본문 내용으로 건더뛰기
Advanced search

Report VOD

Wage Inequality: How and Why it has Changed over the Decades
For more information
Wages can vary depending on the worker’s educational attainment, work experience, and other factors that affect his or her skill level.

Since the 1980s, the United States and other advanced countries have seen their wage inequality deteriorate due to the ever widening gap in wages.

It is widely believed that the problem is rooted in skill-biased technical change, or SBTC.

Specifically, the rapid pace of technological progress has demanded an increasing number of high-skilled labor.
The shortage of such workers has raised their wage levels and aggravated the wage gap between high-skilled and low-skilled workers.

During the past 40 years, Korea’s wage gap has exhibited ups and downs, following a different path from that of advanced countries. But why?

To answer this question, KDI examined how the wage gap has changed with a focus on educational attainment.

From 1980 to 1994, the wage gap continued to narrow, as
the brisk growth of the heavy and chemical industry bolstered the demand for mid-skilled high-school graduates. In comparison, the demand for high-skilled college graduates and low-skilled middle school graduates fell.

In this period, high-school education expanded rapidly, but could not meet the surging demand for high-school graduates, and the latter group’s wage levels rose relative to that ofcollege graduates. Meanwhile, middle-school graduates fell rapidly in number, helping the remaining members of this group to improve their position relative to high-school graduates’.

Under such circumstances, the wage gap was eased by the relative increase in the wages of high-school graduates and middle-school graduates.

From 1995, the development of ICT fueled the demand for college graduates.

However, supply was unable to meet demand, driving up the wages of college graduates.

Accordingly, the wage gap between college graduates and other groups began to widen.

Since 2008, the demand for college graduates has stalled, lowering their wages and serving to alleviate the wage gap.

In a sense, the easing of wage inequality lies with the downward convergence toward lower evels of wage across different educational attainments.

The downturn in the demand for college graduates seen during this period may be due to the slowing of SBTC.

Korea’s wages exhibited a sharp increase from the 1980s to the mid-1990s, after which, the upward trend tapered off. In particular, following the global financial crisis of 2008, the growths of the median wage and the top 10th percentile wage came to a virtual standstill, leading to a downward convergence toward lower levels of wages.

To ensure an overall rebound in wage growth, focus must be placed on enhancing productivity and multi-faceted efforts must bee made toward deregulation, industrial restructuring, and the dismantling of vested interests.

Unfortunately, rising productivity may be accompanied by exacerbating wage inequality. To mitigate this possibility, efforts are also needed to improve the quality of higher education and to strengthen redistribution policies.

VOD 10results

  • For more information
    □우리 경제는 내수와 수출의 개선이 제한적인 수준에 머물면서 2020년에 2.3% 내외의 성장률을 기록할 전망임

    ○ 소비자물가는 수요가 일부 개선되겠으나, 기대인플레이션이 하락하는 가운데 정부의 복지정책도 확대되면서 0%대 중반의 낮은 상승세를 지속할 전망임

    ○ 실업률은 완만한 경제성장세 확대와 정부 일자리정책 등의 영향으로 2019년 보다 낮은 3.5% 내외를 기록할 것으로 예상됨
  • For more information
    Wages can vary depending on the worker’s educational attainment, work experience, and other factors that affect his or her skill level.

    Since the 1980s, the United States and other advanced countries have seen their wage inequality deteriorate due to the ever widening gap in wages.

    It is widely believed that the problem is rooted in skill-biased technical change, or SBTC.

    Specifically, the rapid pace of technological progress has demanded an increasing number of high-skilled labor.
    The shortage of such workers has raised their wage levels and aggravated the wage gap between high-skilled and low-skilled workers.

    During the past 40 years, Korea’s wage gap has exhibited ups and downs, following a different path from that of advanced countries. But why?

    To answer this question, KDI examined how the wage gap has changed with a focus on educational attainment.

    From 1980 to 1994, the wage gap continued to narrow, as
    the brisk growth of the heavy and chemical industry bolstered the demand for mid-skilled high-school graduates. In comparison, the demand for high-skilled college graduates and low-skilled middle school graduates fell.

    In this period, high-school education expanded rapidly, but could not meet the surging demand for high-school graduates, and the latter group’s wage levels rose relative to that ofcollege graduates. Meanwhile, middle-school graduates fell rapidly in number, helping the remaining members of this group to improve their position relative to high-school graduates’.

