Here lies self-employed

Business closures soar on competition, slowing economy

By Park Hyong-ki

Park opened his first restaurant in 1999 selling pork belly in Seongnam, Gyeonggi Province.

With five employees and his college-aged son helping out, the business was running smoothly in the beginning.

But soon, it became "competitive and ugly," Park said.

On the street where he opened his business, a number of other pork belly restaurants started to pop up, leading to a price war.

"I had to apply for bank loans just to stay afloat in the first few months, then changed our menu and offered seafood because the competition became too unbearable," said Park, who asked to be identified only by his surname.

"Back then, there were so many people like me who were in their mid-40s, early 50s trying to restart their life after leaving corporate jobs."

Before he got into the restaurant business, Park used to work for a medium-sized fashion company.

"I think it is harder nowadays to maintain a restaurant. Back then, office workers enjoyed dining out in groups after hours. But it seems young people would rather go home early and do something else in their free time," he said.

The situation for the self-employed has recently taken a turn for the worse.

The rate of self-employed businesses closing down in their first year reached nearly 88 percent in 2017, according to the National Tax Service (NTS) data last week.

This means almost nine out of 10 self-employed people shutter their businesses each year.

The rate is expected to surpass 90 percent this year as the number of people who will file closures with the tax agency will exceed 1 million, the NTS noted.

There are 5.5 million self-employed people here, including 4 million who work alone, as of 2017, according to the OECD.

Too much competition

The country is referred to as a "cemetery for the self-employed" due to this pessimistic outlook.

"There are just too many people trying to sell fried chicken or open other types of restaurants. There is too much competition, leading many businesses to fold quickly," said Jung Gi-yong, an independent management consultant for small- and medium-sized enterprises (SME) and startups.

"Starting small restaurants or motels is easy given their low entry barriers."

This is why so many of them have been opened by those in their 40s and 50s since the Asian financial crisis of the late 1990s.

Jung provides consulting services for companies receiving assistance from the Ministry of SMEs and Startups.

Nowadays, a growing number of those in their 20s and 30s are becoming self-employed restaurant workers amid a tight job market.

There are over 600,000 restaurants in this country that has a population of 50 million people. In contrast, Japan has about 700,000 restaurants, and its population stands at around 127 million, Jung noted.

"This statistics tell us there are too many eateries for a population that is so much smaller than Japan. But it also tells us the harsh, sad reality that opening a fried chicken shop or for other types of dining is the only thing people can do after working years at companies," Jung said.

"And a majority of them were opened to earn a living, not to solve any problems in society."

Jung said there are three types of self-employed workers.

First, there are those with ideas who want to start a business to solve specific social problems and offer solutions. They are called opportunists or entrepreneurs.

Second, there are people who became self-employed to succeed and run their family business. They are called self-employed family business owners.

And there are people who are self-employed just to earn a livelihood.

The United States has the biggest number of self-employed in the world, and most of them are opportunists, while Japan has many self-employed family small business owners.

"Korea mostly has livelihood-type self-employed who need money immediately after retirement, or after they were let go, or after they could not find a job but do not have the skills to become opportunists like those in the U.S.," Jung said.

It's the economy

Analysts say due to the country's weak social safety net system, a lot of people here open their own restaurants and shops because they need money urgently.

The labor market is also too rigid for anyone to acquire skills for the future, while they work at companies before retirement.

Their uncertainty and instability after retirement are driving many to start something that is easy in the short run.

But soon, they face hardship with their margins squeezed on competition, turning to bank loans and even private moneylenders just to survive.

The aggregate debt held by the self-employed reached nearly 600 trillion won ($540 billion) last year, up from 407 trillion won in 2014, according to the Bank of Korea (BOK). Their debt increased by 9.1 percent in 2014 from a year earlier, surpassing that of household debt.

The slow and weak economy is also making it harder to maintain their self-employment. The country's GDP grew less than 1 percent in the second quarter of the year.

"The weaker the economy gets, the harder the self-employed will fall because this sector is usually the first to feel the pinch of an economic slowdown," said Sung Tae-yoon, an economist at Yonsei University.

The economist added the rapid rise in the minimum wage has worsened the situation for self-employed businesses.

The wage was increased 16.4 percent to 7,530 won per hour this year, a record hike, in line with President Moon Jae-in's pledge to raise it to 10,000 won by 2020.

The government has reached an agreement with representatives from labor and businesses to increase the minimum wage by 10.9 percent to 8,350 won an hour for 2019. Local SMEs will have to increase the minimum wages of more than 2 million people, according to the SME ministry's data submitted to the National Assembly.

"Along with the weak economy, this has further raised the cost for the self-employed, leaving many of them hopeless and helpless," Sung said.

"We need to approach the issue concerning the self-employed through a comprehensive economic policy."