Focus on productivity
The author is an economics professor at Korea University.
The excessive measures of the government’s income-led growth policy have hit the Korean economy’s weakest link: small businesses. With their low productivity, these companies can barely endure an economic slump, let alone the shock of President Moon Jae-in’s policies. As employment growth has slowed, more businesses are closing, and the income of the lowest earners has actually fallen.
In Korea, the service sector has lower productivity than manufacturing. Labor productivity, or the amount of output per hour, is just 45 in service industries, compared to 100 in manufacturing. The average productivity of the service sector in developed countries is 90.
Even in the same industry and field, productivity varies drastically among businesses. Some are thriving, but a majority can barely survive. Small and medium-sized enterprises with low productivity cannot endure if the government increases the minimum wage by 29 percent in two years and enforces new labor regulations.
When wages rise faster than productivity, companies reduce hiring. Small businesses have to deal with the shock by cutting other costs or raising prices. Government subsidies can only be a temporary measure. Businesses will hire more, and pay more, only when productivity improves. When overall incomes rise as a result, demand will rise, too, and a good economic cycle will begin.
The market economy develops when individuals work hard to enhance productivity, and the market rewards productivity. World-class football players make far more than average players, and all athletes strive to be the best. Poor-performing football clubs make less and thus pay players less. When the government intervenes and sets a minimum salary for all clubs, football clubs will fire players whose performances don’t meet the minimum salary. The government can provide subsidies to maintain their employment, but there won’t be a fundamental solution until there is better performance.
Labor productivity is affected by individual efforts, but more crucial factors are accumulated capital and technological progress. Labor goes hand in hand with capital and technology to produce output. It is hard for an individual born in a country with little capital and low technological competence to be as productive and make as much as those born in Korea or the United States.
If Lionel Messi played football not in Barcelona but in Argentina, his productivity and salary would be much lower. The average annual income of Cambodians is $1,400, equivalent to one month’s salary of a minimum-wage earner in Korea. This income gap is not because of individual efforts and competency but due to differences in capital and technology.
To enhance the Korean economy’s productivity, education and technical training need to be strengthened, and capital and technology accumulation should be accelerated. Public investment in education, child care, social overhead capital, research and development should increase, and regulatory reform and assistance must focus on urging innovative companies to make drastic investments on future growth drivers.
Fields and industries with especially low productivity invest in people and technology. When labor productivity consistently increases, per-capita income will rise, and so will economic growth. Productivity-driven economic growth will bring a good cycle of employment, growth and distribution.
The government has announced a new budget that includes more social security spending to promote income-led growth. It is only fair to provide more unemployment benefits and vocational training to protect the socially vulnerable, but that can only be a temporary measure to fend off the adverse effects of a policy with government money.
Adding public jobs should be limited to fields where an increase is necessary. Expanding fiscal spending without considering more effective policies would add to debt. Social security spending will only grow as the population ages, and when the pension fund begins to dry up, the burden on future generations will grow.
Resources for inter-Korean cooperation and reunification are also needed. While the government will need more money, a tax hike won’t be easy when productivity declines and economic growth slows.
Moon’s income-led growth drive is a policy that prioritizes improved distribution, and that is very important, but growth must accompany it. While some say that people can be happy with equality despite lower income, as seen in the people of Bhutan, the standard of happiness is different. People feel miserable when living standards worsen compared to the past.
Most Koreans wouldn’t be so happy living in Bhutan. If current policies are making the lives of low-income earners, jobless young people and small business owners harder, the direction should be changed, and a new breakthrough should be sought. The administration is listening to the voices of the people.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Aug. 30, Page 35