Service industry expansion boosts income inequality in S. Korea

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Service industry expansion boosted income inequality in South Korea as service firms tended to have lower labor productivity than manufacturers, and in turn widen wage disparities among workers, a central bank report showed Sunday.

According to the report by Bank of Korea economists, the service industry progressed globally over the past several decades, with added value in the global service sector as a percentage of GDP jumping from 53.4 percent in 1970 to 70.9 percent 2010. The ratio for South Korea increased from 49.5 percent in 1990 to 58.2 percent in 2010.

Faster growth in the service industry lifted the Gini coefficient of South Korea from 0.245 in 1992 to 0.295 in 2009, according to the report. The index was based on disposable income of households with more than two members in the metropolitan area.

The Gini coefficient gauges an extent of income inequality, with the coefficient of zero expressing perfect equality where everyone has the exactly equal income. The index of one indicates complete inequality where only one person possesses all the income.

The correlation between the service sector expansion and the widening income gap stemmed from the lower labor productivity in the service industry compared with the manufacturing sector, resulting in wage disparities between the two sectors, the report said.

Labor productivity in the service industry was higher than that for the manufacturing sector until the late 1990s, but it has been reversed since then, according to the report. There was little difference in wage between employees in the two sectors by the early 1990s, but the wage disparities has since widened, with the wage level for the service sector around half of that for the manufacturing industry as of 2010.

Weak labor productivity in the service sector arose from a high portion of irregular workers and a great number of small firms that are unable to achieve the economy of scale, the report said.

Since the 2008 global financial crisis, the labor productivity weakened further in the service industry, the report noted, adding that the service industry employed many workers who were fired from manufacturers due to low skills.

The report advised that it needs to enhance labor productivity in the service sector by expanding the business size of service firms, saying that the authorities should offer financial aid to small service companies by providing loans based on their technology and business prospects. Endi

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