The recent slow-down of the Korean economy takes the form of long-term
structural trend of stagnation rather than temporary and cyclical recession. The
purpose of the present paper is to decompose and analyze the various sources of
growth in the Korean economy by the growth accounting method and assess the
structural productivity trend by estimating labor productivity and total factor
productivity (TFP). During the period (2009-2016) after the global financial
crisis in 2008, both the economy-wide and the manufacturing sector of the
Korean economy has experienced a rapid real wage growth exceeding labor
productivity growth. The growth in value-added (income) was taken away by
labor income rather than by capital and TFP contribution. As a consequence,
the Korean economy could not avoid the stagnant investment-growth trap during
the period. Throughout the entire period (1996-2014) of our growth accounting
analysis, the growth rate of real value-added (4.31 %) was decomposed by the
growth rates of labor input (0.64 %), capital input (3.01 %) and TFP (0.66
%). The growth rate of TFP in Korea was slightly bigger than other advanced
countries but its relative share of contribution to value-added growth was lower.
The structure of the economic growth in Korea was basically input-led growth
rather than productivity-led growth. We have also indirectly estimated the
potential GDP growth rate of the Korean economy during the period of
2011-2014 as 3.81 percent compared to actual rate of real GDP growth (2.95 %)
by postulating 0 percent growth of labor input rather than realized actual growth
rate of real labor input (-0.83 %) under the assumption that during the period
the Korean economy could have improved low fertility and ageing issues and
youth unemployment problem. There are several reports arguing that Korea’s
potential GDP growth rate has been reduced to around 2-3 percent range but
our estimate implies there was a significant level of potential-real GDP growth
gap (0.86 % point). This gap reflects why the economy’s private sector has felt
a deeper recession gap in the recent past. The Korean economy needs to avoid
populism-based employment-biased macroeconomic policy and to move on to
enhancing its human capital and maintain a positive rate of effective labor input
growth and to aim at a sustainable productivity-led medium-growth path through
technology innovation and system renovation.