Korea‘s labor productivity growth has slowed since the global financial crisis. Much of this is due to the sharp decline in labor productivity gains in the manufacturing industry during the post-crisis period. The service industry, on the other hand, has experienced only a slight slowdown in labor productivity growth. Using the Korea Information Society Development Institute’s 2017 Productivity Account, this paper examines the trend of changes in labor productivity growth by industry during the pre- and post-crisis periods, as well as factors behind such changes.

Looking at manufacturing sectors by level of technology, sectors of all technology levels have seen their labor productivity grow at a slower pace since the global financial crisis. More specifically, sectors of high-level (semiconductors, displays, smartphones, etc.) and medium- to high-level (machinery, automobiles, ships, etc.) technologies, which consist mainly of key export industries, have seen a clear slowdown in labor productivity growth. Labor productivity in the services industry has seen slightly slower growth overall, with a small increase in the personal services, non-ICT producer services and public services sectors offset by a decrease in the distribution and ICT producer services sectors.

An analysis using growth accounting decomposition shows that the main driver of the slowdown in labor productivity growth in the manufacturing industry has been a slowdown in total factor productivity growth. On the other hand, the key factor for the services industry has been a slight slowdown in improvement in the capital equipment ratio. A structural decomposition analysis finds that a major factor behind the slowdown in total factor productivity growth in the manufacturing industry has been a sharp slowdown in growth in output per unit of input (labor and capital), despite some progress made in producing higher value-added products. Output per unit of input varies depending on production process innovation, the emergence of innovative businesses, and efficient allocation of labor and capital. In light of this, the analysis implies that there has been a lack of such innovation and of efficient resource allocation. The slowdown in total factor productivity growth in the manufacturing industry is seen in leading companies as well as those lagging behind, suggesting that this is an industry-wide phenomenon, not an issue of polarization between companies. Meanwhile, it is analyzed that restructuring across industries since the global financial crisis has not been effective in increasing total factor productivity.

In order to enhance manufacturing productivity, it is necessary to promote convergence of the manufacturing and services industries, discover leading core industries and support innovative startups. Regulations need to be eased and structural reform should be implemented to encourage efficient allocation of labor and capital, and restructuring of marginal companies should be continuously carried out. Efforts should be also made to produce higher value-added products that match those of advanced countries.