Determinants of inter-industry wage differentials: a case of the Korean labor market

Abstract

In spite of the drastic changes in the economy and in the labor market, wage differentials across manufacturing industries have been persistent over the last 3a years in Korea. A two-step approach is adopted to analyze the sources of inter-industry wage differentials with special reference to unique features of the Korean labor market. In the first step, individual workers' earnings are regressed on the personal attributes, human capital factors and industry dummy variables. In the second step, the estimated coefficients of the industry dummy variables are regressed on the industry characteristics. Special attention is given to the effects of the industrial policies supporting targeted industries and the government intervention in the labor market on earnings in the manufacturing industries. Also, the effects of market power of a few large business groups (chaebôls) and the large influx of women and highly educated workers into the labor market are analyzed. The empirical finding shows that the amount of subsidized bank loans that is a proxy for the industrial policy and the average years of schooling of the industry have a positive effect on earnings. On the other hand, the large influx of female workers shows a negative effect on the earnings of female workers as well as other workers. In addition, the results of our analysis show that the effect of the proportion of workers employed in large firms in a given industry on earnings is insignificant. The evidence does not support the hypothesis of the positive effect of the market concentration on wages; nor does it support the hypothesis of the negative effect of the monopsonic restraints in the employment practice. In general, the results of our study support the proposition that the wage differentials that exist in Korea are products of both human capital characteristics and industry characteristics. In particular, industrial policy has been primarily responsible for keeping wage differentials persistent between the supported industries and the non-supported industries.