Abstract
Korea is one of the countries in which the gap in productivity growth between manufacturing and service sector is the most pronounced among OECD countries. The slow productivity growth in the service sector is associated with the increasing use of low-productivity service intermediates by Korean manufacturing firms. The share of outsourced services in terms of employment increased dramatically in Korea, while, on the contrary, its share in terms of output did not grow significantly. This implies either that the production of outsourced services became extremely labor intensive than before, or that the outsourced services became much cheaper than manufactured products or services in general. The specificity that characterizes the pattern of Korean de-industrialization occurred, because the subcontracting firms were able to impose very low prices to their subcontracted service providers. The institutional background of this practice is the combination of the strong dual labor market with the segmented product market. The findings of this paper implies that competition policies and labor market policies can play a more important role than industrial policies do, for productivity growth in the service sector in Korea.
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Source: author’s calculation from OECD STAN database
Source: author’s calculation from OECD STAN database
Source: Author’s calculation from OECD STAN database
Source: author’s calculation from Bank of Korea, Input–Output tables
Source: author’s calculation from OECD STAN database
Source: author’s calculation from OECD STAN database
Source: author’s calculation from Bank of Korea, Input–Output tables
Source: author’s calculation from OECD STAN database
Source: author’s calculation from Bank of Korea, Input–Output tables
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Notes
The de-industrialization caused by service outsourcing is often considered as changes purely arising from the industrial classification, while the nature of activities does not change at all. See, for example, Demmou (2010).
See, for example, Baek (2012).
See, for example, Ahn (2013).
Although I will not discuss in detail the empirical validity of these explanations, it would be useful to note that the demand-bias hypothesis does not seem to provide with a strong argument for de-industrialization in a globalized context. Even though the share of services increases in domestic final consumption, additional demands can be created from abroad thorough exports. The empirical evidence for demand-bias hypothesis is not so strong neither. Although some studies argue that the share of services in the final consumption tend to have increased, as in Schettkat and Yocarini (2006), recent data for OECD countries show that the real value-added share of manufacturing increased in many OECD countries.
From the 2010 and on, the absolute number of manufacturing employment tends to redress slightly, but its share continues to decrease.
Statistics Korea, Economically Active Population Survey.
It should be useful to note that this conclusion was made based on a strong assumption that the output–labor ratio of the outsourced service intermediates is exactly same to the ratio that one would find if the service intermediates were produced in house. It is much more realistic to assume that the ratio is higher in the case of insourcing than in the case of outsourcing, because the manufacturing firms tend to pay higher wages to their workers. In this case, the estimated number of jobs disappeared from the manufacturing sector due to service intermediate outsourcing will be smaller than in Fig. 6.
Note that, differently from the case of manufactured goods, outputs of services are measured based on their sales.
The output–labor ratio for the outsourced service intermediates was calculated here by dividing their real value by EE.
Statistics Korea, Economically Active Population Survey. The official statistics on non-regular were produced only from 2003.
During the high growth period, the negative impacts of this subcontract system on SMEs were partially compensated by the positive spill-over effects resulting from the strong performance of the Chaebol groups through strong demands for intermediate inputs. The changes in the firm strategies towards a heavier reliance on outsourcing practices and weakening of the inter-industry linkages, owing to the growing off-shoring practices of large firms and the development of information technology industries, made these benefits dissipate.
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Ok, W. The Korean exception: service outsourcing by manufacturing firms and the role of institutions. Evolut Inst Econ Rev 13, 165–182 (2016). https://doi.org/10.1007/s40844-016-0040-7
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DOI: https://doi.org/10.1007/s40844-016-0040-7