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.