ISBN 92-2-111565-8
ISSN 1020-5322
First published 1999

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Contents

Foreword

The present study on changes in the employment, occupation and skill structure in the Korean manufacturing sector in view of increased exposure to international competition, is part of a set of country studies on the project "Jobs, technology and skill requirements in a globalized economy", undertaken by the Employment and Labour Market Policies Branch.

This paper focuses on the employment and skill effects of increasing global competition and technological innovations in the manufacturing sector. It explores the hypothesis that the adoption of new technologies and improvements in the skill composition of labour would be primarily observed within industries which were more exposed to foreign competition. This study presents, therefore, a range of descriptive and analytical information on trade, technology, jobs and skill requirements in manufacturing.

The paper shows that labour-saving technological changes have an indirect impact on employment growth through their output and/or export growth effects. In terms of international trade, the study reveals that the export sector has contributed to continuing employment growth by changing its output structure from labour-intensive products to technology and skill-intensive products. Moreover, skill upgrading has proceeded faster in the industries which faced intensive competition from abroad, i.e the export and import-competing industries rather than in the domestically-oriented industries. It also provides indications on the role played by industrial policies in upgrading the skills of the labour force.

Gek-Boo Ng
Chief
Employment and Labour Market Policies Branch

I. Introduction

Over the last three decades, Korean ⁽¹⁾economy succeeded in outward-looking economic development strategy based on export-led industrialization and import of foreign technology. Its comparative advantage in well-educated, relatively cheap, skilled workforce has been the base of outward-looking economic growth.

However, Korean economy, which now seeks to move to the next level of industrialization and join developed country group, encounters with new challenges. First, it should be more completely integrated into global economy than ever to join developed countries both in name and reality, even though Korea was admitted to OECD in 1996. Second, Korea has to secure its competitive capabilities in science and technology to compete with more advanced countries in global world economy.

Integration into global economy and advancement in technology would prompt structural changes not only in output composition but also in employment and occupational composition of workforce. The Korean economy is now experiencing greater structural adjustments of output and employment as the degree of integration with world markets increases and the change in technology becomes faster than ever. Employment growth in the manufacturing sector, which has been the major sector of employment growth, began to stop since the late 1980s. The shortage of low-skilled workers becomes a serious problem particularly in the labour-intensive industries that were leading exporting sectors in the past. Even though demand for high-skilled engineers and technicians increases, the unemployment rate of workers with high level of education is relatively high and the possibilities of layoff or dismissals in white collar workers are also increasing.

All these changes are the results of increased integration with world markets and faster technological changes it prompts. In order to understand these changes and set up new manpower policies, a study of employment and skill effects of global competition and technological change is necessary. Of course, there have been a lot of research of the effects of human capital on economic growth in development economics and labour economics, but relatively few of the effects of economic growth on human capital, in particular, occupational composition, job structure and skill requirements. It is these demand-side analyses which would contribute to understanding globalization, technological change and their economic impacts and policy implications. This study will focus on employment and skill effects of increasing global competition and technological innovations in Korean manufacturing sector over the last two decade-between 1970 and 1990. The analysis of this period would give useful implications for the ongoing greater changes in foreign competition, technology, and employment in manufacturing sector in the 1990s.

This paper will test the hypothesis that Korean manufacturing sector has increased its skill level of workforce by increasing the degree of exposure to foreign competition and developing its technological capability to obtain competitiveness in world markets over the last two decades. In particular, the hypothesis that the adoption of new technology and improvements in skill composition of workforce would be primarily observed within the industries that were more exposed to foreign competition such as exporting sub-sector or import-competing sub-sector will be examined.

II. Increased exposure to international markets in the manufacturing sector: 1970-90

Using cross-section data of the Korean manufacturing sector, this section will classify the manufacturing industries into sub-groups to examine which is fast growing sector, which is export-oriented sector or import-competing sector or domestically-oriented sector, which is technologically innovating sector and/or productivity increasing sector. This classification can be used for the analyses of employment and occupational structure. Before going forward, I will explain the data sources.

Data sources
This study will present a range of descriptive and analytical information on the trade, technology, employment, occupations in the manufacturing sector of Korea. The first is about international trade related data such as the level and the share of exports and imports by industries. The second is about technology or production related data such as output, total fixed capital, productivity, and R&D investment. The third is about employment and skill related data. The main sources of these data are in what follows. Detailed data on the international trade can be obtained from Yearbook of Trade Statistics (Office of Customs Administration, Korea). However, they are classified in terms of products not in terms of industries. That is why Input-Output Table (1970, 1975, 1980, 1985, 1990, Bank of Korea) is used to obtain trade-related data for disaggregated manufacturing industry sectors in this study. Data on output, employment, and productivity are obtained from Report on Mining and Manufacturing (Economic Planning Board, Korea). Data on employment and occupations are from micro-data of Occupational Wage Survey (1971, 1976, 1980, 1985, 1990, Ministry of Labour, Korea).

Without any unified data sources about trade, technology, and employment, I am forced to merge these different data sources by 3-digit industry level, which could cause some problems. First, classifications of industry sectors are different between Input-Output Table (IOT) and Report on Mining and Manufacturing (RMM), Occupational Wage Survey (OWS). To solve this problem, I adjusted the classifications to three-digit 28 industries by aggregation.

