Korea's Labor Productivity, and How to Interpret Data About Korea

An article titled Seven Reasons Why Korea Has the Worst Productivity in the OECD, from March 2014, has been recently making rounds in TK's Facebook feed again. It was a dumb article at the time of the publication, and it remains dumb today. Regardless, the article continues to receive approving reactions--which merits pointing out exactly what is dumb about this article.

First, the article itself. The author Michael Kocken, writing for Business Korea magazine, begins with this:

Korea was recently named the worst place for worker productivity in the OECD, which was featured in a recent article by this magazine. This news is not surprising for any professional previously or currently working in Korea, as the notorious overtime hours coupled with years of low growth have been a widely-discussed issue over the past few years.

Then the article makes the familiar, banal complaints about Korea's corporate culture:  Korea's corporate structure is too rigid and hierarchical; there is no honest and direct communication; worker distraction from the Internet and smartphones; hungover workers, valuing form over substance, new workers who are poorly equipped, and the need to put in useless "face time."

Typical office scene in Korea. Is this the home of low productivity?
(source)

What's dumb about this article?

First, the article's starting premise is flatly untrue. Korea's labor productivity was not the worst in the OECD. Korea's labor productivity per worker in 2012 (which was the most recent data available as of the article's writing) was at 23rd place among the 34 OECD member states. Sure, 23 out of 34 is still in the lower range. But it is a far cry from being at the worst place.

But let's be generous and make an ample allowance between the bottom third and the rock bottom. After all, it would be good for Korea to aspire to be on the above-average side of the OECD. However, even this allowance cannot save this article. The main problem with the article is that the author does not seem to understand what "labor productivity" means. This is apparent from the second sentence of the article's opening paragraph, which refers to Korea's long overtime hours. Even setting aside the factual inaccuracy that TK noted earlier, this is a strange statement.

Why is it strange? Because OECD measures labor productivity by, essentially, dividing "output" by number of hours worked. (The precise methodology is somewhat more complicated, especially on how one defines "output." If you are interested in the actual methodology, you can find it here.) This necessarily means that the longer one works, the lower the labor productivity, because if you increase the denominator while holding the numerator at the same level, the result is always a smaller number. In other words, Korea's labor productivity is low because of long overtime hours, not despite the overtime, as Kocken appears to imply.

This leads us to the most important lesson:  what OECD means by "labor productivity" is not what an ordinary person would think. When OECD states Korea has low labor productivity, the word "productivity" is not being used in the same manner in which regular people talk about being "productive at work." But the latter is exactly how the author Michael Kocken uses the term "productivity." Then the article simply runs with the incorrect understanding of the term, and make the trite, stereotypical complaints about Korea's corporate culture.

(More after the jump.)

Got a question or a comment for the Korean? Email away at askakorean@gmail.com.



Well then. If Korea's low labor productivity doesn't mean what a regular person may think it means, what does it actually show?

Korea's low labor productivity shows that the value creation in Korea's economy is heavily concentrated. The OECD report that focuses on Korea makes this very clear (at pp. 4-5): Korea's labor productivity is excellent in areas for which Korea is known, and very poor in other areas. Specifically, Korea's labor productivity in manufacturing is world-class, while labor productivity in service industry is below par. (As of 2010, labor productivity in Korea's manufacturing sector ranked second in the OECD.) In fact, labor productivity in Korea's service industry is only half as much as that of Korea's manufacturing industry. This ends up dragging down the whole of Korea's labor productivity per worker, because over 70 percent of Korean workers work in the service industry.

Why is the labor productivity in Korea's service industry so low? There are largely two reasons. First, unlike Korea's manufacturing industry, Korea's service industry does not compete in the global market. For example, Korea's legal industry was a closed market until very recently; foreign law firms will not be able to fully operate in Korea until 2017. Same is true for Korea's medical industry, whose market will not open to international hospitals until much later, if it ever does. Absent world-class competition, it is not a surprise that Korea's service industry does not have world-class labor productivity.

Second reason is that the Korean economy has an inordinately huge number of mom-and-pop shops, which technically belong to service industry. One of TK's favorite Korea trivia is:  Korea has 12.2 restaurants per 1,000 people, whereas Japan only has 5.7 restaurants per 1,000 people and the United States has 1.8. As much as Koreans love their food, gastronomical pleasure alone does not explain why Korea has nearly seven times more restaurants per capita than Americans do.

Because Korea has had a weak social security network, few Koreans could truly afford to "retire"--that is, take their savings, add them with governmental assistance, and stop working. Instead, upon "retiring" from their initial career, most Koreans have to take their savings and open up their own business to generate enough money to get through old age. This leads to a proliferation of restaurants, a business with pretty low initial barrier to entry. In particular, franchise restaurants--which are very easy to open without much experience--makes the barrier to entry even lower. (By the way, this is a large part of the reason why Korea has so many different fried chicken restaurants everywhere.)

And of course, this trend is hardly limited to restaurants: as of 2011, 28.2 percent of all Korea's workers were self-employed, which is a huge proportion compared to the OECD average of 16.1 percent. (In fact, the same number for Korea in 2010 was eye-popping 36.8 percent.) Such mom-and-pop shops naturally have low labor productivity, because the hours tend to be long and the value created tend to be small. And there are far too many of them in the Korean service industry.

The low labor productivity of the mom-and-pop shops weighs down the labor productivity of the entire service industry, which in turn weighs down the overall labor productivity of the Korean economy. This is arguably the most important reason why Korea tends to have low labor productivity.

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The lesson here is simple: be diligent. If you are going to write about data regarding Korea, actually look at the data. Let the data speak, instead of inserting your own bias.

As shown above, OECD's labor productivity has nothing to do with Korea's corporate culture. If Korea's corporate culture were dragging down Korea's labor productivity, one should expect to see that drag across all sectors. But data says that is not true. Korea's manufacturing sector has world-beating labor productivity--and it is not as if Korea's manufacturing giants (e.g. Samsung, Hyundai, LG) are known for their touchy-feely lack of hierarchy. Having accurate knowledge about what labor productivity indicates, leads to the accurate conclusion:  if Korea is good at something, it has excellent labor productivity in that area; if Korea is not as good, its labor productivity in that area is poor. Simple as that.

Do you think Korean work culture is too hierarchical, to Korean economy's detriment? Fine, make that argument. TK is skeptical of the claim that the corporate culture which created a world-beating manufacturing sector can be a problem somehow, but he is willing to entertain a good argument to the contrary. Find actual data that supports your contention, and we will have a debate. But don't bring in irrelevant data because it kind of sounds like the thing you are going for--because that's just lazy, and laziness is what often leads to dumb articles like this one.

Got a question or a comment for the Korean? Email away at askakorean@gmail.com.

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