The Korean Economic Forum
The Effects of Factor Substitution and Technological Progress on the Growth and Distribution of the Korean Economy
Jong-Wha Lee (Korea University)Year 2021Vol. 14No. 2
Abstract
This study analyzes the growth and distribution of the Korean economy using a neoclassical growth model that considers production factor substitution and technological change. The CES production function estimates show that the substitution elasticity between aggregate labor and physical capital is about 0.95 for the period from 2000 to 2017, suggesting that when physical capital per effective labor expands, labor income share is stable. In contrast, skilled and unskilled labor are highly substitutable, so the income share of skilled labor increases with the supply of highly educated workers. Korea’s labor hours,physical capital, human capital, and total factor productivity growth have slowed, contributing to the downward trend in GDP growth. The estimated contributions of labor hours, physical capital, human capital, and total factor productivity to the average annual GDP growth rate of 3.5% in 2010-2017 were 0.3%, 1.7%, 0.3%, and 1.2% points, respectively. For inclusive and sustainable growth, Korea must pursue policies to enhance human capital accumulation and technological innovation.