Second, the sampling method and survey scope are different between data sources. RMM are surveyed on all establishments with five or more employees while OWS are surveyed on around 3,000 establishments sampled with ten or more employees. On the other hand, the survey scope of IOT comprises all establishments in theory, but the data on IOT are estimated using other survey data in reality. The fact that small establishments with ten or less employees have very little meaning in Korean manufacturing sector would make this problem trivial. Thus, these data are used being merged boldly with some reservation. Employment and skill related data of OWS are aggregated over individuals within each industry, then they are matched to industrial data from RMM and trade data of IOT. So, the final data set consists of data on trade, production, employment and occupations of 28 three-digit industries, 1970-1990.

Third, the 1971 OWS data has a problem in sampling. The OWS survey started in 1971, but it was not perfect at that time. Thus, the 1971 employment and skill data have to be interpreted with reservation.

Long-term trends of the manufacturing sector
The Korean manufacturing sector has already gone into the highest level of outward orientation in the early 1970s. The export-ratio to total output already increased from 13.0 per cent in 1970 to 20.8 per cent in 1975 reflecting the adoption of export promoting policies, and kept the level around 20 per cent thereafter (see Table II-1).

What is worth noting, however, is that even though Korea adopted outward-looking development strategy, the market in the Korean manufacturing sector has been rather closed over the last two decades as indicated in the statistics in Table 1. Between 1970 and 1990, the ratio of imports to total domestic demand in manufacturing sector decreased from 29.4 per cent to 20.9 per cent. It implies that Korean economy has been successful in import substitution of heavy industries such as basic metal (iron and steel) and machinery industries as well as export promotion. The import-ratio of steel industry has decreased from 71.9 per cent to 15.3 per cent, that of machinery industry from 78.3 per cent to 42.0 per cent (see Table II-1). Basic metal had a great portion of import in 1970, but the success of establishing iron industry contributed to decreasing its import since 1975.

But, these import-substituting industries quickly transformed themselves into exporting ones. Of course, the import protection also contributed to the decrease in the import-ratio. The transformation of trade policy in 1968 opened domestic market to foreign products, but a lot of import regulations protected domestic market from foreign competition. However, the degree of import liberalization reached to almost 99 per cent in the manufacturing sector as of 1990. The import protection can not be a cause of low level of import-ratio any more, and the low level of import-ratio does not mean low level of exposure of domestic market to foreign competition any more in the manufacturing sector.

The structure of output and trade by sector in the manufacturing sector has also changed impressively. Table II-2 and Table II-3 indicates that the output and trade structure have changed from one based on food, textile and chemicals to one based on machinery, transport equipment, electronics, steel and iron. The two pillars of Korean manufacturing sector are textile industries (KSIC code 32) and machinery, equipment and electronics industries (KSIC code 38). The output share of textile has decreased from 21.8 per cent in 1970 to 13.7 per cent in 1990 while that of machinery and equipment has increased from 12.2 per cent to 34.1 per cent.

Within the heavy industry category, the faster growing sectors of the 1970s were iron, steel, and chemical industries while machinery, equipment and electronics, and transport equipment were the faster growing sectors of the 1980s. Consumer electronics and semiconductors, in particular, have grown most sharply in the 1980s.

These patterns appear in the changes of export composition by sector as well. The export share of machinery and equipment increased dramatically from 9.3 per cent in 1970 to 42.3 per cent in 1990 while the export share of textile decreased from 43.2 per cent in 1970 to 31.4 per cent in 1990. It suggests that there has been a strategic change of comparative advantage in the Korean manufacturing sector.

The change in composition of import was not so impressive as that of output or export. Import has been concentrated on capital goods and chemical products constantly since 1970. The change of production and trade composition means change of production technology in manufacturing. The fact that the output share of labour-intensive industries decreased and the output share of capital or skill-intensive industries increased implies a great change of the overall technical structure in the manufacturing sector.

Technical change can be examined using indicators such as capital per employee, capital intensity (capital/output, capital coefficient) and labour intensity (number of employees/output, labour coefficient) as proxy variables representing technical change. The capital per employee is calculated as the amount of fixed capital per employee, the capital intensity as the amount of capital per unit output (per one million won) and labour intensity as the number of employee per unit output (per one million won). The growth rate of capital per employee can be decomposed into two parts, growth rate of capital intensity and growth rate of labour intensity (K/L=K/Y-L/Y). Figure 1 shows growth trends of these indicators.

A notable feature of the figure is that there has been a sizable decrease in labour intensity and the stagnation of capital intensity since 1983. That is, the increase in capital per employee was due to the decrease in labour coefficient rather than to the increase in capital coefficient. From this, we can see that labour-saving technological change has been strengthened since 1983 while there might have been capital using-technological change between 1973 and 1979 due to a lot of investment in heavy industries in this period. From Figure I, it can be found that the log index of increase in capital intensity was larger than that of labour intensity between 1977 and 1982. It means that output shift to capital intensive industries or capital deepening within the industries has occurred for the late 1970s reflecting the HCI promoting policies while labour-saving technological change began to be intensified since 1983.

Classification of the manufacturing industries into sub-group
To identify changes in the sectoral level of exposure to international competition, I classified manufacturing industries through the analysis of sectoral trade balances over the last two decades. Export performance and degree of exposure of domestic market to import penetration can reflect the degree of exposure of domestic industries to international competition. Export performance can be measured with export-ratio (export/total output), and degree of exposure to import penetration with import-ratio (import/total demand (=output-export+import)). Export-ratio and import-ratio by industries are presented in Table II-1.

Exporting industries are those which rank high in the average export-ratio between 1970 and 1990. Import competing industries rank high in the average import-ratio between 1970 and 1990. The rest are classified as domestically-oriented sector. I also decomposed the exporting industries into exporting light-industries and exporting heavy-industries because they are very different in technological structure and workforce composition except the fact that they are exporting-industries.

