Paradoxes of Korea’s chip boom: Labor’s share of GDP hits record low

As surging investment in artificial intelligence drives a semiconductor boom, corporate profits are soaring, but labor’s gains are falling further behind, new government figures show. With the Korean economy apparently set to post annual growth of at least 3.6% this year, experts are calling for more government investment in jobs to mitigate polarization.

 The Hankyoreh’s analysis of seasonally adjusted national accounts from the Bank of Korea’s Economic Statistics System on Sunday found that compensation of employees — representing labor’s share of economic output — accounted for just 41.1% of nominal gross domestic product (GDP) in the second quarter of this year.

That was down 6.8 percentage points from 47.9% a year earlier, hitting its lowest level since 2010, when comparable quarterly data became available.

 Compensation of employees includes wages and employers’ contributions to social insurance programs.

 Meanwhile, gross operating surplus — defined as income from invested capital earned by businesses and the self-employed — jumped from 43.9% to 51.9% of GDP over the same period, reaching its highest level since 2010.

Workers’ share of GDP had risen gradually over 13 years, from 43.2% in the first quarter of 2010 to around 48% in 2023, and then leveled off. But as the semiconductor boom gathered momentum, that share plunged 5.7 percentage points in just six months, from 46.8% in the fourth quarter of last year to 41.1% in the second quarter of this year.

 During the previous semiconductor boom of 2016-2018, the capital share never exceeded the labor share by more than 3 percentage points. But this time, the gap has widened to 10.8 percentage points.

 The Bank of Korea publishes annual figures for labor’s share of income at the end of each year. That calculation compares compensation of employees and gross operating surplus as shares of national income while excluding depreciation of capital assets, among other factors, from total domestic output.

 For this analysis, however, the Hankyoreh calculated compensation of employees as a share of quarterly GDP, following a methodology used in earlier research by Chang Ji-yeun, a senior research fellow at the Korea Labor Institute. As Korea’s semiconductor boom creates a rapidly increasing amount of value added each quarter, Chang’s method provides a snapshot of how much of growth is reaching workers.

The decline in labor’s share does not mean that wages are falling in a poor economy. Compensation of employees through June actually rose 7.9% year over year. But labor’s share fell because of the 38.7% surge in operating surplus that drove the GDP increase.

 One reason for that decrease is that semiconductor manufacturing is not particularly labor-intensive, but the main reason is that the current boom has been driven by a sharp increase in memory chip export prices, with most of the resulting profits flowing into operating surplus.

 There appears to be little prospect of an improvement in labor’s share in the third quarter. Corporate profits rise as soon as product prices increase, but wages do not generally catch up until the annual wage negotiations and performance bonuses the following year.

 Labor’s share could rebound in the first quarter of next year, when major semiconductor companies distribute performance bonuses. But if semiconductor prices keep rising in the meantime, the gap could widen further.

 A more fundamental problem is that even if labor’s share rebounds early next year, those benefits may be concentrated among the narrow slice of the workforce who receive higher bonuses — namely, workers at major corporations, but not those at their subcontractors.

 According to Chang’s analysis, employees at major memory chip manufacturers earned an average of 140 million won per person in the first half of this year, even as the average pay at 15 listed suppliers ranged from just 29 million to 51 million won.

 In a recent report titled “Assessing the Conditions for a Recovery in Private Consumption,” the Bank of Korea predicted that in high-income households, purchasing power would primarily be boosted by bonuses and dividends, while in low-income households, it would largely depend on increased government transfers and a decline in the dollar’s value relative to the won.

 A more lasting solution, experts say, requires investment aimed at translating economic growth into employment and labor income.

 “To deal with the hiring slowdown and growing job insecurity that are being caused by artificial intelligence, investment in people must become the foundation for the next phase of growth,” said Chang.

 She proposed using the government’s announced Future Response Fund — which is to be financed with tax revenue generated by the semiconductor boom — to invest actively in workforce development. Under her proposal, newly hired young workers would have an opportunity to build up their resume, while middle-aged and older workers would take on the role of passing down their expertise and skills.

Jeong Se-eun, a professor of economics at Chungnam National University, agreed about the need for government intervention.

“The profits generated by the semiconductor boom are trapped in the industry, with no trickle-down effect. There’s no way to unlock them through existing market mechanisms,” the professor said.

 “We need to channel the additional public revenue generated by the boom into job creation and employment-related welfare, including unemployment benefits, vocational training for the AI transition, and more government jobs.”