Policy Study The Evolution of Wage Inequality in Korea 2018.12.31
Series No. 2018-01
Wage inequality in Korea has undergone several changes in 1980-2016. It fell in 1980-1994, rose in 1995-2007, and then fell again in 2008-2016. Different worker characteristics have had different impacts on wage inequality. In the early years, sex, age, and education were the three most important characteristics, but in later years, firm tenure became the most important one, followed by education and establishment size.
The impact of each worker characteristic can be decomposed into price effect (the sensitivity of wage inequality to a marginal change in worker characteristics) and distribution effect (the impact of changing distribution of worker characteristics across wage quintiles). In the cases of sex and age, both price and distribution played important roles in reducing inequality. In the case of education, price was the main driver in all periods, reducing inequality in the first period (1980-1994), increasing it in the second (1995-2007), and again reducing it in the third (2008-2016). In the cases of tenure and establishment size, distribution contributed significantly to increasing inequality.
Price is determined through the interaction between demand and supply. As for sex, the relative demand for male workers declined in all periods and particularly in the second and third periods, and accordingly their relative wage fell. As for age, the relative demand for older workers increased in all periods. But it was outpaced by the increase in supply, and as a result the relative wage fell for older workers. As for education, the relative demand for college graduates over high school graduates increased faster than the supply in the second period but not in the first and third periods. The relative wage of college graduates rose in the second period but not in the other periods.
There have been suggested many explanations for the changes in demand. Among them, the endogenous technical change hypothesis posits that the increased supply of a particular group induces innovations that make more use of that group. According to this hypothesis, the increasing supplies of female workers and older workers increased the demand for these workers. Similarly, an increasing supply of high school graduates in the 1970s and 1980s led to the subsequent increase in the demand for them in the first period; an increasing supply of college graduates in the 1990s and early 2000s led to the subsequent increase in the demand for them in the second period; and the leveling off of their supply at the end of the 2000s led to the subsequent leveling off of the demand for them in the third period. On the other hand, the stories based on skill-biased technical change (SBTC) cannot provide explanations on the increases in the relative demand for some groups of unskilled workers―female workers (in the second and third periods), elderly workers (in the third period), and high school graduates (in the first period).
The rapid rise in the skill levels of female workers and younger workers appears to have added to the demand for them. On top of the endogenous technical change, this may explain the declining relative demand for male workers, and the slow increase in the relative demand for older workers (relative to the supply).
In addition to the price, the distribution of worker characteristics across wage quintiles have had important impact on wage inequality. In the case of sex, light manufacturing (most notably textiles, apparel, and leather products) had provided low-pay blue-collar jobs for the mass of female workers. Since the 1980s, however, the decline of this industry and the expansion of service industry and white-collar jobs provided female workers with the opportunity to move up the wage ladder and helped reduce the gap between sexes.
The average tenure has grown continuously, and so has the wage gap between long tenure and short tenure. This has increased the importance of tenure as a determinant of wage inequality. In the meantime, the group of workers with short tenure came to include not only younger workers but also older ones who have entered the labor market at later ages or who have had to hop around unstable jobs during their career. All older workers are not necessarily earning high wages, and this makes age less important now as a predictor of wage inequality.
Over the decades, large establishments have increasingly relegated blue-collar jobs and low value-added activities to smaller establishments and focused instead on white-collar jobs and high value-added activities. Now a smaller number of workers are working in large establishments, and establishment size is more important than before in increasing wage inequality.
A look at the changes in employment and wage across occupations indicates that supply factors (i.e., workers migrating into high-paying occupations) were at work in the first period to reduce the gap between low-paying and high-paying occupations. In contrast, it is difficult to find a clear pattern in the second and third periods. Much the same story can be told of the changes in employment and wage across industries.
These findings have important policy implications. Efforts are needed to further upgrade women’s skill levels. It is also necessary to strengthen the labor market attachment of disadvantaged workers (including older workers) and help them stay with an employer longer, for example by reducing the regulations on their employment. Priority should also be given to improving the quality of education at all levels of schooling (especially at the upper-secondary level) rather than expanding its quantity. Any impediments to SMEs’ growing large should be eliminated and firms with stronger potential for job creation should be allowed to outcompete those with weaker potential. Lastly, flexibility should be increased in the labor market to accommodate rapid structural changes in the economy.
Decomposition of Wage Inequality
2. Estimation of Wage Equations
3. Approximation of Percentiles with Quintile Averages
4. Results of the Decomposition of Levels
5. Results of the Decomposition of Changes
1. Theoretical Framework
3. Relative Demand, Relative Supply, and Relative Wage
4. Between- and Within-industry Change in Demand Shifter
5. Graphic Presentation of Changes
6. Explaining Within-industry Changes
2. Age and Firm Tenure
3. Establishment Size
4. Occupation and Industry
1. Main Findings
2. Policy Implications
3. The Future
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