The result of the classification by this method is presented in Table II-4. Just like general understanding, main products of the exporting industries are textile, footwear (light industries) and automotive, shipbuilding and electronics (heavy industries). They usually exported over 30 per cent of their outputs over the period. Import competing sectors are mostly composed of capital-goods producing industries. The imports took over 40 per cent of the total domestic demand in these sectors. Domestically-oriented industries are producing food, beverage, wood products, paper, non-metallic mineral products, iron and steel.

Next, the manufacturing industries are also classified according to production technology - physical capital intensive industries, human capital intensive industries, and physical labour intensive industries. It is supposed that value added is composed of three parts, rewards for physical capital, rewards for human capital, and rewards for physical labour. I also assume that remuneration for non-production employees is rewards for human capital and remuneration for production employees is rewards for physical labour, and the rest of the value-added is rewards for physical capital. Physical capital intensive industries are those that rank high in the ratio of rewards for physical capital to total value-added. The other industries are classified in the same manner. Table II-4 presents the ratios by industries and their classification, which suppose that Food, beverage, chemicals, non-metallic mineral products, iron and steel are physical-capital intensively produced, and machinery, equipment and electronic products are human-capital intensively produced. The rest of them are physical labour intensively produced.

Trends of manufacturing by sub-group
Table II-5, Table II-6, Table II-7 present trends of production, trade and technology by the classified industry groups. The share of exporting industries' output to total manufacturing output has increased from 36.3 per cent in 1970 to 47.2 per cent in 1990. Of course, the output share of exporting light-industries has decreased since 1975 contrary to that of exporting heavy-industries. In particular, import-competing industries increased their output faster than any other industry groups. The annual growth rate of output between 1970 and 1990 was over 21.8 per cent in exporting heavy-industries and 21.1 per cent in import-competing industries. On the contrary, it was only 14.3 per cent in exporting light-industries and 14.7 per cent in domestically-oriented industries.

What is more impressive in these Tables is that export growth of import-competing industries is higher than that of any other industries. The annual growth rate of export in import-competing industries was 29.4 per cent and the share grew from 2.3 per cent to 13.1 per cent between 1970 and 1990. It was particularly higher in the period of 1985 and 1990. This indicates that import-competing industries also increased their economic and export performance. As You (1994) argues, the Korean import-substituting industries quickly moved into exporting industries.

Exporting heavy-industries also raised their share of export from 11.3 per cent in 1970 to 35.3 per cent in 1990 with the annual growth rate of 25.5 per cent. It can be argued that the industries that were exposed to international competition increased their output and export much faster than the domestically-oriented industries with the exception of light industries.

The import composition by industry group changed relatively slowly. Import-competing industry group, however, gained its share of import while the domestically-oriented industry group lost its share. The constant increase in the import of capital goods reflects unchanged dependency on foreign technology of Korean manufacturing sector. Trade pattern in the Korean manufacturing sector seems to conform to Heckscher-Ohlin theory which postulates that trade reflects the particular strengths of a country's factor endowment-its comparative advantage, that is, countries export goods that use their abundant factors intensively in production and import goods that use their scarce factors intensively in production. Table II-6 shows that exporting sector is more labour-intensive and import-competing sector is more capital-intensive in Korean manufacturing sector even as of 1990. Domestically-oriented sector is most capital-intensive. It might be because iron and steel industries and chemical industries are included in that sector.

As for the growth of factor intensity, the decline of labour intensity and the growth of productivity (=value added per employee) have been larger in exporting heavy industries and import-competing industries particularly for the 1980s although labour-saving technological changes appear in all industries for the 1980s.

That is, exporting heavy-industries and import-competing industries have changed their technical base from capital-using ones between 1977-1982 to labour saving ones thereafter. It suggests that the fastest growing sectors both in output and export such as exporting heavy-industries and import-competing industries have raised their capital intensity for the late 1970s but provoked labour-saving technological change raising productivity for the 1980s faster than other sectors. So, the new trade theory developed by Krugman, Dixit and Norman, and Lancaster that competitive advantage can be changed strategically is accepted in Korea as well. Balassa (1977) also argues that comparative advantage can change its pattern in the process of economic development. In countries progressing on comparative advantage, their exports can supplant the exports of countries that graduate to a higher level. A lot of studies of World Bank also indicate that there is evidence that the developing countries are exporting not only the traditional, labour-intensive and resource-based product, but are also recording very fast growth in the export of a variety of products of capital goods industries.⁽²⁾

In the first phase of industrialization of developing countries, the success in absorbing large pool of surplus labour force appears to advocate the outward looking policies with labour-intensive production method. It is not enough, however, to raise the output and employment in the latter part of the industrialization. That is, developing countries can also raise and upgrade technological levels in order to be more competitive in global world markets.⁽³⁾

Table II-7 shows the changing pattern of output and export by technology. The export share of physical labour intensive industries has diminished a lot from 74.3 per cent in 1970 to 38.5 per cent in 1990 while their import share has increased from 6.3 per cent in 1970 to 10.3 per cent. Larger part of export growth has occurred in human capital or physical capital intensive sectors, while larger part of import growth has occurred in human capital or physical labour intensive sectors rather than physical capital intensive sectors. Particularly, the industries using human capital more intensively has accelerated their export and output share. They also increased productivity by labour-saving technological changes rather than capital accumulation in the 1980s (see Table II-8). It implies human capital or job skill might be an important factor in enhancing export performance and developing technological capabilities in the 1980s.⁽⁴⁾

III. Changes in the structure of employment in the manufacturing sector (1970-90)

Employment of manufacturing sector
The manufacturing sector has been a key source of employment growth since the industrialization began in the 1960s. The share of workers in manufacturing to total workers has been doubled over the last two decades from 13.2 per cent in 1970 to 27.2 per cent in 1990 while that of agricultural sectors decreased from 50.4 per cent to 14.7 per cent.

