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There are various studies on the relationship between labor productivity, employment, and wage. First, the relationship between labor productivity and employment can be explained by the relative size of substitution effect and compensation effect. In other words, when the improvement in the labor productivity comes from the technological innovation, it will substitute labor so that employment falls. On the other hand, improvement in the labor productivity causes the prices of goods and services to fall and increases demand for those goods and services. It will therefore increase demand for labor in those industries. Second, the real business cycle theory argues that productivity shock will have a positive effect on employment. However, Gali(1999) argues that productivity shock lowers the marginal production cost while, because of the price rigidity, demand for goods does not change. As a result, firms reduce the number of worker employed from a rise in the labor productivity. Finally, Chang et al.(2009) note that, even when there is a price rigidity, technology shock may increase employment if it is less costly to hold inventories. In sum, whether a rise in labor productivity on employment is positive or not is subject to empirical investigation. The paper utilizes panel vector autoregressive (VAR) model to compare the effects of labor productivity shocks on employment, proxied by the total hour worked, and wages between manufacture industries and service industries. The results show that labor productivity shocks in the manufacturing sectors have positive effects on employment while those in the service sectors have negative effects on employment. Labor productivity shocks in both in manufacturing and service industries cause wages to rise. However, the wage rise is higher in the manufacturing industries than services industries in response to labor productivity shocks. A rise in employment in the manufacturing sector and a fall in employment in the service sector in response to a labor productivity shock can be explained by two different theories. First, our results support that the compensation effect is greater than the substitution effect in the manufacturing sector while the compensation effect is less that the substitution effect in the service sector. Second, because holding inventories are less costly in the manufacturing sector, labor productivity shock increases employment in the manufacturing sector while it lowers employment in the service sector.