President Moon’s experiment
Manufacturing vs. Service
Policy Trade Off; Manufacturing with Jobless Growth vs. Service with Growth Disease
President Moon’s policy experiment: Employment-led Growth
“There’s only one solution. Making good-quality jobs. Jobless growth must be stopped.
There should be a paradigm shift, not creating jobs by growth but growth by creating jobs.”
President Moon announced his economic policy direction, the Employment-led Growth in his first administrative policy speech on June 12, 2017. Meanwhile, the Government has been tried to make new jobs mainly in the service sector. According to many studies, service sector has grown with job creation despite low productivity. Whereas manufacturing sector has grown with improved productivity while lesser employment, we call it ‘Jobless growth’.
Do we suffer from Baumol’s growth disease?
The graph above represents the proportion of service and manufacturing sector of Nominal GDP and Real GDP. The proportion of manufacturing sector of Real GDP has grown rapidly (5% to 29%) while the proportion of service sector of Real GDP has decreased (64% to 53%) from 1960 1Q to 2018 2Q. The difference between nominal and real data appears in almost the whole OECD countries. It happens due to factors of production. Because productivity of the service sector has grown slowly while relative price has increased rapidly compare to manufacturing sector. Also, service sector has grown labor-intensive, while manufacturing sector has grown capital-intensive.
The proportion of the service sector in the economy has grown considerably, the national productivity would follow as the service sector. If the service sector keeps growing with low-productivity, it can cause ‘Baumol’s growth disease’ that overall economic growth approaches service sector. The dispersal graph below represents the relationship between average GDP growth by each industry and the following; labor productivity or the number of workers from 2006 to 2017. The service sector has grown with increasing the number of workers rather than improving labor productivity, while manufacturing has grown with no difference in those factors.
Meanwhile, the government has been focused on the service sector - which has a higher level of job creation effect than manufacturing - and tried to solve employment problem and low-growth problem through this. Accordingly, we would like to evaluate the effectiveness of President Moon’s policy and figure out it will work or not.
Empirical analysis
To prove the relation and determine it is just a correlation or causality, we will conduct both panel and time series analysis of GDP growth of change in labor productivity and work force in 2006-2017. The results are as follows.
By panel analysis, both labor productivity and work force have significantly affected to each industrial GDP growth in a positive direction. Hence, we can assume that there’s some causality and President Moon’s policy, increasing work force in service sector looks rational. Because more work force has led economic growth.
However, the conclusion would be changed by time series analysis. In the manufacturing sector, labor productivity has affected GDP growth significant positively and work force has affected GDP growth negatively which is not significant. Although in the service sector, work force has affected GDP growth significant positively and labor productivity has affected GDP growth negatively which is not significant. Therefore, President Moon’s policy might make our economy to low-productivity or ‘Baumol’s growth disease’.
Conclusion: President Moon’s policy dilemma
The service sector has a job creation effect despite low productivity. The government has been tried to increase the work force in the service sector, although it’s curious it can improve economic productivity despite job creating.
The result of regressions, we can realize two things. First, though the visible relation with our own eyes, we need to analyze the data. Second, even after the analysis, if we didn’t choose a data properly, it could misinterpretation about causality. Panel analysis represents statistically significant both labor productivity and work force. However, time series analysis by sectors shows some differences by factors of production in manufacturing and service sector.
President Moon said, “The number of good-quality jobs is increasing steadily.” on last October 10. However, increasing work force in service sector doesn’t mean good-quality jobs in the whole economy. Because it has low-productivity. Thus, it’s a policy dilemma; Employment versus Productivity. He is stuck in unemployment and low-productivity. However, one thing is quite clear. Increasing work force in the service sector is just short-term prescription. Therefore, President Moon must figure out what is the fundamental solution to the Korean economy.
Reference
Korea Creative Content Agency, “Labor Productivity Analysis of Cultural Content Industry”. KOCCA Vol 44. (2011)
Ga Woon Ban, “The Shift to the Service Economy and the Characteristic of the Structural Change since Financial Crisis in Korea”. Labor Economy Journal Vol 33 Issue 1. (2010)
Wan Geun Oh, “Changes in Industrial Structure and Economic Growth: A Study on the Analysis of the Effect of Boumal effect on the Country” Financial and Economic Research Vol 454. (2011)
Jung-Yup Park. Chosun Ilbo, 2018. 10. 10 <http://news.chosun.com/site/data/html_dir/2018/10/10/20181010 01662.html>
Si-Hang Jung, Chosun Ilbo, 2017. 6. 12 <http://news.chosun.com/site/data/html_dir/2017/06/12/20170612 01605.html>
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