I Introduction Employment in the Korean manufacturing industry has been declining since 1990, not only in the share of total employment but also in absolute numbers. The value-added share of manufacturing in the total GDP has been stable at around 24 percent since 1990; however, in this period, due to the decline of the construction industry, which explained 9.5 percent of the GDP on average in the pre-crisis period but currently explains 6.3 percent of the GDP, the combined share of manufacturing and construction value-added has shown a tendency to decline. If the reduction of manufacturing and construction is represented by the head of a coin, expansion of the service industry constitutes the tail, comprising one of the key features in the structural changes of the Korean economy since 1990. Besides, the manufacturing industry has tertiarized itself. As R&D, design, maintenance and consumer finance become more important in the value chain than the manufacturing process itself, firms such as Samsung Electronics and LG Electronics have increased their workforces in R&D and design. Currently more and more traditional manufacturing or equipment firms are selling solutions rather than intermediate goods or equipment alone. A growing proportion of service work within those manufacturing companies is causing them to resemble service firms. The growth of the service industry and the acceleration of tertiarization in the Korean economy since 1990 have been influenced by three factors. To begin with, the income increase has pushed up the demand for service goods (Oh 2005). At the same time, changes in the environment of international trades, particularly the so-called China Shock (Choi et al. 2005; Kim 2006), have reduced employment in the manufacturing sector. Also, as information and communication technology (ICT) diffused in the 1990s, production processes became more high-skilled and capital-intensive, and new knowledge-intensive jobs have come into existence, tertiarizing the composition of employment (Hur et al. 2002). This study analyzes features of tertiarization of the Korean economy, comparing them with the experiences of other OECD countries. Here tertiarization

includes the rise of the service share in production, intermediate input, and trade, as well as the increase in employment in the service industry and in service jobs in the overall economy. Though the service industry is growing in employment and production, its productivity growth is decelerating. According to Baumol (1967), the economic development and the consequent income growth will raise the demand for service goods. As the productivity grows slower in the service industry than in manufacturing, prices of service goods increase at a higher rate. The results are a shift of labor to the service industry. Thus, tertiarization will bring in both a productivity and growth slowdown in the overall economy. However, productivity growth of all the service industries is not necessarily slower than that of manufacturing. Therefore, the result of tertiarization is not as gloomy as Baumol (1967) predicts. For instance, if tertiarization is accompanied by a growing proportion of communication and other business services whose productivity growth is comparable to that of manufacturing, the tertiarization may not necessarily lead to productivity slow-down. Besides, all the service goods are not final goods as is assumed by Baumol (1967). When service goods are used as intermediary input, the productivity growth of the overall economy can grow providing the total factor productivity growth of the intermediary good-producing service industry is positive (Oulton 1999). This study will first investigate the overall and sector-specific aspects of tertiarization. Drawing on the features of tertiarization in progress on the one hand, and the implications of Baumol (1967) on the other hand, this study will discuss policy implications. This chapter is composed of five sections. Section II examines the various aspects of tertiarization of employment and reasons for the fast expansion of service employment. Section III investigates tertiarization in production, focusing on the growing share of production as well as the intermediate input of services. Section IV summarizes the main characteristics of tertiarization in Korea. Lastly, in Section V we discuss policy implications for ensuring more and better jobs in the tertiarizing Korean economy.