    Under such circumstances, the wage gap was eased by the relative increase in the wages of high-school graduates and middle-school graduates.

    From 1995, the development of ICT fueled the demand for college graduates.

    However, supply was unable to meet demand, driving up the wages of college graduates.

    Accordingly, the wage gap between college graduates and other groups began to widen.

    Since 2008, the demand for college graduates has stalled, lowering their wages and serving to alleviate the wage gap.

    In a sense, the easing of wage inequality lies with the downward convergence toward lower evels of wage across different educational attainments.

    The downturn in the demand for college graduates seen during this period may be due to the slowing of SBTC.

    Korea’s wages exhibited a sharp increase from the 1980s to the mid-1990s, after which, the upward trend tapered off. In particular, following the global financial crisis of 2008, the growths of the median wage and the top 10th percentile wage came to a virtual standstill, leading to a downward convergence toward lower levels of wages.

    To ensure an overall rebound in wage growth, focus must be placed on enhancing productivity and multi-faceted efforts must bee made toward deregulation, industrial restructuring, and the dismantling of vested interests.

    Unfortunately, rising productivity may be accompanied by exacerbating wage inequality. To mitigate this possibility, efforts are also needed to improve the quality of higher education and to strengthen redistribution policies.
  • For more information
    In an aging society there are 7 seniors out of every one hundred people, while an aged society has 14 and a super-aged society has 20.

    Korea is expected to enter a super-aged society in 2026.

    In fact, at the current pace of aging, Korea is on track to become a super-aged society 10 years faster than Japan.

    In terms of the working-age population, Korea’s 65-plus population will grow 1.7 times faster than Japan from 2015 to 2050.

    And the share of the senior population will equal that of the working population in 2050.

    So, what are the economic repercussions of a rapidly aging population?

    KDI conducted an analysis based on the labor force participation rate by age group in 2017,
    assuming 3 scenarios to estimate the economic growth rate for the coming three decades.

    Firstly, assuming that the labor force participation rate remains unchanged during the period,
    the economic growth rate will average 2.0% in the 2020s and 1.0% in the 2040s.

    Next, taking into account Korea’s lower employment rate for women than for men, estimates were made for the growth in the participation rate of women.

    For this, Sweden’s employment structure, which has a small gap between men and women, was applied.

    However, the results showed that the economic growth rate declined.

    Growth trends again failed to improve when the employment structure of Japan, who underwent population aging before Korea, was applied.

    The reason for the lack of improvement is because the number of retirees far outnumbers that of the working population.

    As a result, even a high participation rate is inadequate to offset the decline in the labor supply.

    Accordingly, unless significant improvements are made in productivity through measures to expand the substitute labor force, which includes women and young people, efforts to counter population aging will remain limited.

    Additionally, the results revealed that in order to ease the downtrend in economic growth,
    the labor participation rate of women must be at a similar level to Sweden and that of men to Japan’s while the senior participation rate is at Korea’s level.

    The involvement of the senior population in economic activities will not only ease the decline in economic growth but also reduce the dependency ratio, serving as an effective countermeasure to population aging.

    [Interview with the author]
    The most effective means in terms of responding to population aging is utilizing the senior labor force. And, there are many prerequisites for this, including overhauling the retirement age system and adjusting the wage system.

    In addition, we must move away from the social norms of perceiving the over 65s as dependents or surplus. A new life cycle must be established for the senior generation, and the population should be granted opportunities and roles to productively contribute to society.

    It is true that compared to the quantity, the quality of Korea’s senior labor market remains subpar.

    However, the baby boomers who will soon retire are far more educated than the preceding senior generation. As such, their employment and their productivity in the senior labor market is also expected to increase. In particular, policy efforts must be ramped up in terms of providing vocational training and lifelong education programs to assist those looking to change careers later in life.
  • For more information
    Generally, the economic growth rate is calculated using the real GDP growth rate, which fixes prices to look at the changes in volume.

    This differs from the nominal GDP growth rate, which reflects the changes in prices and represents the value amount.

    Nominal GDP is an important economic indicator as most aspects of everyday life, for example, income, loan repayments, government budget, etc. are all expressed in terms of the amount, and not volume.