The employment growth rate of manufacturing sector was higher in the early 1970s and in the late 1980s. The employment elasticity was also much higher in the first part of 1970s (see Table III-1). In actual fact, the early part of 1970s was the extension of the former period in terms of the pattern of industrialization. The promotion of labour-intensive industries created great employment opportunities for the immigrants from the rural sectors or the underemployed people in the urban informal sector in the period of 1963-1975, which was a great employment expansion period.

The late 1970s, however, shows slower employment growth rate. It was argued that the Korean economy passed the Lewis turning point in 1975 (Bai, 1982). The unlimited pool of labour supply began to be exhausted since 1975.⁽⁵⁾ The slowdown in the employment growth of

the late 1970s was explained by the labour supply side view of the turning point hypothesis. Of course, it can also be explained by labour demand side view of the slower expansion in output and lower employment absorption. The shift in the composition of manufacturing production towards more capital-intensive products might have reduced the employment absorption power of manufacturing sector. The continued growth of real wage and government's subsidy to capital accumulation in heavy industries caused a steady decline in relative price of capital compared with labour, which resulted in capital-deepening and declining employment absorption.⁽⁶⁾ Consequently, Korean economy could flexibly respond to the declining labour supply in the late 1970s and early 1980s. The labour demand also decreased when the growth rate of labour supply began to decrease. Not only the pool of overpopulation in rural sector has decreased but also the enrollment rate to a higher grade of school has increased and the growth rate of economically active population has decreased since 1980. The structural adjustments of labour market in the early 1980s, therefore, were considered successful (Kim, 1994).

However, the most drastic change in employment of manufacturing began to occur after 'three low economic boom period (1987-1989)'. Not only the employment absorbing power and the employment share of manufacturing sector but also the absolute number of employment in manufacturing has declined since 1990. The labour-intensive light industries began to be discarded because they lost international competitiveness due to the shortage of low-skilled workers and their wage hike, and the imports of lower priced products of other low-wage countries such as China and other South East Asian countries. The advancement in factory automation and rationalization of management also blocked employment growth of other manufacturing industries. From now on, the service sector will be more important in absorbing employment.

Decomposition of employment growth
Next, I will investigate how much international trade or technology impacted on employment growth in the Korean manufacturing sector. As we saw in the above, employment has grown very fast in the manufacturing sector in spite of its labour-saving technological changes over the last two decades. It implies that even labour-saving technological changes have indirect employment growth effects through their output or export growth effects.

In order to investigate the effects of trade, technology and domestic demand on employment, I decomposed employment changes into three sectors such as domestic consumption, net trade (export-import), technical change. On the assumption that employment change in each sector of industries is proportional to its output change and that technological change is labour-saving one, employment change can be decomposed into three parts (D, F, T) as in equation (1). In equation (2), the first factor is labour-output ratio in 1970, and the second factor measures the change in domestic usage of an industry's product no matter its origin. Equation (2) transforms this change into employment based upon the labour-output relation existing in 1970. Equation (3) performs similarly for the change in foreign trade. In equation (4), the first factor measures changes in labour-output relation between 1970 and 1990, which is then multiplied by the total output in 1990. Therefore, D measures employment change caused by changes in domestic usage of a product. F measures employment change caused by changes in net foreign trade. T measures employment change caused by changes in labour-output ratio.

The results of this analysis are presented in Table III-2. In interpreting the results, however, we should keep in mind some important assumptions and limits of this methodology. First, in this methodology, import is supposed to have the same employment-offsetting effect just as export and domestic demand have employment-gaining effect. That is, it is assumed that some products could be produced domestically if the products were not imported. In reality, however, there are a lot of imported products that can not be produced domestically. Second, this analysis identifies only the first-round, direct effects of domestic demand, foreign trade, and labour-output ratio. Indirect and induced effects are subsumed within the domestic growth category. Third, the fall of the output-labour could occur without any new technological advancement if there were improvements in organization and human capital. That is, attributing all the change in the labour-output ratio to technology neglects the possibility that improved human capital can use old technology more efficiently than before.

Decomposition of employment growth

(1) E90-E70 = D + F (=X-M) + T

(2) D = (E70/O70)* (O90-X90+M90)-(O70-X70+M70)

(3) F = (E70/O70)* (X90-M90)-(X70-M70)

X=(E70/O70)*(X90-X70)

M=(E70/O70)*(M90-M70)

(4) T= (E90/O90)-(E70/O70) *O90

D=employment change from domestic consumption of an industry's product no matter its origin

F=employment change from net foreign trade of an industry's product

T=employment change from changes in labour-output ratios as measured by labour usage per one million won of an industry's output

E=employment of an industry

O=output of an industry

X=export of an industry

M=import of an industry

70=subscript for 1970

90=subscript for 1990

* All 1970, 1980 prices are adjusted to 1990 levels using producer price indices of 2 digit manufacturing industries.

Table III-2 shows that 3.3 million increase in employment were occurred between 1970 and 1990, which resulted from a net addition of an estimated 15.9 million gain due to domestic economic growth, and 0.1 million gain due to net trade (3.3 million due to export minus 3.2 million due to import), offset by net losses of 12.7 million from adoption of change in the labour-output ratio. Domestic demand and export growth caused employment growth of 18.1 and 3.8 times each as large as 1970 employment level in spite of 14.4 times of direct offsetting effects by labour-saving technological changes.

