In September, the OECD cut its growth outlook for South Korea from its previous estimate of 3 percent made in May.

"Economic growth is projected to remain close to 3 percent through 2020, as fiscal stimulus offsets sluggish employment growth, which reflects double-digit hikes in the minimum wage in

2018-20 and restructuring in the manufacturing sector," the organization said in a report.

Measures to stabilize the housing market have led to a decline in construction orders for residential property, it said.

The OECD's latest growth estimate is on par with the Bank of Korea's latest outlook.

Last month, the BOK trimmed its economic growth outlook to 2.7 percent for 2018 from its earlier projection of 2.9 percent. This is lower than the finance ministry's 2.9 percent outlook and the International Monetary Fund's forecast of 2.8 percent.

The South Korean economy expanded 3.1 percent in 2017 and 2.9 percent in 2016.

"Output growth is projected to remain close to 3 percent, despite sluggish employment growth in 2019, partly as a result of a hike in the minimum wage by a further 10.9 percent," it said.

The improved relationship with North Korea is a landmark event that may also have positive economic implications.

Moreover, progress in structural reforms to raise productivity in lagging sectors would boost output growth, the OECD said.

But further increases in workers' compensation, which is part of the government's commitment to mark up the country's minimum wage, would damped employment and output growth, it warned.

The OECD said hikes in the minimum wage should be moderated to avoid negative effects on employment. The "income-led growth" strategy, driven by minimum wage increases and higher public employment and social spending, needs to be supported by reforms to narrow productivity gaps between the manufacturing and service sectors and the gulf that exists between large and small firms.

The priority is regulatory reform, focusing on services, where labor productivity is less than half of that in Korean manufacturing. Policies to promote entrepreneurship and raise productivity at small firms are also needed to promote inclusive growth, the OECD said.

"Trade protectionism remains a concern: with intermediate goods accounting for four-fifths of Korea's exports to China, its largest trading partner, Korea is vulnerable to higher import barriers on Chinese exports to the US," the OECD said. (Yonhap)