The self-employed on the brink of collapse

Sohn Hae-yong
The author is the business news editor of the JoongAng Ilbo.

I recently visited the “kitchenware street” in Hwanghak-dong, Seoul, and there were more merchants than customers. The merchants buy products from closed stores and sell them to new restaurants. Gas ranges, sinks, tableware, utensils, tables and chairs were all stacked in the alleys, but not many people were shopping. A vendor who has been doing business here for more than 20 years said, “I can’t even sell new products at half off. This only happened during a recession.” He added, “This business runs when restaurants close and open, but used goods are not being sold as not many new restaurants are opening.”

The kitchenware street provides a glimpse into how small businesses are doing. The current condition of the self-employed can be confirmed in numbers. Last year, 986,487 businesses (individuals and corporations) reported closures, the largest number since related statistics began to be gathered in 2006. It is also the largest increase from the previous year, 119,195 more. A total of 482,183 owners said they closed because of slow business, second most after 488,792 in 2007 during the financial crisis.

As a result, the small business ecosystem has shrunk. It has become a new normal that less than 20 percent of all the employed are self-employed. In the second quarter, there were 5.668 million self-employed people, making up 19.65 percent of the total number of employed people at 28.839 million. The number is breaking records every quarter — from 19.89 percent in the fourth quarter of last year to 19.74 percent in the first quarter of this year. It is drastically different from 2004, when the self-employed made up more than 27 percent of all employees.

The proportion of the self-employed tends to decrease as the economy advances. Considering that the proportion of the self-employed in Korea is two to three times that of major economies — such as the United States with 6.6 percent, Germany with 8.7 percent and Japan with 9.6 percent — the share will fall further in the future. The problem is that it is not a positive decline caused by the increase in quality jobs.

Profitability has long deteriorated due to the burden of labor costs resulting from the minimum wage increase and a deepening rent burden from rising real estate prices. Business restrictions and decreased spending due to the Covid-19 pandemic made matters worse. Since then, rising ingredient costs have made running a business more difficult, and interest rate hikes to curb inflation pushed the people hanging on with debts off the cliff. The self-employed faced challenges in both sales and costs.

The crisis of small businesses does not end with the self-employed. Due to the nature of the Korean economy, where the self-employed make up a high percentage of the working population, the crisis of self-employed businesses is both a result and cause of the economic downturn. It is a vicious cycle — from “a lack of domestic demand” to “a decline of the self-employed” to “decreased consumption and employment” to “sluggish domestic demand.” Currently, the postponement of the repayment of principal and interest — and an extension of maturity — barely saved those small businesses. But if delinquency surges, the health of the financial sector also can be threatened.

Of course, the government is not sitting on its hands. Past governments have been pouring out various policies to support small businesses. The current administration also came up with a 25-trillion-won ($18-billion) support program to help small business owners ease their loan burden and provide fixed expenses such as electricity bills and delivery service fees. But this is nothing but “buying time” to avoid an immediate crisis.

After all, structural problems lie underneath the crisis of self-employment. In Korea, many people start small businesses to make a living without preparation. Many small businesses are not technology-based start-ups but simply restaurants and lodging businesses, which are easily shaken by economic downturns.

Structural crises should be addressed with structural prescriptions. The decline of small businesses should be accompanied by industrial restructuring. An exit strategy is also needed. The government must help businesses lacking competitiveness to shutter and help them find new jobs through retraining programs. More fundamentally, to prevent people from starting a business without preparation, the government must create a political and social environment to encourage companies to create more quality jobs.