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Wage Inequality and the Efficiency of Workers in Korea, 1965-2007

Economic Research Institute (82-2-759-5490) 2010.11.19 1773

Wage inequality between skilled and less skilled workers  is found to be affected negatively by the relative supply of skilled labor and positively by both the capital-to-GDP ratio and the ratio of exports of goods and services to GDP. A rise in trade openness and a shift toward a more skill-intensive production structure are expected to increase wage inequality as well as GDP. An increase in the supply of skilled workers since 1985 helped keep wage inequality stable. Raising the supply of skills and human capital via improvements in educational quality is necessary to slow or reverse the growth of wage inequality.

  While the efficiency of skilled labor has risen since 1980, the efficiency of unskilled labor has not changed very much over this period. This reflected three factors: the  complementary relationship between capital and skill, the worldwide development of skill-biased technological change , and the skill-intensive industrial structure in Korea.

The different time paths of skill and unskilled labor efficiencies imply that empirical studies of productivity and potential output which assume homogeneous workers are likely lead to incorrect analysis and policy conclusions. It further suggests that capital is not homogeneous and consequently such studies also offer incorrect analysis and policy conclusions if they make this assumption.. Workers and capital are themselves imperfect substitutes.  Hence, appropriate and reliable empirical studies of productivity and potential output must start from the assumption that all the types of workers and capital stocks are not identical in the production of goods and services by industries.



Contents

1 . Introductio n 1

2 . Production Sector Framework 3

2 .1 Econometric Specification 7

2 .2 Empirical Results 9

2 .2.1 The economy-wide national account data in Korea 9

2 .2.2 Household Income Distribution Data 1 5

2 .2.3 Policy Implications 1 7

3 . Efficiency of L abor 17

3 . 1 Computation of the Efficiencies 18

4 . C onclusions 20

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