreases after retirement, inevitably have a low propensity to consume.
Baby boomers, who were big hands in the domestic market, reduce spending upon retirement, becoming a factor dragging down overall private consumption. There are expectations that senior-friendly industries such as the silver industry will grow, but they have not yet grown to a scale sufficient to offset the shrinkage of the domestic market.
Limit of Domestic Market Size Due to Population Decline
The decline in the total population due to low birth rates is reducing the absolute size of the domestic market itself. It is absurd to expect domestic demand to grow when the number of people to consume is decreasing. Industries related to infants and toddlers such as formula, diapers, and study materials are already on the verge of collapse, and the waves of the population cliff, such as the crisis in the education market due to the decline in the school-age population and the decrease in housing demand, are spreading to all industries.
It is also a structural cause forcing companies that have hit the growth limit with the domestic market alone to go overseas.
Increase in Single-Person Households and Fragmentation of Consumption
As the household structure rapidly reorganizes from 4-person households to single-person households, consumption trends are also changing. Consumption valuing small capacity, cost-effectiveness, and convenience has become mainstream rather than large capacity and high consumption.
This brought about the growth of convenience stores and home meal replacement markets, but resulted in a decrease in traditional family-unit consumption expenditures (e.g., large home appliances, family restaurants, medium-to-large apartments, etc.). Companies are modifying marketing strategies to match this fragmentation of consumption, but there is a limit to increasing the total amount of overall consumption.
Proposals for Vitalizing Domestic Demand and Creating Jobs
Fostering New Industries through Bold Deregulation
The fundamental solution to solving the domestic demand slump and job shortage is to revive the vitality of the private sector. To this end, the government must embark on bold and unconventional deregulation that companies can feel, rather than show-off deregulation.
We must break down entry barriers in new industry fields and introduce a negative regulation system to create a playground where innovative companies can play freely. Only when new industries grow are new quality jobs created.
Improvement of Labor Market Dual Structure and Securing Flexibility
A grand social compromise to break the dual structure of the labor market is urgent. We must build a win-win cooperation model to reduce the gap between large corporations and SMEs, and regular and non-regular workers, and hasten the reorganization of the wage system such as introducing job-based pay.
Also, while increasing the flexibility of the labor market to reduce corporate employment burdens, we must create an environment where workers can move jobs with peace of mind by tightly weaving the social safety net, such as expanding unemployment benefits and strengthening re-employment education.
Advancement of Service Industry and Balanced Regional Development
We must move away from the growth strategy centered on manufacturing and intensively foster high-value-added service industries. Service industries such as tourism, medical care, and content have a much higher employment induction effect than manufacturing.
In addition, by fostering regionally specialized industries, we must create quality jobs in local areas to create a local ecosystem where young people want to stay. The recovery of the domestic market and job creation cannot be achieved in a short period, but if we do not start structural constitution improvement from now on, the future of the Korean economy will not be able to escape the swamp of long-term stagnation.