    This discrepancy between the nominal and real GDP is called the GDP deflator.

    Like the core and headline CPI, the GDP deflator is an indicator for the changes in prices and shows the GDP price level.
    This is due to the growth in the GDP deflator, but why?

    The results of KDI’s analysis on the GDP deflator using consumption, investment, export and import reveals that

    while consumer and investment prices have been relatively stable,
    there was considerable volatility in export and import prices.

    Specifically,
    international oil and semiconductor prices, exchange rates and aggregate demand pressure are some of the factors that influence the growth in the GDP deflator.

    Since 2015, international oil prices have become the main source of volatility.

    In 2015 and 2016, the GDP deflator rose on the back of falling oil prices and a rising exchange rate.

    In 2018, the GDP deflator reversed to a decline due to rising oil prices and a falling exchange rate in the first half and rising oil prices and falling semiconductor prices in the second.

    Based on these results,
    the outlook for the GDP deflator in 2019 shows that
    if the decline in demand eases and oil prices remain flat while semiconductor prices maintain the downtrend of 20%, the GDP deflator will mark 0.1%.

    However, if demand remains sluggish and oil prices rise while semiconductor prices fall, the GDP deflator will stand at –0.2%.

    Finally, if there is a rebound in demand, oil prices fall and semiconductor prices show a rapid recovery within the year, the GDP deflator will post 0.4%.

    The growth in the GDP deflator growth is expected to remain low as the downtrend from last year is expected to continue while semiconductor prices continue to fall.
  • For more information
    Korea’s economic growth rate dropped to a yearly average of 3% in the 2010s, raising concerns over growth potential.

    The economic growth rate is an indicator for the growth in the sum of all products and services that are produced by a country.

    As total output is determined by labor, capital input and productivity, we are able to see the contribution rate of each factor to economic growth.

    Accordingly, KDI conducted an analysis of the contribution of production factors to the decline in economic growth.

    It was found that there were no meaningful changes in labor input while a slowdown was seen in physical capital and total factor productivity or TFP.

    Declines were also evident in these two factors in the per capita economic growth rate, implying that the value-added created by and the labor productivity of an individual has also dropped.

    The decline in physical capital contribution is often seen when an economy reaches maturity.

    In Korea, this means that the downtrend in TFP growth was the major driver of the fall in growth, and not that investments have stagnated.

    Then, why is productivity growth falling?

    Improvements in the determinants of total factor productivity i.e systems, efficient resource allocation, education and human capital among others may have slowed.

    On the other hand, the fall in external demand resulting from the slow growth in international trade following the global financial crisis may have been a contributing factor.

    In fact, since the financial crisis, Korea’s goods export has declined and the growth in labor productivity, especially manufacturing, has deteriorated significantly.

    The IMF concluded that the fall in growth suffered by the majority of countries following the global financial crisis propelled the fall in growth potential. It also expects that it will take a considerable amount of time to return to pre-crisis levels.

    Due to such conditions in the world economy, it is hard to expect that Korea’s labor productivity will swiftly respond to a recovery in external demand.

    Based on the analysis, it is expected that Korea’s growth rate in 2020 will mark a high 1% if conditions remain the same, and a low-to-mid 2% if there is an uptick in productivity on continued innovation.

    The economic growth rate per capita is also expected to stand between a high 1% to a low-to-mid 2%.

    (Interview with the Author)
    The growth of Korea’s economy is expected to decelerate even further in 2020 considering the population aging factor. Responding to the falling growth trend with active fiscal policies could be effective in the short-term, but a recurrence will place a strain on government finance. If efforts were concentrated on enhancing productivity, the decline in the growth rate could be eased in the long-term. From a institutional or resource-allocation perspective, Korea still has sufficient room to improve productivity.
  • For more information
    Household debt poses a serious risk to the Korean economy.

    Advanced economies have shown for the past 130 years that an excessive growth of private loans leads to longer and more severe recessions.

    The significance of financial stability has become widely recognized since the global financial crisis, and has led many countries to strengthen their macro-prudential management to avoid excessive loan-taking.

    After the global financial crisis, the majority of OECD countries adjusted their household debt ratios.

    In Korea, however, household debt has doubled in size, despite the countless warnings and government actions, and the risks are snowballing.

