In a meeting with a group of local business leaders last week, Bank of Korea Gov. Lee Ju-yeol said the country’s economic survival hinged on efforts to boost the competitiveness of the manufacturing sector.
His remarks reflected growing concerns that domestic manufacturing companies have been losing their competitive edge to foreign rivals in recent years.
An international comparison of labor productivity and costs, recently released by a local think tank, deepened such worries. Clearly it is now more urgent than ever to achieve a fundamental shift in President Moon Jae-in’s economic policy, which is intended to boost growth by increasing wages.
The study by the Korea Economic Research Institute, based on data from US nonprofit organization Conference Board Inc., showed labor productivity in the manufacturing sector increasing at a far slower pace in South Korea than in most other major economies since 2010. Yet during the same time frame the country has recorded a steeper rise in unit labor costs, a figure that is calculated by dividing per capita labor costs by labor productivity.
Labor productivity for an average worker in the 41 countries surveyed gained 3.4 percent during the eight-year period ending in 2009 and 3.5 percent during the subsequent eight years.
Corresponding figures for Korea, in contrast, revealed a plunge from 7 percent to 2.8 percent. Accordingly, the country’s global ranking in terms of labor productivity growth dropped from fifth to 28th. From 2010 through 2017, Korea lagged behind advanced economies such as Japan, Germany and France -- which saw labor productivity in the manufacturing sector increase 4.1 percent, 4 percent and 2.9 percent, respectively.
Unit labor costs in the 41 countries surveyed decreased 1.7 percent per year on average from 2010-2017, after increasing 6 percent during the previous eight years. But the corresponding numbers for Korea climbed by 0.8 percent to 2.2 percent, with its rank for labor efficiency falling from No. 3 to No. 37. Only China and India outpaced Korea in terms of rising unit labor costs during 2010-2017.
Since Moon took office in May 2017, strategies to enhance labor productivity and corporate competitiveness have largely been neglected.
The minimum wage increased by double digits in 2018 and 2019. A shorter maximum workweek was introduced this year without giving full consideration to corporate demand for more flexibility in its implementation.
Pro-labor measures taken by the Moon administration in the absence of parallel measures to enhance productivity continue to undermine the country’s industrial competitiveness.
What complicates the problem is that the global economy is slowing rapidly. According to IHS Markit, a London-based global information provider, the manufacturing purchasing managers’ index in February slid to 48.5 in Japan, 49.2 in the eurozone and 53.7 in the US. These were the lowest levels seen since June 2016, June 2013 and October 2017, respectively.
Weaker manufacturing competitiveness amid a global economic slowdown could push the Korean economy further to the margins. The BOK leader’s emphasis on manufacturing competitiveness is in no way misplaced.
Labor reforms should be accelerated to reduce costs and enhance productivity. Essential steps in this regard include an expansion of the flexible working-hour system and an overhaul of the two-tier structure of the labor market, with its unnecessary distinctions between large and small companies and between regular and nonregular employees.
It is also necessary to push for deregulation more actively in a bid to ensure that new technologies will be applied to the nation’s manufacturing industries more effectively.
Unless such policy steps are taken with the necessary sense of urgency, local manufacturing firms will be left with no other choice but to cut employees or move production abroad in order to stay afloat.
The loss of decent jobs at manufacturing companies cannot be offset by the Moon government’s efforts to create more jobs in the public sector and expand employment programs by increasing fiscal expenditure.
Since late last year, President Moon and his aides have acknowledged the need to revive the manufacturing sector. But their rhetoric has not been backed by consistent steps toward creating more business-friendly conditions for local manufacturers.
Instead they have adhered to their income-led growth policy, which has only worsened unemployment and made poor people poorer.
The Moon administration should abandon its misguided policy and replace it with what might be called a productivity-led growth strategy. That would be the best way to help the country’s manufacturing exporters get through a prolonged global slowdown.
