🚨 Low Service Industry Productivity: Only 40% of Manufacturing Level, Urgent Structural Improvement Needed
Today Korean Economic News | 2025.07.04
📌 Korea: Strong in Manufacturing, But Why Is Service Industry Productivity Still Low?
💬 Korea's service industry labor productivity per person is only 40% of manufacturing level, showing deepening economic structural imbalance. Especially after COVID-19, even high-value service industries saw productivity decline, moving opposite to global trends. Experts point out that service industries must move beyond simply supporting manufacturing to become independent export industries. Unlike major countries like the US and Germany that are leading economic recovery through high-tech service industries, Korea remains stuck in low-value domestic service industries, requiring urgent structural improvements.
1️⃣ Easy to Understand
Korea has world-class competitiveness in manufacturing like semiconductors, cars, and shipbuilding, but service industries are still lagging behind. This is one of the important structural problems in our economy.
"Productivity" might sound difficult, but it simply means "how much value one employee creates." For example, if a manufacturing worker creates 100,000 won worth of value per day, a service worker only creates 40,000 won worth of value.
Why is there such a difference? First, most of Korea's service industries remain in a "role of helping manufacturing." Logistics, distribution, and finance developed mainly to meet manufacturing companies' needs, not as independent services that can be exported overseas.
In contrast, look at the US - Apple makes money not just from iPhones but also from various services like the App Store and iCloud. Google also earns money worldwide through services like search, YouTube, and cloud. These services can be sold worldwide once created, making productivity very high.
Another reason for Korea's low service productivity is regulations and systems. Even when trying to start new services, innovation is difficult due to complex permit procedures and various regulations. Also, most service industries focus only on the domestic market, so they cannot build global competitiveness.
The situation got worse after COVID-19. While demand for non-contact services increased and digital service industries grew rapidly worldwide, Korea could not properly use these opportunities. Instead, existing service industries saw even lower productivity.
If we don't solve this problem, Korea's economic future could become dark. Manufacturing alone has limits, and service industries must become new growth drivers.
2️⃣ Economic Terms
📕 Labor Productivity
Labor productivity means the added value one worker creates in a certain time period.
- It's calculated by dividing added value by total working hours, and is a key indicator measuring economic efficiency.
- Higher productivity means creating more value with the same effort, strengthening competitiveness.
- Technology development, education level, and capital investment are main factors for productivity improvement.
📕 Service Industry
Service industry means industries that provide intangible services rather than physical goods.
- Finance, distribution, logistics, IT, education, healthcare, and tourism are typical service industries.
- The more developed a country, the higher the proportion of service industries in the economy.
- Korea's service industry accounts for over 60% of GDP, but productivity is relatively low.
📕 Added Value
Added value means newly created value in the production process.
- It's sales minus intermediate costs like raw materials.
- It consists of wages, profits, and taxes, becoming a real indicator of economic growth.
- Higher added value with the same input means higher competitiveness.
📕 Service Export
Service export means intangible service transactions across borders.
- IT services, financial services, cultural content, and tourism are main service export items.
- Digital technology development is rapidly increasing the importance of service exports.
- Korea's service exports are about 15% of total exports, lower than developed countries.
3️⃣ Principles and Economic Outlook
✅ Structural Causes of Korea's Service Industry Productivity Decline
Let's analyze the fundamental reasons why productivity gap between manufacturing and service industries is widening.
First, service industry's manufacturing-dependent structure limits productivity improvement. Korea's service industry grew as a supporting role for manufacturing during the manufacturing-centered economic development process. Logistics specialized in transporting manufacturing products, finance in funding manufacturing companies, and distribution in selling manufactured goods. In this structure, service industries move according to manufacturing needs rather than independent value creation, limiting innovation and productivity improvement. Actually, Korea's producer service industry (business services) proportion is lower than developed countries, and most focus on low-value services.
Second, domestic-centered small market structure makes it difficult to achieve economies of scale. Most Korean service companies focus only on the domestic market, so they cannot build global-level competitiveness. Especially restaurants, retail, and personal services are mostly small local businesses, limiting technology investment and system improvements. In contrast, US and European service companies target global markets, achieving high productivity through large-scale investment and innovation. Netflix, Uber, and Airbnb are typical examples.
Third, excessive regulations and institutional rigidity hinder service industry innovation. Even when trying to introduce new service models, complex permit procedures and regulations protecting existing industries act as barriers. Especially professional service fields like finance, healthcare, education, and law have limited competition and slow innovation due to strong entry regulations. Also, labor market rigidity makes it difficult for service companies to restructure or relocate personnel for productivity improvement.
