Contribution to Economic Growth
The Korean economy posted high growth during the period 1960-1995, but the rate of economic growth has moved downward since the mid-1990s.
Korea’s average annual economic growth rate was 7.3% in the 1970s, 6.9%
in the 1980s, 7.1% in the first half of the 1990s, and 3.7% in the latter half of the 1990s.
Examining the contribution of each production factor including physical capital, labor, human capital, and total factor productivity, it was found the contribution of physical capital and labor to economic growth dropped significantly after the latter half of the 1990s and this was the major reason for the sluggish economy at that time. <Table 1-1> shows the contribution of each production factor to economic growth. Physical capital’s contribution to economic growth dropped from 57.1% in the 1970s to 45.6% during the period 1996-2001 and labor’s contribution for the same period also dropped from 30.1% to 13.8%.
The data suggest that Korea can no longer rely on a traditional input-driven growth strategy to generate economic prosperity, and should find a new economic growth engine such as human capital or total factor
productivity. <Table 1-1> shows that total factor productivity’s contribution surged from 5.4% in the 1970s to 31.0% during the period 1996-2001, but human capital made insignificant contribution to economic growth during the period analyzed. In this respect, human resources development is the most important and urgent task to ensure another driving force for the Korean economy.
In the past, human resources were emphasized only with regard to quantity, and hence the use of terms such as manpower or labor force, but today, the focus of human resources is changing into a quality-oriented one.
In essence, creative minorities are taking the initiative to promote economic growth through invention and innovation, and knowledge workers will be considered more and more important in the knowledge economy of the 21st century. Therefore, the importance of population numbers and working hours for economic growth will gradually diminish, and the qualitative aspect of human resources such as skill level, technological ability and creativeness will be underlined.
<Table 1-1> Economic Growth and Contribution Degree by Factor
(Unit: %, %p) Contribution by factor
Period GDP Physical
capital Labor Human capital
Total factor productivity 1971-1979 7.3(100.0) 4.2(57.1) 2.2(30.1) 0.5(7.4) 0.4(5.4) 1980-1989 6.9(100.0) 3.7(52.9) 1.5(21.3) 0.7(10.2) 1.1(15.6) 1990-1995 7.1(100.0) 3.3(45.7) 1.5(20.5) 0.8(10.8) 1.6(23.0) 1996-2001 3.7(100.0) 1.7(45.6) 0.5(13.8) 0.4(9.6) 1.1(31.0) Note: The contribution rate of each factor to economic growth is shown in parenthesis.
Source: Kwon, Taek-Chung et al., Human Capital and Growth Potential, 2003.
Quantity and Quality of Human Resources
Exploring the stock of human resources is one of the crucial ways to understand the past economic growth experience and to map out a new growth plan. Korea passed the stage of un-limited labor supply in 19751) and this increased the need for human resources development policy to
1) According to Lewis (1954), it is possible for underdeveloped countries to supply labor un-limitedly in the early stage of economic development. As the economy grows, labor supply becomes no longer unlimited and this is accompanied by wage increases.
efficiently utilize the limited supply of labor. That is to say, the demand for human resources is a constraint in the early stage of economic growth, but the supply of human resources is valued only when the economy has exhausted the abundant labor supply.
Especially, since recovering from the financial crisis in late 1997, the Korean economy has faced a major challenge: how to make the transition into a new economic system where the quality of human resources counts for far more than ever before. As companies have begun to emphasize profitability over sales growth, fundamental changes have occurred in the labor market, such as massive lay-offs, the increasing use of irregular workers, and the increased preference for experienced workers. The essence of change in the labor market after the 1997 financial crisis could be summarized as enhancing labor market flexibility and improving labor productivity.
It is possible to highlight three distinctive time periods with reference to the accumulation of human resources from the period of economic growth that started in the 1960s. Period 1 covers the period 1960-1975, and is characterized by an un-limited labor supply. Period 2 comprises the period 1976-1996 where the labor supply became limited. Period 3 commences from the end of the financial crisis in 1997 where the quality of human resources is brought into relief. According to <Table 1-2>, which shows the overall trends in human resources, Period 1 is marked as a period of high population growth, gradually increasing economic activity participation, and high unemployment.
In the early stage of economic growth, the population grew rapidly and labor-intensive industries absorbed an increasing unskilled, low-wage labor supply.
During Period 2, economic growth began in earnest. As a result, the population growth rate declined to around 1%, the labor force participation rate reached 60%, and the unemployment rate fell to 2%, which is actually considered full employment. In this period, the industry structure transformed into one oriented towards heavy industries including cars, ships, electronics, computers, and semiconductors. Labor disputes and the organization of labor unions in the late 1980s became the cause of rapid increases in wages around that time. Hence, this period is marked by the realization of labor shortages and the growing demands for highly skilled workers.
