The Relationship between Unemployment and Productivity in Korea

Abstract

The standard theory shows that, while demand shocks cause the long-run unemployment-productivity schedule to have a negative slope, supply shocks cause it to have a zero slope. This paper finds that low unemployment has largely been related to high labor productivity in Korea for the past two decades, creating a long-run negative relationship. Capital accumulation, better education, and high aggregate demand are cited as key factors of the inverse relationship. Empirical results show that about half of labor productivity growth is actually attributed to an increase in capital stock and that there is also a negative relationship between unemployment and the ratio of capital to the labor force.