Mind the (Wage) Gap: The Large Firm-SME Divide and Delayed Labor Market Entry for Young Adults in South Korea

This study examines the relationship between South Korea’s dual labor market, the divide between large firms and small and medium-sized enterprises (SMEs), and the increasingly delayed entry of young people into the labor market. As the working-age population shrinks and mismatch widens, the inefficient use of available labor has become a long-term social concern. Delayed entry into the workforce gives workers less time to accumulate skills and experience, eroding human capital and, in aggregate, the skill level of the entire workforce. Drawing on recent administrative data, the analysis shows that large firms have steadily accounted for about 12 percent of all regular wage workers (excluding temporary workers and day laborers), while the SME share now sits around 39 percent. Although on aggregate, the ratio of average SME wages to average wages at large firms has improved over the past ten years, climbing from 0.43 in 2015 to 0.49 in 2024, in nominal terms the monthly wage gap grew from KRW 2.98 million to KRW 3.65 million3), so workers are likely to perceive the gap as having widened, rather than narrowed. The labor market has also grown more rigid: workers are likely to stay in their current positions, entries and exits have declined, and moving from an SME to a large firm is almost unheard of; at most, just five to six percent of workers in their twenties (the most mobile cohort) do so. Empirical results indicate that the widening of the wage gap between large firms and SMEs is associated with delayed entry into workforce, and that the effect of the rigid, dual structure of the market on the supply of young adults’ labor supply carries a lag. Given the current wage gap, four-year university graduates are estimated to defer graduation by about one month, and labor market entry by about 3.6 months. Because the structure of the labor market appears to be a quasi-permanent feature of the Korean economy, this study argues for the introduction and continuous, permanent operation of support policies that raise the real wages of young SME workers through direct support to individuals, rather than to firms. The author argues that the permanence of such programs would incentivize long-term employing planning by both young workers and firms.