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Prepared by Jacques Miniane. Particular thanks are due to Prof. Kyungsoo Choi of Korea Development Institute, both for his insights into the issue of income inequality in Korea and for sharing his data on Korea’s labor income Gini.
In keeping with the usual terminology in Korea, we will use the term “regular worker” to define someone under an open-ended salaried contract, and “non-regular worker” someone under a fixed-term contract.
In this paper we define social polarization as differences across individuals in terms of the precariousness of their jobs (permanent versus fixed-term contracts, full-time versus part-time, etc.), the security and predictability of their income, and their coverage under social insurance.
As quoted in Business Korea, March 2006, page 12.
Differences include the fact that the rise in inequality has been continuous in some countries (i.e., the United States), but has come in bursts in others (i.e., the United Kingdom, where inequality rose sharply in the 1980s and stabilized in the 1990s). Note that, while this paper concentrates on the trends in advanced countries, other authors have found that increases in inequality in regions such as Asia cut across countries’ income levels (see IMF, 2006).
Why this is so is not entirely clear, but one factor could be that severance payments—which on average are high in Korea—were substantially smaller for lower-wage employees. Note also that the seniority-based wage system then prevalent in Korea pushed many firms to fire older workers, for whom wage was substantially above their marginal productivity.
As IMF (2006) points out, Korea is the only Asian country where inequality rose during the financial crisis, perhaps because the other countries affected had much larger rural sectors, and the crisis predominantly hit the relatively affluent urban citizens.
Korea’s Gini coefficient computed by the National Statistics Office shows no trend increase since the crisis. The official Gini is computed based on total household income including severance payments, which are quite large in Korea. When one decomposes total income between regular labor income and others (including severance payments), a Gini based on the former shows a trend increase since the crisis, and a Gini based on the latter shows a strong trend decline. Adding the two explains why the official Gini has been relatively stable since 1998. Because severance payments are much larger in Korea than elsewhere, and because severance payments are very lumpy, a Gini based on labor income is more appropriate to compare trends in Korea with those in other countries.
It is also worth stressing that up to 2003 household income in Korea was sampled from salaried households only, thereby excluding the self-employed. This is key in a country where the self-employed account for a rising share of the labor force, a share now close to 30 percent. In this paper we generally exclude the self-employed in our calculations (unless specifically mentioned) in order to obtain longer series. Note that once the selfemployed are included the value of the Gini increases by some 15% percent.
Authors that do not subscribe to the view that SBTC has been the main driver of wage and income dispersion include Card and DiNardo (2002) and Lemieux (2006). In the particular case of the Unites States, these papers have argued in favor of institutional factors such as the real decline in the minimum wage, or changes in workforce composition, notably age and experience.
Examples of capital and skill complementarity are countless: think of the asset manager who can now track instantaneously the performance of a global portfolio with countless assets, or the top doctor who can consult in real-time on a far-away surgical procedure.
The skill premium is usually defined as the ratio of wages of college educated workers to wages of noncollege educated workers.
Skill-biased technological change and competition from low-cost countries need not be mutually exclusive explanations of the increase in inequality. To the contrary, they could be mutually reinforcing. Imagine that SBTC leads to greater polarization of work within services than within manufacturing. If so, competition from low cost countries could exacerbate the effects of SBTC by shifting labor from relatively egalitarian manufacturing into relatively polarized services. This hypothesis is only speculative, though.
This may be simply due to the fact that, in many countries in the sample, salaried employees accounted for less than 50 percent of total employment. But this is not true in Korea, and certainly not in the early to mid-1990s when inequality started rising.
The OECD has constructed harmonized measures of the Gini coefficient for most of its member countries, but unfortunately Korea is not part of the sample.
The calculation for Korea is based on the labor-income Gini, not the total income Gini.
This calculation is based on household income data from the National Statistics Office. Calculations using labor income data supplied by Prof. Kyungsoo Choi of Korea Development Institute show an 18 percent real decline for the bottom decile, and an 8 percent real decline for the second lowest decile. Bottom incomes have not fared well in the United States either, but the decline has been smaller than in Korea over this period despite lower overall economic growth.
To some extent, self-employment and part-time or fixed-term employment is the result of preferences. However, there is evidence, including for Korea, that much of it is not.
These figures are from the October supplementary survey to the monthly Economically Active Population Survey (EAPS) conducted by the National Statistics Office. The supplementary survey was first undertaken in 2002, and hence no data exists for earlier periods. The standard EAPS is longer dated, but its classification of workers between regular workers and non-regular workers can be misleading, in that workers with fixed-term contracts of one year duration or longer are classified as regular workers.
Note that, even after adjusting for relevant observable characteristics, these specifications do not control for unobservable but potentially relevant ones, nor do they easily control for the potential endogeneity of temporary work.
Not all regular employees are covered by social insurance, because many work in small enterprises that evade contributions.
OECD (2004) attributes only a moderately high value to Korea’s employment protection legislation on regular employment. But this is because, de jure, Korea has no legal provisions for monetary compensation in the case of dismissals. De facto, workers do receive severance payments. This being said, one should be careful when comparing these de facto payments with those in other countries (i.e., one should take the graph plotted above with a grain of salt). Severance payments in Korea are high because they are often in lieu of retirement benefits, which are paid to the dismissed worker in one lump sum. But the fact remains that high severance payments are a good proxy for the legal difficulty of dismissing workers discussed in the paragraph.
Some authors such as Kim (2002) have gone so far as to argue that layoffs of regular workers have become even harder after the reinterpretation of the LSA.
The fact that Korea now has a relatively liberal regime for fixed-term employment (OECD, 2004) only accentuates the perceived cost of permanent employment.
Pyo et al. (2006) also find that TFP growth has improved in services, being slightly negative before the crisis and slightly positive after.