The Service Sector Snag

Despite South Korea's status as an entrepreneurial powerhouse, its economy suffers from an inadequate service sector

By Rick Wartzman

Whenever I am in Seoul, as I was earlier this week, I find myself marveling at the place: its top-flight airport, its shimmering skyscrapers, its ubiquitous high-tech gadgetry—all of these outward signs of an economic transformation achieved largely in a single generation. It's no wonder that Peter Drucker called South Korea "undoubtedly" the most entrepreneurial nation on earth.

And yet if there is a weak spot to be found in Korea—and in many other countries around the world—it is one that Drucker also understood well: a huge service sector that is struggling to be productive.

Earlier this month, the South Korean government announced that it would invest 300 billion won (or $260 million) in research and development aimed at enhancing service-provider productivity. "Korean industries took it for granted to invest in R&D for products, but questioned the same necessity in services," one official explained. Now the plan is to promote technology that can spur advances in health-care delivery, advertising, design, business services, and more.

The Koreans are being driven, in part, by statistics showing that the nation's service sector is only half as productive as that of the U.S. But some wonder whether the strides the U.S. has made in this area over the last 15 years are more illusion than reality. Economist Paul Krugman, for one, has pointed out that much of the U.S.'s productivity prowess has supposedly been in financial services. "Given recent events," he asks, "are we even sure that the expansion of the financial system was doing anything productive at all?"

Wage Gap

In any case, what we do know for sure is that wages for many service workers continue to lag badly—and this is what most concerned Drucker. In fact, with the ranks of service firms growing rapidly, he warned of "the prospect of social tensions unmatched since the early decades of the Industrial Revolution."

The service sector is varied and vast. In the U.S. today, more than 80% of jobs are to be found in services; in Korea, that number stands at about 70%. Drucker, for his part, tended to divide this giant universe into two different categories: knowledge work and unskilled or semiskilled positions.

The former group is, of course, in relatively good shape—especially those who have been able to obtain high levels of education. In the U.S., for instance, those with a college degree earn on average two-thirds more than those who've finished high school, according to the Goldman Sachs Global Markets Institute. And those with professional degrees boast incomes nearly twice as large as those with just a college diploma.

But the latter group—janitors and waitresses, retail clerks and nursing-home attendants—are in a much tougher spot. "In their social position," Drucker wrote in a 1991 piece in Harvard Business Review, "such people are comparable to the proletarians of years ago: the poorly educated…masses who thronged the exploding industrial cities and streamed into their factories."

Targeting Productivity

For these workers to get ahead, Drucker believed that there was only one remedy: increasing their productivity (or output per hour of work). "The less productive an economy," Drucker asserted, "the greater the inequality of incomes. The more productive, the less the inequality."

Over the years, some experts have maintained that by its very nature, service work is labor-intensive and not conducive to productivity gains—a phenomenon known as "Baumol's disease" (so named for William Baumol, the economist who first described it).

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