This paper applies the multilateral index number approach in order to measure the relative TFP levels of

the service industries in Korea. This application is possible as the EU and Korea KLEMS databases have

been built for gross output growth accounting at the detailed industry-level, with a wide coverage of

countries. Currency conversion is a difficult issue and a limitation of this paper, but it has been possible

to  overcome this problem to some extent by making use of industry-level gross-output PPPs provided

by the EU KLEMS.

The analysis of TFP levels and growth reveals that Korea’s market services suffer not only from very low

TFP levels compared to the world frontier, but also from  decelerating growth which drops the Korean

service industries’ TFPs farther away from the frontier. The gap is the biggest in distribution services,

which in developed countries normally has the highest labor productivity level. The gap is also quite

large in personal services. In the case of producer services the gap is smallest, but it has started to widen

in recent years. From this analysis, it becomes clear that restructuring and modernization in distribution

and personal services is essential for the Korean service sector if it is to resume to its path of catching-

up sooner rather than later.

Decomposition analysis of the TFP growth of Korea’s market services reveals not only that most of the

service industries, except post and telecommunication services, suffer from declining productivity

growth, but also that weak within-sector restructuring has negatively affected overall TFP growth in the

service sector since the financial crisis. Regression analysis using international panel data consisting of

eight countries and nine service industries for the period 1987~2004 shows that FDI inflows, regulations

and market size are important in explaining inter-country differences in TFP levels. In addition to these

three factors, R&D and human capital are also important in determining differences in TFP growth in the

service sector.