The Wage Premium and Market Structure: The Case of South Korea and Taiwan
AbstractWe seek to understand why the difference between wages earned by skilled and unskilled labor, the so-called “wage premium”, varies across developing countries, using South Korea and Taiwan as empirical case studies. South Korea and Taiwan are both small developing countries with export-led economies that enjoy relatively high incomes compared to their Asian counterparts (excluding Japan). Between 1990 and 2000, Taiwan experienced a decrease in the wage premium, while South Korea remained the same wage premium. In particular, during that period, the wage premium fell from 67% to 25% in Taiwan, but remains around 44% in South Korea (Helms et al, 1999; Choi and Jeong, 2005); the trend continued through 2012 according statistics published by South Korean and Taiwanese Ministries of Labor. The existing academic literature offers several theories of how wage premia are determined. One strand of the literature attributes cross-country variation in the wage premium to differences in relative human capital factor endowments; another strand attributes it to differences in rates of skilled biased technical change; and a third strand attributes it to differences in the degrees of competition at the sectoral level (Leamer 1996; Feenstra and Hanson, 1997; and Krugman, 2001). However, none of these theories adequately explain differences in the wage premium observed between South Korea and Taiwan. Both countries have comparable relative human capital endowments (Guo, 2005), have traded heavily with the U.S. (U.S. census data), and have experienced substantial skill-based technical change over the past decade (Chan, 2005; Choi and Jeong 2005). The puzzling question is then: why is the wage premium in South Korea much higher than in Taiwan? In an effort to resolve the puzzle, we theorize that cross-country variation in the wage premium arises from differences in the degree of competition in markets for differentiated goods. Taiwanese firms are small and operate in a monopolistic competitive environment, whereas South Korean firms are larger and enjoy more government support (Feenstra and Hanson, 1993; Rodrik, 1994). In our paper, we explore whether these differences in market structure can account for the observed differences in the wage premium between the two countries. To understand the impact of competition on the wage premium, we build and analyze a general equilibrium model of two trading partners, one a small developing country with a relatively low skilled labor endowment and the other a large developed country with a relatively high skilled labor requirement. The trading partners produce and trade two types of goods, a homogenous good and a differentiated good, both of which are produced using two types of labor, skilled and unskilled. We analyze the model under different assumptions regarding the competitiveness of the differentiated good market and find that the wage premium in the developing country will be higher if the market for the differentiated good is characterized by oligopolistic competition rather than monopolistic competition. We then test the predictions of our theoretical model empirically. Specifically, we test the hypothesis that that wage premium is positively related to concentration measure. Due to the limitation of two different forms of data available to us — individual- and industry-level data — we employ the two stage regression method developed by Goldberg and Pavcnik (2003). In the first stage, we regress the wage premium on individual characteristics, industry dummies, an education variable and an interaction variable of education level and industry dummies; in the second stage, we regress the parameter estimated in the first stage against a measure of product market competition (i.e., the concentration ratio) and other control variables. To our knowledge, a cross-country level comparison on the influence of product market structure on the wage premium has not been undertaken for developing countries. We employ data from several sources. We use a panel of individual-level and industry-level observations over three distinct years drawn from several sources: the Taiwan Manpower Utilization Survey (TMUS), Academia Sinica (Taiwan), the Korean Labor & Income Panel Study (KLIPS), the OECD Structural Analysis database (STAN), and the U.S. Economic Census. Import and export data are taken from United Nations Commodity Trade Statistics Database and the International Economic Data Bank (IDEB). Data obtained from TMUS and KLPS are at the individual level and the data obtained from sources are at the industry level. We restrict our attention to trade between the Taiwan and the U.S. and between South Korea and the U.S. because for both countries, the U.S. is each country’s most important trade partner. Our analysis departs from the well-established factor endowment and skilled-based technical change literatures, providing a novel explanation that wage premium differences across developing countries differ due to market structure and market power under trade. Our study should provide ample fuel for thought for development economists and policy makers in developing countries who are interested in the impact of trade on economic growth and on the distribution of income among those living in developing countries.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Agricultural and Applied Economics Association in its series 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. with number 151292.
Date of creation: 2013
Date of revision:
Contact details of provider:
Postal: 555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202
Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.org
More information through EDIRC
Labor and Human Capital;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-05 (All new papers)
- NEP-LAB-2013-07-05 (Labour Economics)
- NEP-LMA-2013-07-05 (Labor Markets - Supply, Demand, & Wages)
- NEP-SEA-2013-07-05 (South East Asia)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lawrence F. Katz & Lawrence H. Summers, 1989.
