Falling Labor Productivity in Korean Manufacturing... Impact of 'Delayed Restructuring' (Comprehensive)

Bank of Korea 'Analysis of Factors Slowing Manufacturing Labor Productivity Since the Global Financial Crisis'
Manufacturing Labor Productivity Growth Rate -6.3%P Since the Financial Crisis
Triple Challenges: Economic Slump, Export Impact, Large Firm Weakness, and Delayed Restructuring

[Asia Economy Reporter Kim Eunbyeol] 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 the sluggish performance of large corporations and delayed structural adjustments.

According to the analysis titled "Factors Behind the Slowdown in Manufacturing Labor Productivity Since the Global Financial Crisis," released on the 25th by Nam Chung-hyun and Song Sang-yoon, associate researchers at the Bank of Korea Economic Research Institute, South Korea's labor productivity growth rate fell by 1.72 percentage points during the post-crisis period (2009?2017), a much sharper decline compared to major OECD countries (approximately -0.54 percentage points). In particular, labor productivity in the manufacturing sector, which experienced high growth before the crisis, dropped significantly. Based on calculations using the Bank of Korea's survey data on mining and manufacturing from Statistics Korea, the manufacturing labor productivity growth rate decreased by 6.3 percentage points, falling below 5%. Apart from the labor productivity index compiled and published by the Korea Productivity Center, there is no official labor productivity indicator. Last year, the Korea Productivity Center reported a labor productivity index growth rate of -0.2% for all industries and 1.4% for manufacturing.

The Bank of Korea viewed the global decline in demand and the slowdown in international trade following the financial crisis as having a negative impact on labor productivity. When comparing labor productivity growth rates with export growth rates, the correlation coefficient between the two variables was 0.77, indicating very similar trends. Given South Korea's economy's high dependence 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. First, labor productivity significantly slowed in industries with a relatively high share of value added within the manufacturing sector. The average annual labor productivity growth rate in electronics components, automobiles, other machinery, and other transportation equipment (including shipbuilding)?which account for 47.1% of total manufacturing value added?fell by 10.3 percentage points after the crisis. Another reason is the decline in growth momentum of industries that previously played a leading role in boosting labor productivity before the crisis.

Large corporations experienced a 7.9 percentage point drop in labor productivity growth rates before and after the crisis, a larger decline than that of small and medium-sized enterprises (-4.6 percentage points), which also contributed to the slowdown in growth. Delayed structural adjustments were another cause. Low-productivity firms were not effectively exited from the market, which reduced efficiency. Before the crisis, 55.4% of the bottom 20% labor productivity firms exited the market within three years, and 66% within five years; after the crisis, these figures dropped to 50.2% and 61.1%, respectively.

Associate Researcher Nam Chung-hyun stated, "To boost labor productivity in large corporations and existing key industries, efforts should be made to activate investment, enhance ICT utilization in work processes, and improve research and development (R&D) efficiency." He added, "It is especially necessary to encourage manufacturing companies to utilize big data and cloud technologies." He further emphasized, "Unlike the United States, where business failure imposes less personal cost, in South Korea, individuals face significant financial burdens and debt when businesses fail, making structural adjustments difficult. Conditions should be created so that low-productivity firms can exit the market without incurring large costs and re-enter the market after acquiring new technologies."

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