The Effects of Industrial Structure Changes on Employment and Production
Authors:   Asia-Europe Perspective Association, Jeon Su-Min 
Published: December 2024

Changes in industrial structure contribute to stagnant productivity of the entire economy and slowing economic growth. Usually, when a country’s economic development enters a mature stage, there is a deindustrialization phenomenon in which the share of manufacturing is transferred to the share of the service industries, and Korea has been fast in the employment sector since the 1990s. This phenomenon leads to a gap in productivity growth rates between manufacturing and service industries. Recently, concerns have been raised that the distribution of resources among industries is not smooth due to the decline in labor productivity and economic growth in the 2010s. Accordingly, this study analyzed the changes in productivity related to the trend of labor productivity and looked at the characteristics of the Korean economy, recognizing that it needs to increase productivity between industries and allocate resources efficiently in order for it to leap out of its low growth trend. In addition, panel analysis was conducted on how changes in industrial structure affect the share of employment and production. The main results are summarised as follows:
First of all, the effects of labor productivity factor decomposition were greater than static and dynamic effects in all industries, manufacturing and service industries. This led to a rise in overall labor productivity due to technological innovation being more effective than by employment movement or inter-sector interactions from 1993 to 2019. In addition, the signs of static and dynamic effects showed different results from industry to industry, but the negative signs of dynamic effects showed a greater shift in employment from a highly productive industry to a lower industry. This is the result of Baumol’s structural burden assumption on the Korean economy. On the other hand, the manufacturing sector has been redistributed from less productive to higher industries as a result of static and dynamic effects among detailed industries, but the effectiveness has been low. The service industry had different results in static and dynamic effects. These results mean that employment shifts rapidly to highly productive industries, while employment shifts from fast-growing to slow industries.
Next, according to panel analysis, the share of employment and production by industry are affected by labor productivity, labor income share, capital intensity, export dependence and import dependence. Labor productivity has a negative impact on employment, but it has a positive impact on production. In general, labor productivity and employment may be expected to increase employment in industries with high labor productivity, but in practice, the consequences of the share of employment were not. This is the result of Baumol's hypothesis in panel analysis. The increase in labor income share also led to an increase in household income, driving aggregate demand or economic growth. On the other hand, the capital intensity differs depending on whether capital and labor are alternatives or complementary, in which all industries and manufacturing industries are shown to have an inverse relationship between employment and production as capital and labor are alternatives. On the other hand, the service industry acted as a complementary relationship to attract employment. Foreign direct investment is expected to have a negative impact on employment and production as it replaces domestic production and exports, but only in the manufacturing and service industries have a positive impact on employment. These results may vary slightly by industry, but they can be interpreted as the result of qualitative changes in domestic industries, such as the spread of the fourth industry, technological innovation, advancement and convergence of major industries.