"Can Interindustry Wage Differentials Justify Strategic Trade Policy?,"
in: Trade Policies for International Competitiveness, pages 85-124
National Bureau of Economic Research, Inc.
- Lawrence F. Katz & Lawrence H. Summers, 1989. "Can Inter-Industry Wage Differentials Justify Strategic Trade Policy?," NBER Working Papers 2739, National Bureau of Economic Research, Inc.
- Adrian Wood, 1995. "How Trade Hurt Unskilled Workers," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 57-80, Summer.
- Pabo Sanguinetti & Sebastian Galiani, 2003.
"The impact of trade liberalizationon wage inequality:Evidence from Argentina,"
Department of Economics Working Papers
011, Universidad Torcuato Di Tella.
- Galiani, Sebastian & Sanguinetti, Pablo, 2003. "The impact of trade liberalization on wage inequality: evidence from Argentina," Journal of Development Economics, Elsevier, vol. 72(2), pages 497-513, December.
- Sebastian Galiani & Pablo Sanguinetti, 2003. "The Impact of Trade Liberalization on Wage Inequality: Evidence from Argentina," Working Papers 65, Universidad de San Andres, Departamento de Economia, revised Oct 2003.
- Koujianou Goldberg, Pinelopi & Pavcnik, Nina, 2003.
"The response of the informal sector to trade liberalization,"
Journal of Development Economics,
Elsevier, vol. 72(2), pages 463-496, December.
- Goldberg, Pinelopi Koujianou & Pavcnik, Nina, 2003. "The Response of the Informal Sector to Trade Liberalization," CEPR Discussion Papers 3874, C.E.P.R. Discussion Papers.
- Pinelopi K. Goldberg & Nina Pavcnik, 2003. "The Response of the Informal Sector to Trade Liberalization," NBER Working Papers 9443, National Bureau of Economic Research, Inc.
- Kang-Shik Choi & Jinook Jeong, 2005. "Technological change and wage premium in a small open economy: the case of Korea," Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 119-131.
- Conte, Andrea & Vivarelli, Marco, 2007.
"Globalization and Employment: Imported Skill Biased Technological Change in Developing Countries,"
IZA Discussion Papers
2797, Institute for the Study of Labor (IZA).
- Andrea Conte & Marco Vivarelli, 2007. "Globalization and Employment: Imported Skill Biased Technological Change in Developing Countries," Jena Economic Research Papers 2007-009, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
- Al-Muharrami, Saeed & Matthews, Kent & Khabari, Yusuf, 2006.
"Market structure and competitive conditions in the Arab GCC banking system,"
Journal of Banking & Finance,
Elsevier, vol. 30(12), pages 3487-3501, December.
- Al-Muharrami, Saeed & Matthews, Kent & Khabari, Yusuf, 2006. "Market Structure and Competitive Conditions in the Arab GCC Banking System," Cardiff Economics Working Papers E2006/8, Cardiff University, Cardiff Business School, Economics Section.
- Nickell, Stephen, 1999. "Product markets and labour markets1," Labour Economics, Elsevier, vol. 6(1), pages 1-20, March.
- Head, Keith & Ries, John, 2002. "Offshore production and skill upgrading by Japanese manufacturing firms," Journal of International Economics, Elsevier, vol. 58(1), pages 81-105, October.
- Edward E. Leamer, 1996. "In Search of Stolper-Samuelson Effects on U.S. Wages," NBER Working Papers 5427, National Bureau of Economic Research, Inc.
- Robert C. Feenstra & Tzu-Han Yang & Gary G. Hamilton, 1993.
"Market Structure and International Trade: Business Groups in East Asia,"
NBER Working Papers
4536, National Bureau of Economic Research, Inc.
- Feenstra, R.C. & Yang, T.H. & Hamilton, G.G., 1993. "Market Structure and International Trade: Business Groups in East Asia," Papers 93-23, California Davis - Institute of Governmental Affairs.
- Nickell, S & Vainiomaki, J & Wadhwani, S, 1994. "Wages and Product Market Power," Economica, London School of Economics and Political Science, vol. 61(244), pages 457-73, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search).
If references are entirely missing, you can add them using this form.