The Shift to the Service Economy: Causes and Effects (in Korean)

In Korea, the service sector has been steadily growing and made up 56% of the economy’s total value added and 65% of its employment in 2005. However, the sector's overall productivity level is still very low and its productivity growth decelerated in the 1990s, which contrasts with the situation in developed countries. Keeping the current state of the Korean service sector in mind, this paper empirically analyses the causes and effects of the shift to services in Korea from a comparative perspective. Baumol (1967)'s Cost Disease Hypothesis predicts that it is inevitable for the share of the service sector to increase due to the rising inter-sectoral productivity differential between progressive sectors (like manufacturing) and stagnant ones (like services). The analysis of this paper, however, shows that other factors such as exogenous demand shocks including changes in final consumption or in intermediate demand for production have also contributed to the enlarged share of the service sector in Korea. It is shown, however, that the role of productivity differentials is more prominent in the increase in employment. This paper also analyses the impact of the shift to services on economic growth using Korean time-series data and international panel data consisting of 14 OECD countries, including Korea, for the period 1981～2003. The results show that the enlargement of the service sector, with its lower productivity, had a negative effect on economic growth. However, they also point to some mitigation of this general tendency when the share of sub-sectors with higher productivity such as producer services or knowledge-based services increases.