Since 1990, however, the offsetting effects of labour-saving technological changes would exceed the employment growth effects of increase in domestic demand and export, so the absolute number of employment and the employment elasticity of output would decline since 1990 as we saw in the above. The effects of technology and foreign trade on employment varied from industry to industry. A major employment gainer of net foreign trade is the textile industry and a major loser is the chemical industry. If the offsetting effects of import were not considered, machinery, equipment and electronics industries as well as textile industry would be the major employment gainers of export. The employment growth between 1970 and 1990 due to export growth is 13.5 times as large as the 1970 employment level in machinery, equipment and electronics industries.

The increase in the efficiency of the use of labour-saving technology as measured by the numbers of employees per million won of output reduced the number of workers needed in all industries. Most significantly, the machinery, equipment and electronics industries reduced labour input 43.5 times. It might reflect on maturing and increasing labour productivity in these industries. The effect is not so significant in the light industries such as textile, wood products and other manufacturing industries.

Conclusively, the machinery, equipment and electronics industries, which are the most outward-oriented industries in Korean manufacturing sector, experienced the largest employment increase due to export growth and the largest direct employment decrease due to labour-saving technological change. On the other hand, the textile industry, which is also one of the major exporting sector, has experienced larger employment increases due to export growth but smaller direct employment decreases due to labour-saving technological change.

Employment by sector
The internal composition of employment has also changed very rapidly just like the composition of output or export. Table III-2 shows that the change in employment composition by industries is very similar to those of output or export. Textile, apparel and leather industries (KSIC 32) and fabricated metal products, machinery, equipment and electronics industries (KSIC 38), which are the two largest manufacturing sector, account for almost 60 per cent of total manufacturing employment. Then, the largest relative employment loss occurred in food, beverage, tobacco (KSIC 31) and textile, apparel, leather industries (KSIC 32), whose employment share fell from 13.3 per cent, 32.0 per cent each in 1970 to 6.8 per cent, 21.7 per cent in 1990, while the largest employment gain occurred in machinery, equipment and electronics industries (KSIC 38), whose employment share increased from 17.4 per cent in 1970 to 38.5 per cent in 1990. Particularly, the employment share of electronics industry increased most sharply from 4.7 per cent to 16.0 per cent and that of machinery industry from 2.8 per cent to 7.0 per cent.

The employment elasticity (=annual employment growth rate/annual output growth rate) was very high in textile and electronics in the 1970s, but that of textile industry turned negative in the latter half of the 1980s. It will become worse in the 1990s. The lack of low-skilled workers in exporting light-industries became a serious problem in the 1990s. It is around the end of the 1980s that foreign workers began to be imported for the low skilled jobs in Korea On the other hand, the employment elasticity in machinery and equipment sector has been the highest over the two decades even though it has declined in the 1980s. This sector has been not only the engine of output and export growth but also employment growth.

These facts can be confirmed in Table III-3, III-4. The exporting heavy-industries and import-competing industries increased their employment share, while the employment share of exporting light-industries has declined since 1975 and that of domestically-oriented industries has also decreased constantly since 1970. The annual employment growth rate is the highest in exporting heavy-industries, 10.9 per cent and the next is import-competing industries, 9.9 per cent. By industry groups classified by production technology (see Table III-4), the human capital intensive industry group raised its employment share in contrast with those of the physical capital or physical labour intensive industry group. It is the natural result of output and export growth in this industry group as we saw in the previous chapter.

Employment growth by skill level
Then, did the skill intensive sectors always gain employment in the Korean manufacturing sector? Before the analysis of the changes in occupation and skill composition, it should be checked if the industries that experienced larger employment growth were those that were intensive in the use of skilled labour. It should be done in the way which is different from the above breakdown method in which the classification of industries does not reflect change in factor intensity within each industry. Take an example of electronics industry which changed its technology most rapidly. The electronics industry is classified as one of the human capital intensive industry group, but it was one of the physical labour intensive industry group as of 1970.

Thus, it would be better to investigate the relationship between employment growth and skill intensity within each industry. I take a regression method, which regresses employment growth against initial skill intensity by industries. In this regression, I use share of non-production workers to total employment as a skill measure.

Table III-5 shows regression coefficients of change in log employment (for example, the change between 1985 and 1990 is 'log (employment in 1990)-log (employment in 1985)') against non-production employment share in initial year (for example, in 1985) for each 4 period. The positive coefficient implies that the bigger employment gain occurred in the more non-production worker intensive industry.

The rest of Table III-5 are regression coefficients of changes in log employment against other skill measures such as share of scientists and engineers to total employment and education level. It shows that there was no significant relationship between initial skill intensity and employment growth at least before 1985, suggesting that there have not been significant employment shifts towards skill intensive sectors.

However, it became significantly positive between 1985-1990. Before 1985, export-led industrialization implied employment absorption based on export promotion of labour-intensive products. After 1985, however, employment growth occurred significantly in skill intensive sectors. These trends will be getting stronger in the 1990s. Low-skilled labour intensive light manufacturing industries are now losing not only their international competitiveness but also their employment share.⁽⁷⁾

The major findings of this chapter are twofold. First, the industries which have been exposed to foreign competition have increased their employment share the most except for exporting light-industries. Second, during the early phase of industrialization, employment growth was accomplished by prompting exporting labour-intensive industries, but in the latter phase of industrialization, the skill-intensive industries played an important role in raising employment. That is, the exporting sector has contributed to continuing employment growth by changing its output structure from labour-intensive products to technology and skill-intensive ones.

