Academic journal article Seoul Journal of Economics

Wage Inequality and the Contribution of Capital, Differential Labor Quality and Efficiency to Economic Growth in Korea, 1965-2007

Academic journal article Seoul Journal of Economics

Wage Inequality and the Contribution of Capital, Differential Labor Quality and Efficiency to Economic Growth in Korea, 1965-2007

Article excerpt

We show that skilled and unskilled labors are imperfect substitutes and that capital and skilled labor are complementary in production. The Korean economy has experienced skill-biased technical changes. The capital stock growth is found to be the main source of the economic growth. The contribution of the efficiency and labor input growth of skilled workers is the second most important source. The rate of contribution of TFP growth to GDP growth has increased from 27% in 1991-1996 to 36% in 2001-2007. This paper shows that Korea's policy of educating its workforce has boosted productivity and growth and it prevented a widening in wage inequality.

Keywords: Wage inequality, Labor efficiency, Skill-biased technological change, TFP, Korea

JEL Classification: E13, J31, N15, O30, O47, O53

I. Introduction

The ratio of the wages received by skilled workers relative to the wages of unskilled workers in the United States has increased markedly since die 1970s. This increase in relative wage inequality has received enormous attention on the source of the steady rise in the wage inequality.1 A central hypothesis regarding wage inequality in the literature is that technological change has shifted labor demand toward skilled worker; skill-biased technological changes (SBTC).2

A similar increase has occurred in Korea. Before the early 1960s, Korea was largely a closed economy. The majority of employed persons were engaged in agriculture and in government service sectors or were employed by utilities and banks. The government of Korea initiated the First Five Year Economic Plan in 1961, at which time Korea exported low tech light manufactured goods.3 By the 1990s, however, the Korean economy produced and exported knowledge-intensive goods and services. Figure 1 gives tiie trend of wage inequality during the 1965-2007 period.4 It shows that the ratio of the wage rate of skilled workers to less skilled workers declined from 4.3 in 1960 to 3.4 in 1964, but then rose to a peak level of 6.3 m 1976.5 Wage inequality then generally declined to the level of 3.3 in 2000 before showing a tendency to rise again at a slow rate from 2001 to 2007. The average ratio of 3.47 during the 20012007 period is only slightly higher than the average ratio of 3.4 during the period 1993-2000 and is below the average ratio in the 1960s. We note that a rise m wage inequality does not necessarily mean that unskilled workers become worse off, but it mean that unskilled workers become better off at a slower pace than die skilled workers.

The purposes of this paper are threefold. First, it examines which factors are main sources of wage inequality between skilled and unskilled workers in Korea. The Korean labor market evolved in line with changes in the economy's production structure and its openness to trade. Hence, wage inequality is expected to reflect the relative demand for skilled workers in an open economy which is affected by the capital stock and trade openness and the relative supply of skilled labor. We show that the two types of labor are imperfect substitutes and that capital and skilled labor are complementary in production. The paper computes the efficiencies of skilled and unskilled labor in Korea stace 1965. The ratios in efficiency between skilled and unskilled workers showed that skill- biased technological changes have been occurring. Finally, using a growth accounting method, it analyzes the contribution of factors of production to economic growth and shows ttiat total factor productivity growth cap- tures the efficiencies and quality changes of workers. Our empirical find- ings provide evidence that Korea's educated labor force enabled Korea to attain its productivity and economic growtìi wiüiout greatìy widening wage inequality and thus income inequality.

The rest of the paper is organized into four sections. Section II de- scribes the production sector framework for the analysis of wage inequal- ity. It presents the specification for empirically investigating wage in- equality and discusses die empirical results. …

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