Service industry productivity decline is not just an efficiency problem but a signal showing fundamental economic structural imbalance. If not solved, sustainable growth of Korea's economy could become difficult.
✅ Global Service Industry Trends and Korea's Competitiveness Gap
Let's compare and analyze major countries' service industry development status and differences with Korea.
First, the US leads global value chains through high-tech service industries. US companies like Google, Amazon, and Microsoft provide advanced services like cloud, AI, and platforms worldwide, creating huge profits. These companies' services show very high productivity because once developed, they can serve the whole world simultaneously. Especially after COVID-19, as digital transformation accelerated, the value of these services has grown even more. US service exports account for 35% of total exports, matching manufacturing exports.
Second, Germany and Japan create new value by combining manufacturing and service industries. Germany's "Industry 4.0" implements smart factories by combining IT services with manufacturing. German companies like Siemens and SAP export solutions combining manufacturing know-how with IT technology worldwide. Japan also attacks Asian markets through SoftBank and Rakuten in telecommunications, e-commerce, and fintech. These countries successfully use strategies extending from existing manufacturing strengths to service industries.
Third, China and India are rapidly growing through government-led digital service industry development. China's Alibaba and Tencent compete in global markets with e-commerce and mobile payment services, while India has become a global hub for IT service outsourcing. Especially India's TCS and Infosys create high added value by handling IT work for companies worldwide. Compared to this, Korea has limited presence in global service markets except for some cultural content like K-POP and games.
Korea falling behind in global service industry competition could become a major constraint on future economic growth. Growth models centered on manufacturing have limits.
✅ Policy Directions for Service Industry Productivity Improvement
Let's suggest comprehensive measures for structural innovation and productivity improvement in service industries.
First, regulatory reform and introduction of negative regulation systems are urgent. We must shift from current positive regulation methods (specifying only what's allowed) to negative regulation methods (specifying only what's prohibited) to increase freedom for service industry innovation. Especially in new technology-based service industries like fintech, medtech, and edutech, we must expand regulatory sandboxes and activate temporary permit systems. Also, we must ease entry regulations protecting existing industries to encourage service quality improvement and productivity increase through competition.
Second, digital transformation support and technology investment expansion are needed. Government-level support must be expanded so small and medium service companies can introduce digital technologies. Using digital technologies like cloud, big data, and AI can greatly increase service industry productivity. For example, introducing kiosks and delivery apps in restaurants can reduce labor costs and increase sales. The government must expand the "digital voucher" system and strengthen consulting and education for small business digital transformation.
Third, service export expansion and global expansion support are important. We must develop convergence services combining Korea's excellent manufacturing know-how with IT technology to enter overseas markets. Especially in fields where Korea has strengths like K-beauty, K-food, and K-healthcare, we must develop service models and support overseas expansion. Also, we must seek opportunities to export Korean-style service solutions like smart cities, digital healthcare, and online education in emerging markets like ASEAN, Middle East, and Africa.
Service industry productivity improvement doesn't happen overnight. Long-term and systematic approaches with participation from government, companies, and individuals are needed.
4️⃣ In Conclusion
The reality that Korea's service industry productivity is only 40% of manufacturing level shows serious structural imbalance in our economy. This is not just a problem of specific industries but an important task directly connected to Korea's overall future competitiveness.
Until now, Korea achieved economic development through compressed growth centered on manufacturing. But now, with service industries accounting for over 60% of the economy, sustainable growth is difficult without service industry productivity improvement. Especially to overcome growth limits from low birth rates and aging, innovative service industry development is essential.
The core problem is that Korea's service industries still remain in supporting roles for manufacturing. Logistics, distribution, and finance developed to meet manufacturing companies' needs, but services that can independently compete in global markets are insufficient. In this structure, service industry innovation and productivity improvement inevitably have limits.
The solutions are clear. First, we must reform excessive regulations to increase freedom for service industry innovation. Especially through introducing negative regulation systems and expanding regulatory sandboxes, we must create environments where new service models can be freely tried.
Second, productivity innovation through digital transformation is needed. Government-level support must be expanded so even small service companies can use advanced technologies like cloud, AI, and big data. This allows creating more value with the same workforce.
Third, we must build competitiveness in global markets through service export expansion. Based on K-culture's success experience, we must develop Korean-style services in various fields and support overseas expansion.
Ultimately, service industry productivity improvement is not a choice but a necessity. Only by developing from a manufacturing powerhouse to a service powerhouse can we guarantee Korea's sustainable economic future.