IV. Changes in occupational composition and skill structure

The chapter will deal with the hypothesis that advancement in skill composition or skill upgrading has been more remarkable in those industries which are more exposed to global competition will be tested. The empirical study will focus on examining relationship between technology, international trade and skill composition of the manufacturing sector using various skill and technology measures as well as the general features of changes in the skill level of the manufacturing.

Skill measures
In this study, the change in skill composition will be measured by the various skill measures reflecting occupational composition, job requirements and human capital.

The primary skill measure used here is the share of non-production workers to total employment. It is most widely used in analysing skill composition of workforce. One weakness of this measure as a proxy for skill demand, however, is that it does not exactly reflect change in relative demand for non-production labour. There is a possibility that it may over-represent shifts in demand for non-production labour when relative wage of production labour to non-production labour increases, which causes firms to substitute some production workers for non-production workers. Thus, as an alternative measure of change in relative demand for each type of labour, the share of total wage payments received by non-production workers to total wage payments should be used. Berman, Bound and Griliches (1994) say that changes in the non-production share in the wage bill provide a better measure of the demand shift toward non-production labour as long as the elasticity of substitution between production and non-production labour is above one.

Another weakness is that the non-production worker includes a lot of low-skilled service jobs such as janitor, cleaner or simple clerical jobs, and various liberal occupations while excluding production supervisors, foreman, and skilled workers that are of considerable importance in manufacturing sector of developing countries even though the measure of non-production workers' share seems to have high correlation with education level or other job characteristics reflecting high skill contents.

Thus, some other complementary measures such as the share of scientists and engineers, the share of skilled jobs which is indexed by the degree of job complexity, the share of workers with skill licenses to total employment are included in my analysis. The human capital measures such as education level, job experience, and job tenure within firms will be also used. It turns out that different skill measures give somewhat different results. The skill measures and their data sources used in this study are presented in the Appendix Table-1.

Changes in skill structure in the manufacturing sector
Table IV-1 shows that the overall skill level of the Korean economy, measured by occupational composition, has been upgraded constantly. Professional, technical and administrative jobs and clerical jobs are doubled over the last two decades. The share of production jobs also increased through 1990 due to the growth of manufacturing sector.

The patterns of change in skill composition differ in each period. The production jobs grew faster over the 1970s, then got only small gains in the early 1980s, which was due to the stagnation of manufacturing sector. The economic upturn in the late 1980s raised the share of production jobs, but it declined thereafter. On the other hand, the professional, technical and administrative jobs have been stagnated in the 1970s and began to increase since 1980. These trends have occurred similarly in the manufacturing sector.

The general trends of skill levels in the manufacturing sector can be identified in Figure IV-1 and Table IV-2. Figure IV-1 plots non-production employment as a fraction of total employment and non-production share of total wage payment in the manufacturing sector. Table IV-2 presents more detailed skill structure of the manufacturing sector by various skill measures.

First, the non-production workers' share of total employment, which is represented by the top line of Figure IV-1, has risen consistently over the past two decades except in 1972 and 1974. The ratio has been doubled from 13.7 per cent in 1970 to 26 per cent in 1992. In particular, 1975-1980 and 1987-1992 saw larger increase in the share of non-production workers.

Second, however, the contents of increase in non-production workers' employment share were different between the two periods. From Table IV-2, we can see that the increased jobs within non-production workers were mostly clerical jobs during the heavy and chemical industry promoting period (1975-1980), over which a lot of capital accumulation has occurred. If there might have been kind of 'capital-skill complementarity' in this period, it must have been 'capital-clerical jobs complementarity'. The financial procedures to make foreign loan to import large scale capital equipment from abroad and trade-related work might have increased the needs for tasks of clerical jobs.

On the other hand, the technology drive period (1980-) saw the rise of scientists and engineers more than clerical workers within the non-production jobs. The share of professional and technical workers particularly scientists and engineers began to rise since 1980 owing to the emphasis on science and technology by firms as well as by government. Clerical workers have increased constantly but the increasing rate declined in the 1980s. The share of sales and service workers did not change a lot. If the skill level of scientists and engineers were higher than that of clerical workers, it can be argued that the skill upgrading trends in the 1980s would be higher than those measured by the share of non-production worker. That is, the measure of non-production workers' employment share might have underestimated the movements toward more skilled labour to the extent that skill upgrading could occur within non-production jobs.⁽⁸⁾

Thus, it can be argued that Korean manufacturing sector experienced skill upgrading even within non-production jobs in the 1980s. This can be confirmed by the trends in the share of high-skilled jobs within non-production jobs in Table IV-2. The share of non-production high-skilled jobs, which did not increase so much over the 1970s (5.8 per cent point in 1971, 6.6 per cent point in 1980), started to increase sharply over the 1980s to 15.2 per cent point in 1990.

In particular, we can see a sharp rise in the non-production workers' employment share to total employment after 1987, which reflects the industrial restructuring of the manufacturing sector such as the waning of light industries and the advancement in factory automation and changes in labour market structure which the wage hike of production worker and the labour shortage of unskilled workers has caused.

Of course, these structural changes were also accompanied by not only the absolute decrease in production workers but also increased demand for non-production workers. This can be confirmed by the trends in wage share of non-production workers in the Figure IV-1. The wage share of non-production workers has grown rapidly since 1987 in spite of unprecedented wage-hike of production workers in 1987-1990.

