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Employment and productivity: Korea’s manufacturing sector faces paradox of increased employment with stagnant production in aftermath of financial crisis

Author Kang, Duyong Date 2016.05.05 Issue No 627

While Korea’s manufacturing industry has shown no signs of growth due to sluggish exports since the financial crisis, employment in manufacturing has been, ironically, increasing rapidly.
○ The average growth rate of real value added in the manufacturing sector over the five year period from 2010 to 2015 was 3.4 percent, which is the lowest on record. Job growth in manufacturing, however, was the highest it has been since the economic boom between 1986 and 1991, standing at a record 2.2 percent.
○ From the beginning of the 1990s until the financial crisis hit, employment in manufacturing decreased steadily due to deindustrialization.


While the recent surge in employment is remarkable, the lack of real growth in the industry in 2015, resulting from low production growth and high employment, has taken an unprecedented toll on productivity growth, which stands at -2.3 percent .
○ Although such post-crisis slowdown in productivity has been observed occasionally in developed countries, it does not usually accompany a massive increase in employment, as is the case in Korea.


There is no clear explanation as to how Korea’s manufacturing sector has maintained such rapid rates of job growth. However, government employment strategies such as the “tax credit system for job-creating investment” are likely responsible.
○ The tax credit system for job-creating investment?the biggest policy of its kind?is favored by businesses for the significant increase in tax breaks it provides. The manufacturing industry in particular has been one of the main beneficiaries of this policy.
○ To make more accurate judgments on the matter, more information from and cooperation with the National Tax Service is needed.


If it is confirmed that such policies have indeed had a significant impact on employment rates, complementary measures will be required to increase the use of employment-related policies, enhance the impact of employment policies in non-manufacturing sectors, and reflect the quality of employment.