"Slowing Labor Productivity in South Korea: Impact on Large Corporations and Lagging Restructuring"

Bank of Korea 'Analysis of Factors Slowing Manufacturing Labor Productivity Since the Global Financial Crisis'

[Asia Economy Reporter Eunbyul Kim] The significant slowdown in labor productivity in South Korea's manufacturing sector since the global financial crisis has been influenced not only by economic conditions but also by sluggish labor productivity in large corporations and delayed structural adjustments.

According to the "BOK Issue Note - Analysis of Factors Behind the Slowdown in Manufacturing Labor Productivity Since the Global Financial Crisis" released by the Bank of Korea on the 25th, South Korea's labor productivity growth rate fell by 1.72 percentage points between 2009 and 2017, showing a greater slowdown than major OECD countries. In particular, the labor productivity growth rate in manufacturing, which had shown high growth before the crisis, dropped by 6.3 percentage points after the crisis. This was calculated using the Bank of Korea's survey of the mining and manufacturing industries and is analyzed as a factor hindering the growth of the Korean economy.

First, the global decline in demand and international trade following the financial crisis negatively affected labor productivity. When comparing labor productivity growth rates with export growth rates, the correlation coefficient between the two variables was 0.77, showing very similar trends. Due to South Korea's economy being highly dependent on exports, a decrease in exports leads to reduced utilization of labor and capital factors and weakens resource allocation efficiency.

There are also industrial factors. Labor productivity significantly slowed down in industries with relatively high value-added shares within manufacturing. The average annual labor productivity growth rate in electronics components, automobiles, other machinery, and other transportation equipment (including shipbuilding) manufacturing?which accounts for 47.1% of total manufacturing value-added?fell by 10.3 percentage points after the crisis. The decline in growth momentum of industries that previously played a major role in boosting labor productivity is also a reason.

Large corporations experienced a 7.9 percentage point drop in labor productivity growth rates before and after the crisis, which was a larger decline than that of small and medium-sized enterprises (-4.6 percentage points), contributing to the slowdown in growth. Poor structural adjustment also had an impact. After the crisis, the exit of low-productivity firms was sluggish, which lowered efficiency. Before the crisis, the exit rate of the bottom 20% labor productivity firms was 55.4% after three years and 66% after five years, but these rates fell to 50.2% and 61.1%, respectively, after the crisis.

Nam Choonghyun, Associate Research Fellow at the Micro-Institution Research Division of the Bank of Korea's Economic Research Institute, stated, "To boost labor productivity in large corporations and existing key industries, efforts should be made to activate investment, enhance ICT work utilization, and improve research and development (R&D) efficiency." He added, "In particular, it is necessary to encourage manufacturing companies to utilize big data and cloud computing."

He also emphasized the need to create an environment where the exit of low-productivity firms can proceed smoothly. In South Korea, the high costs borne personally by business owners upon closure make structural adjustment difficult, so improvements in this area are necessary. Associate Research Fellow Nam stressed, "Low-productivity firms should be able to exit the market without incurring large costs and have conditions that allow them to acquire new technologies and re-enter the market."

This content was produced with the assistance of AI translation services.