Third, what is interesting in Figure IV-1 is that the demand for skilled labour might be price-elasticity in Korean manufacturing sector. Just as the ratio of average non-production workers' wage to the average production workers' wage decreased, the non-production employment share increased. When the ratio decreased greatly, the share also increased a lot as in 1975-1982 and 1986-1991. That implies that changes in relative wage had strong substitution effects in the manufacturing sector. Thus, the increased share of non-production employment might have over-represented the shift in demand toward skilled labour, which is the opposite of the US case in Berman, Bound and Griliches (1994)

Figure IV-1 shows that the non-production workers' share of payments did not increase so much as the share of employment. Viewed from the measure of non-production workers' wage share, skill demand increased only after 1979 and soared rapidly after 1988.

These facts, however, can be explained by the supply-side of labour force and skill composition. That is, the rise in the share of non-production workers and the fall in their wage advantage might have been caused by the increased supply of educated labour and growing labour shortage of low-skilled labour. The supply of educated labour increased constantly and labour shortage of low-skilled labour were severe in the late 1970s and late 1980s in Korea. Then, the demand for skilled labour may not have been over-represented by the measure of employment share of non-production workers.

Moreover, if the elasticity of substitution between production and non-production labour is below one, the substitution effects can not defy effectiveness of share of non-production employment as a skill measure. Even the increase in demand for non-production worker could not raise wage share of non-production worker if the increase in production workers' wage is faster. The elasticities of substitution between production and non-production labour were mostly below one. Thus, the demand for skilled labour would be more than that measured by wage share of non-production worker and less than measured by employment share of non-production worker in the Korean manufacturing sector.

Therefore, it can be argued that skill demand in the first half of 1980s was not so low as compared with that in the late 1970s when not only the relatively large increase in wage of production workers which might have induced substitution away from production labour in the late 1970s but also skill upgrading trends within the non-production workers in the 1980s are considered.

Fourth, there was an exception, however, to these skill upgrading trends in the 1980s. The proportion of production high-skilled jobs has been stagnant over the 1980s even though it increased so much during the 1970s. Nonetheless, the human capital of production workers increased over the 1980s. A mismatch existed between demand and supply for skill. The mass production system of the Korean manufacturing did not create decent jobs for production workers specially for the 1980s.

The workers with skill license increased constantly over the 1980s. The increasing rate of the share of workers with skill license to total employment might have been higher in the 1970s than in the 1980s even though no data on workers with skill license over the 1970s are available. That is because the vocational training system which had been promoted very actively in the 1970s, became stagnant over the 1980s. As for human capital accumulation, the average education level increased constantly, but the increasing rate was higher in the 1980s than in the 1970s. It is the same in case of tenure and job experience. However, job tenure was relatively low until 1985, which means that the labour market in Korean manufacturing sector was very turbulent with very high rate of turnover. That implies that internal labour market was not established at least for production workers until 1987, which might have incurred lack of structured on-the-job training in the Korean manufacturing firms.

Anyway, except for the job skills of production workers, all the skill measures indicate that skill upgrading was more accelerated in the 1980s than in the 1970s. It makes no difference to be viewed from the occupational compositions and job requirements (demand side) or from human capital skill (supply side) except the case of production workers.

Changes in skill composition by industries
Table IV-3 shows which industries are non-production worker intensive. Was a skilled industry in 1970 still a skilled one in 1990? The answer can be found in Table IV-3.

First, in 1970, machinery, equipment and electronics industries (KSIC 38) together with textile industries (KSIC 32) were among the low-skilled industries in terms of non-production workers' employment share. In 1990, however, they changed to high-skilled industries. In particular, the machinery industry (KSIC 382) raised its non-production workers' employment share faster than any other industries.

Second, the textile industries (KSIC 32) and other manufacturing industries (KSIC 39) are still the least skilled industries as of 1990, but the increasing rates of non-production workers' employment share were the fastest. They are almost doubled (KSIC 32) or 2.5 times increased (KSIC 39) over the period. It might have caused skill effects of employment reallocation between industries to be relatively small. As we saw in Chapter III, there have been a great employment reallocation from the textile industries (KSIC 32) to machinery, electronics and equipment industries (KSIC 38). However, the skill effects of this reallocation could be smaller than within-industry skill effects if the skill upgrading rate was the fastest in the textile industries.

Then, what happened to changes in skill composition between industries? Table IV-4 presents the industry shares of employment by type of worker. As I said, textile industries (KSIC 32) and machinery, equipment and electronics industries (KSIC 38) are two pillars of Korean manufacturing sector and major exporting and import-competing industries which are most exposed to foreign competition. They experienced rapid increase in the share of non-production worker, but in some different ways. In textile, apparel, leather industries (KSIC 32), the loss of share in production worker (-10.1) was larger than the loss of share in non-production worker (-4.8). On the other hand, in machinery, equipment and electronics industries (KSIC 38), gain of share in non-production worker (24.8) was larger than the gain in production worker (19.9). Thus, the reallocation of employment from textile industries to machinery industries, which means rapid decrease in production workers in textile industries as well as rapid increase in non-production workers in machinery and equipment industries, does not necessarily cause high level of between-industry skill effects.

As for the other industries, which are mostly domestically-oriented industries, KSIC 37, 36, 33 industries showed little difference in changes of employment share between production and non-production worker. As we saw in Table III-2, these industries also showed little change in employment share. Therefore, these industries had very little meaning in the skill effects of employment reallocation. In case of chemical (KSIC 35), the share of non-production worker declined despite the increase in the share of production worker, so non-production worker intensity might have fallen in the chemical industries.

