Explaining the Cyclical Behavior of the Korean Labor Market

Author: Weh-Sol Moon

The Korean labor market is characterized recently by (1) more volatile
employment and OLF than unemployment and (2)employment which is much
more correlated with OLF than with unemployment. Based on these facts,
the role of the unemployment rate as a business cycle indicator would seem
to have been weakened, and a significant amount of the fluctuations in
employment is explainable primarily by the fluctuations in the rate of
nonparticipation. In this paper, I evaluate existing models and modify them.
The distinction between unemploymunt and OLF becomes clear, and the
model developed in this paper generates the OE transition without an
assumption that nonparticipants are inactive searchers. Moreover, some
parameters which determine the model dynamics are assumed to be timevarying.
The modified model accounts quite well for the Korean labor
market of the last two decades. Among other time-varying parameters,
stochastic nonparticipant’s probability of entering the labor force, which
moves in coordination with the state of the labor market, explains the
Korean labor market. A quantitative analysis of the reduced-form dynamics
shows clearly that a change in the participation rate is capable of
generating the cyclical movements of employment, unemployment and OLF
that we observe in the 2000-2007 data.

JEL Classification: E24, E32, J63, J64

Keywords: Search and Matching, Business Cycle, Labor Force Participation