South Korea’s labor productivity in the manufacturing industry is overrated by up to 11 percent, according to a study from the Bank of Korea (BOK). It said that labor productivity goes down when indirectly employed workers, such as dispatched workers and in-house subcontractors’ workers, are reflected in the calculation.
Labor productivity of small and medium-sized manufacturing firms with less than 300 employees is rated 3.9 percent to 4.4 percent higher by excluding indirectly employed workers. In the case of large companies with more than 300 employees, the level of overestimation is 8.7 percent to 11.2 percent, according to the BOK report released on May 13. Labor productivity is the amount of goods and services that a single worker produces in a given amount of time. It is calculated by dividing the amount of goods and services and added values by the total labor input. The bank said that labor productivity goes higher when excluding indirectly employed workers from the amount of labor input, which is the denominator of the equation. Indirectly employed workers are often excluded from the amount of labor input since their labor costs are categorized as service expenses, instead of labor expenses, in accounting.
South Korea has been considered a country which has relatively lower labor productivity among OECD member countries. The BOK report says that the country’s labor productivity is even lower than previously known. This can be used to counter the labor community’s argument that South Korea pays lower wages compared to labor productivity.
However, the effects of indirect employment on productivity varied depending on the technological level of companies. Labor productivity of manufacturing firms based on the skilled workforce decreased by 0.9 percent when the ratio of indirect unemployment increased by 1 percentage point. The expansion of indirect employment in these sectors prevents firms from accumulating human capital, leading to lower productivity.