Was the skill upgrading more remarkable in industries exposed to foreign competition? Table IV-5 shows that the exporting industries are low-skill intensive and import-competing industries are high-skill intensive even as of 1990. The non-production employment share is 20.5 per cent in exporting industries as compared with 29.0 per cent in import-competing industries and 28.3 per cent in domestically-oriented industries in 1990. It indicates that the Korean exporting industries are still low-skilled ones.

The skill upgrading trends, however, are in favour of exporting industries. The skill upgrading rate was faster in exporting industries particularly in exporting light-industries if skill is measured by non-production workers' employment share. The annual growth rate of the share of non-production workers' employment was 3.49 per cent in exporting light industries between 1970 and 1990. It was 2.75 per cent in exporting heavy industries and 2.72 per cent in import-competing industries, 2.12 per cent in domestically-oriented industries. Anyhow, skill upgrading trends measured by non-production workers' share of employment and wage payment are more conspicuous in the exporting industries and import-competing industries than in domestically-oriented industries.

These trends do not change even with the other skill measures except the share of scientists and engineers and the share of high-skilled production workers to total employment. Table IV-6 shows that the exporting industries are still low-skilled intensive, but the skill level of exporting industries is upgraded more sharply than those of any other industries. In the previous analysis, I found that the exporting light-industries is the fastest in skill upgrading when skill is measured by the employment share of non-production worker. However, it becomes different when other skill measures are applied. For example, the share of scientists and engineers has not changed so much in exporting light-industries. It was 0.6 per cent in 1976 and 0.56 per cent in 1990. It increased the fastest in the exporting heavy-industries from 1.87 per cent in 1976 to 6.85 per cent in 1990. The next is the import-competing industries from 3.42 per cent in 1976 to 9.04 per cent in 1990. The share of non-production workers with skill licenses did not increase in exporting light-industries over the 1980s as well.

The skill effects of technology drive policy of government and firms over the 1980s, the target of which was to improve the international competitiveness of manufacturing sector, were larger in those industries exposed to global competition. The light industry, however, was the exception when judged by the changes in high-skilled jobs within non-production workers. What is interesting in Table IV-6 is that the employment share of production workers with licenses was lower in exporting light-industries. It is because the vocational training system and skill license system were initially engineered by the government to supply manpower for the heavy and chemical industries in the 1970s. The light industry was also an exception in the skill effects of heavy industry promoting policy.

Table IV-6 also shows that the high-skilled production jobs did not increase so much in exporting or import-competing industries. The skill upgrading trends of production workers measured by the employment share of high-skilled production job turned negative in the import-competing industries since 1976, in the exporting heavy-industries since 1980, in the exporting light-industries since 1985. It suggests that those industries exposed to foreign competition with mass production technology system have reduced their dependency on the intermediate skill of production jobs. The growth rate of human capital which reflects the supply side of skill showed little differences between industries. Education level increased faster in exporting light-industries more than in other industries. In exporting heavy-industries, job experience was low and increased not so much. It implies that exporting heavy-industries hired relatively young and higher educated new entrants constantly. On the other hand, the job experience of the exporting light-industries increased very much between 1985 and 1990. It is because the household women workers were re-employed under the changing conditions of the labour market - shortage of low skilled workers in light industries. The job tenure of 1990 is much higher than those of previous years in all industries, which suggests that internal labour market is being introduced as a result of changes in industrial relations since 1987.

Conclusively, skill upgrading trends were more conspicuous in the industries that were exposed to foreign competition than domestically-oriented industries. The exporting light-industries, however, did not experience skill upgrading within non-production jobs even though the non-production workers' employment share grew fastest in these industries. This implies that industrial policies aiming at industrial restructuring to increase global competitiveness had different skill effects by industries.

V. Conclusion

So far, I analysed the impact of outward economic development on employment, occupational composition and skill requirements in the Korean manufacturing sector between 1970 and 1990. First, I reviewed changes in trade, technology and employment of the manufacturing sector. Second, I provided empirical evidence to test the hypothesis that exposure to global competition would increase skill requirements of workforce. The analyses of this study show that the integration into global economy or exposure to foreign competition had great impacts on employment, occupational composition and skill requirements. My major findings are as follows.

First, the outward-looking growth pattern of manufacturing sector was very effective in increasing employment in Korea. Employment growth was more remarkable in the industries that were exposed to foreign competition. Particularly, exporting labour-intensive industries were very effective in absorbing the unemployment or underemployed workforce of rural sector or urban informal sector until the early 1970s. Thereafter, employment growth has occurred primarily in those sectors which accomplished capital deepening and technological development to secure global competitiveness of exports or compete with foreign imports.

Second, skill upgrading has proceeded faster in the industries where foreign competition was intensified. It is the exporting industries and import-competing industries rather than domestically-oriented industries which experienced faster skill upgrading. However, the skill upgrading within the production jobs was relatively stagnant in the manufacturing sector. The exporting light-industries also showed little skill upgrading within non-production jobs in spite of the sharpest increase in the non-production workers' employment share. This means that the foreign competition has the skill upgrading effect only interacting with the industrial restructuring and technological developments.

Notes

1. Korean and Korea refer to the Republic of Korea.

2. These arguments can be supported by the research of Yoo (1994) and Hassink (1994). Yoo (1994) argues that export-led industrialization in Korea did not entail increasing specialization in labour-intensive industries based on cheap labour. Rather, capital-intensive industries grew as fast as labour intensive industries. Hassink (1994) also says that South Korea has reached a production structure that is comparable to that of world leaders as the United States and Japan.