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The Economic Effects of a Rapid Increase in the Minimum Wage: Evidence from South Korea Experiments

Author

Listed:
  • Taeyoung Doh
  • Kyoo il Kim
  • Sungil Kim
  • Hwanoong Lee
  • Kyungho Song

Abstract

South Korea raised the nationwide minimum wage substantially in 2018 and 2019, and the minimum wage rose from 53 percent of the median wage to 63 percent. While the minimum wage has been increasing steadily over decades, the rapid pace in 2018–19 was largely unexpected and driven by a sudden shift in the political environment. We study the economic effects of this minimum wage hike on employment, wages, and labor productivity using South Korean manufacturing firm data. To ensure that sector-specific factors do not drive our main results, we supplement our analysis with data sources covering the service sector. We find a significant negative employment effect of the minimum wage hike for 2018–19 compared with its modest increase in 2015–17, as the fraction of firms exposed to the minimum wage shock substantially increased and these firms adjusted to the shock through both intensive margins (layoffs) and extensive margins (plant closings). We also observe that labor productivity and wages increased more for firms with greater exposure to the minimum wage. Our empirical findings are consistent with a simple task-based production model emphasizing the substitution between labor of different skill levels.

Suggested Citation

  • Taeyoung Doh & Kyoo il Kim & Sungil Kim & Hwanoong Lee & Kyungho Song, 2022. "The Economic Effects of a Rapid Increase in the Minimum Wage: Evidence from South Korea Experiments," Research Working Paper RWP 22-13, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:94988
    DOI: 10.18651/RWP2022-13
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    wages; employment; labor; substitution;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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