Academic journal article Contemporary Economic Policy

Job Reallocation, Financial Crises, and Policy Reforms: Evidence from Korea

Academic journal article Contemporary Economic Policy

Job Reallocation, Financial Crises, and Policy Reforms: Evidence from Korea

Article excerpt

I. INTRODUCTION

Since the global financial crisis, there has been considerable interest in how employment responds to a financial crisis. Estevao and Tsounta (2011) find evidence that the structural unemployment rate rose after 2007 in the United States due to the negative effects of skill mismatches and the weak housing market. Elsby, Hobijn, and Sahin (2010) uncover evidence that key aspects of U.S. labor market dynamics during the Great Recession, such as employment and the labor force participation rate, are similar to those observed in earlier recessions. Burda and Hunt (2011) investigate the reasons unemployment fell in Germany during 2008-2009 and Arpaia and Curci (2010) provide evidence that the response of unemployment to the current recession differs across European Union (EU) countries.

Along with the extensive literature on the response of employment to recessions, the literature on job reallocation has been expanding since the seminal work of Davis and Haltiwanger (1992). However, most studies about job reallocation focus on the dynamics of job flows in developed countries, such as the United States, Japan, and EU countries (Baldwin, Dunne, and Haltiwanger 1998; Burger and Schwartz 2015; Davis, Faberman, and Haltiwanger 2006; Genda 1998; Jurajda and Terrell 2008; Mortensen and Pissarides 1999). (1) Furthermore, little is known about the dynamic process of job reallocation before and after financial crises, although the allocation of physical resources plays an important role in firms' performance and aggregate economic activity (Caballero and Hammour 2005; Cortes et al. 2014; Eisfeldt and Rampini 2006).

To fill these gaps, this article documents the dynamic evolution of job reallocation across Korean firms from 1985 to 2013. In particular, I focus on investigating whether the job reallocation process underwent a structural change after the 1997 financial crisis and the associated labor market reforms. The results of this article provide meaningful insights into the labor market's response to financial crises and market reforms as well as interaction between the labor market and the macroeconomy. Furthermore, this study sheds light on job reallocation in the Asian economies that were affected by the Asian economic crisis and the resulting reforms designed by the International Monetary Fund (IMF) and implemented in the late 1990s.

In Korea, employment growth increased steadily and unemployment growth declined throughout the 1980s and until the mid-1990s, largely because of the fast growth of the economy. During the rapid economic development, the Korean labor markets adopted the Japanese style of lifetime employment and the seniority system before 1997. After the onset of the 1997 financial crisis, in order to raise labor productivity and reduce labor costs, the government allowed firms to lay off workers and replace regular employees with temporary employees. The crisis and these associated labor market reforms changed the dynamic behavior of job reallocation in Korea, providing a natural laboratory suitable for examining the responses of the job reallocation process to financial crises.

To explore the job reallocation process, this article exploits a comprehensive dataset that includes 47.5% and 54.3% of total regular employment in Korea in 1989 and in 2007, respectively. This dataset consists of 34,437 firms and the sample period covers 29 years, from 1985 to 2013.

I adopt the methodology proposed by Davis and Haitiwanger (1992) and Davis and Haltiwanger (1996) to measure job reallocation. While job creation was on average 6.71% in the precrisis (1985-1996) period, it rose to 9.24% in the postcrisis (1999-2013) period. Job destruction also increased, from 5.22% in the precrisis period to 6.80% in the postcrisis period. Because the increase in job creation is larger than the rise in job destruction, employment growth also increased at an annual rate of 2. …

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