Period 3 is marked by a relatively high unemployment rate with skill mismatch. As tertiary education has been expanding rapidly since 1980, over-education has been aggravated as a whole. While a high unemployment rate
coexists with labor shortages in 3D (difficult, dangerous, dirty) industries, business expansion, particularly in high-tech industries, is limited by the growing scarcity of skilled labor, such as scientists and engineers.
According to Korea National Statistical Office, Korea’s total population will reach a peak of 49,956 thousand persons in 2020 and the population growth rate will gradually decline from 0.44% in 2005 to 0.01% in 2020, -0.28% in 2030, and -1.18% in 2050.
<Table 1-2> Trends in Human Resources
(Unit: thousand persons, (%))
Year Population Population in
working age Economically
active population Employed Unemployed Unemployment rate 1963 27,262 14,551(53.4) 8,230(56.6) 7,563 667 (8.1) 1970 32,241 17,468(54.2) 10,062(57.6) 9,617 445 (4.4) 1980 38,124 24,463(64.2) 14,431(59.0) 13,683 748 (5.2) 1990 42,869 30,887(72.0) 18,539(60.0) 18,085 454 (2.4) 2000 47,008 36,186(77.0) 22,069(61.0) 21,156 913 (4.1) 2004 48,082 37,717(78.4) 23,370(62.0) 22,557 813 (3.5)
2010p 49,220 35,852(72.8) - - - -
2020p 49,956 35,838(71.7) - - - -
2050p 42,348 22,755(53.7) - - - -
Note: Percentages are shown in parenthesis.
Source: 1) Korea National Statistical Office, Annual Report on the Economically Active Population Survey, various years.
2) Korea National Statistical Office, Special Population Projections, 2005.
Quality of Human Resources
The quality of human resources is just as important as the supply of human resources itself. Though the quality of human resources is mainly determined by schooling, and vocational education and training, because of space constraints, I would like to discuss only schooling here.
First of all, school education has played a major role in supporting economic growth by enhancing the level of education among Koreans2). The average years of educational attainment of a Korean has almost
2) According to McGinn et al. (1980), the contribution path of education to economic growth is as follows: 1) the enhancement of labor quality through technological progress, improvement of efficiency and knowledge of work; 2) the increase of labor mobility facilitating division of labor and labor force participation rate; 3) the progress of science technology facilitating invention and rapid employment growth; 4) managerial ability improving business management and allocation of resources; and 5) elimination of the social and institutional obstacles which appear in the course of economic growth.
doubled in 30 years, rising from 5.7 years in 1970 to 10.6 years in 2000.
Especially, the average years of educational attainment of the population aged 24-64 increased from 6.8 years in 1970 to 12.3 years in 2000. The rapid growth rate in the average years of education was due to the eagerness for education among Koreans and household preference for increased investment in education as a result of economic growth.
Several important institutional reforms facilitated the expansion of school education as follows: the lottery system instead of written examinations in enrolling freshmen at middle schools in 1969; the equalization of high schools in 1974; and the graduation quota system in universities as part of the July 30th education reform measures in 1980. A series of educational reforms made until 1980 was mainly focused on accommodating the elevated desire for entering high-status schools and reducing unwanted side effects, like the prevalence of out-of-school studies resulting from the severe competition in entrance examinations to higher schools. Also, there was a demand for highly educated manpower from businesses as the economy grew rapidly in a short period.
The Education Reform announced on May 31, 1995 also changed drastically the scheme of Korean education. It focused on nurturing qualitatively excellent manpower to cope with the change in competition paradigm amid the growing trend toward globalization. Quality and technology became a key determinant of companies’ competitiveness so there was an increased need for human capital to support companies’ competitiveness strategy.
In a knowledge-based economy, one of the most important tasks of education is to supply highly skilled workers on demand according to changing labor market circumstances. If the education system is not linked to the labor market, it may be inevitable to have jobless growth and unemployment if the mobility of production factors across borders becomes more volatile. The challenge for the education system in a knowledge-based economy is actively meeting the changing demands for education from students as well as businesses. In order to find and cope with diverse needs from interest groups, schools and education authorities should continually innovate the education system as a whole, including the school governance system, entrance
examinations, and curriculum. To facilitate this process based on autonomous effort from schools, the government has to construct infrastructure to assess education performance and to deliver market signals to the education system through such means as the provision of statistics and information networks.