Industrial Policy, Rise of Skilled Labor, and Firm Growth in the Early Stage of Economic Development

This paper examines the role of education policy in raising specific human capital for industrialization during the period of economic miracle in Korea. As part of the Heavy and Chemical Industry (HCI) drive, the Korean government built technical schools near industrial complexes, resulting in a prompt supply of skilled labor. With practical curricula and training, young and skilled workers were able to enter the new sector. We also document these two patterns by using the Technical School List and the Occupational Wage survey. This government-led education reform led to higher firm-level productivity and growth, which is one of the important aspects explaining the success of the industrial policy. Motivated by historical evidence, we combine the administrative Mining and Manufacturing survey with the Technical School List to study the effectiveness of industry-oriented education reform. We incorporate an education layer into the targeted industries under the HCI drive by exploiting the variation in technical school openings at the county level. Our results show that plants in treated regions tend to employ and invest more than those in control regions, but value-added and labor productivity are negatively correlated with our interaction terms. This implies that firms in HCI sectors experienced disproportionate growth and should pay higher on-the-job costs for workers while education reform may reduce the overall cost of hiring industry-specific labor. In contrast, non-HCI sector firms exhibit a positive correlation with value added and labor productivity. These firms might benefit from the education reform that improved overall quality of skilled workers. Lastly, the effect of education reform was concentrated before the end of the HCI drive period and did not persist after 1980. In the era of emerging industrial policy, our paper presents a new mechanism that encourages more workers to enter a new sector targeted by government-led plans. Our results serve as a starting point for re-evaluating contemporary industrial policy and underscore the need to consider this additional layer in future policy design.