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The Impact of Changes in Manufacturing Wages on Productivity and Prices

Author Oh, Jongseok et al Date 2018.12.20 Page

Income inequality in Korea began worsening since the East Asian economic crisis in 1997, before widening to even more worrying levels in the 2000s. This trend eventually prompted the current government to implement an income-led growth policy to recover reduced wage share and to achieve higher economic growth. Since wage increases can affect other components in the wage share, for example labor productivity and prices, this paper investigates the eventual effect of wage increases in manufacturing, considering this endogeneity in the wage share.


Growths of real wages and labor productivity have decoupled since the East Asian economic crisis and growth in labor productivity

dropped markedly after 2010. This tells us that the most urgent problems confronting Korean manufacturing are reducing the gap

between real wages and labor productivity and at the same time reviving labor productivity. Among the results of an empirical analysis, it is noteworthy that the positive impact of wage growth on labor productivity growth is much greater and significant than that of the reverse, which can imply the possibility of a restored virtuous circle between wages and productivity through that channel. However, it is also noteworthy that employment responds negatively to changes in wages and productivity, which can be ascribed to the rapid application of automation in the production process. The government should implement a policy supporting the creation of decent jobs in new industries to minimize the negative externalities of workforce redundancy.


Although the unit labor cost in Korea written in the local currency has increased secularly, the unit labor cost deflated by the PPP

exchange rate showed a reduction and as of 2016 had not fully recovered to mid-1990s levels. The result of an analysis of the

determinants of manufacturing markup using the industry-level data shows that the influence of the wages is not so important compared to the other causes, such as the prices of the intermediate goods and capital. In addition, the results of our firm-level analysis show no strong evidence for the negative impact of increased wages on exports. These all imply that the market power of Korean manufacturing industries has been consolidated and Korean exporting firms now rely more on non-price competitiveness. 


Considering this endogeneity in the wage share, policymakers could set a rise in the wage share as a long-run policy target while they adjust the speed of wage increases to control its short-run impact on employment and exports. In addition, from a long-run perspective, the government could seek to influence other labor market-related institutions in ways that stimulate private manufacturing wages. Lastly, this wage policy should be implemented alongside sister polices calling for innovation-driven growth and a fair economy?.