    So, why have past policies failed to contain the situation?

    Macro-prudential policies can enhance social welfare through financial stability, but this requires a long-term effort.

    And because the policies restrict excessive amount of loans to reduce the risks of financial instability, it is difficult to gain public support during recessionary periods when production and employment are low.

    They also generate resistance from interest groups due to their impact on the loan and real estate markets.

    It may be theoretically shown that, the more policy makers are fixated on the short-term outcomes, the more likely they are to choose stimulus packages that entail excessive debt, despite their concerns over financial instability.

    On the other hand, those who prioritize long-term gains will select macro-prudential policies that sustain financial stability rather than short-term stimulation of the domestic demand.

    The pursuit of short-term gains is exacerbated by Korea’s short election cycles, with important elections occurring every one to two years.

    In fact, after the global financial crisis, decision-makers ignored the warning signs about the state of household loans, and adopted not only monetary and fiscal policies but also stimulus measures that would ease loan regulations in the hopes of reviving the economy in 2014.

    Given the high preference for short-term results, it would be difficult to effectively pursue macro-prudential policies to achieve financial stability.

    (Interview with the author)
    In order to improve the macro-prudential management system,
    institutional mechanisms must be put into place to prevent the horizon of decision-makers from narrowing. In the UK, the central bank is guaranteed independence as the enforcer of macro-prudential policies which deters tendencies to focus on the short-term gains. In the case of Australia and Canada, a separate financial supervisory institution implements such policies with the openness and transparency of the decision-making process. Taking a cue from these countries, the independence and accountability of the institution that implement macro-prudential policies in Korea must be strengthened by guaranteeing tenure and adopting an evaluation and compensation system for top decision-makers to encourage them to pursue the longer-term benefits.
  • For more information
    Retired financial regulators often find their way to executive positions in the private sector.

    To explain the economic impact of such a practice, also known as “revolving door,” there are two hypothesis.

    The first looks at the practice from a positive perspective, explaining that by hiring ex-regulators as executives, financial firms can utilize their expertise and experience to improve financial soundness.

    The other takes a more negative stance, speculating that financial firms can use the ex-regulators’ connections to unjustly avoid being penalized by the financial authorities.

    So, does this really happen?

    To answer this question, KDI empirically analyzed the economic impact of ex-financial regulators joining private firms.

    Firstly, an examination was conducted into whether ex-regulators actually contribute to the performance and improvement of the firms’ financial risk management.

    Based on data of ex-regulators hired by financial firms from 2011 to 2017, The analysis revealed that there were no discernable changes within the first three months of appointment,

    and while those from the Bank of Korea contributed somewhat, the remaining ex-regulators did little to improve the hiring firms’ financial risk management.

    Next, an analysis was conducted to see whether the probability of a firm being penalized by the financial authorities changed after the appointment of an ex-regulator.

    It was found that for firms whose executives had previously served in the FSS, the probability of regulatory action dropped by roughly 16% in the first 3 months.

    This is much higher than when firms tried to curb the probability by reducing their non-performing assets.

    Nevertheless, the analysis also revealed that this advantage disappears during the following three months.

    Then, does the probability of regulatory action decrease because ex-regulators reduce non-financial risks such as personal information leaks?

    An examination into whether there were, in fact, changes in the management of operational risks while the probability of regulatory action diminished found no such changes.

    That is, the probability of regulatory action decreased despite the lack of improvements in the financial soundness of firms after the appointment of an ex-regulator.

    In the US, where there are also many such cases, there were clear improvements in the firms’ financial performance while there was little change in the probability of regulatory action.

    So, why is there a discrepancy between Korea and the US?

    The answer lies in the fact that the US’ financial supervisory system has a decentralized structure while Korea’s is centralized and within which the majority of duties tied to financial supervision is undertaken by a single institution.

    Indeed, if the authority was granted to numerous institutions, it would create the necessary checks and balances which, in turn, would make it difficult for financial institutions and private firms to collude.

    Also, from the firms’ point of view, it would make it more difficult to form ties with a large number of regulators.

    [Interview with the author]
    (Keeyoung Rhee, Fellow at KDI)
    If the current financial supervisory system itself incentivizes improper practices, a shift to a decentralized supervisory structure can be discussed. But, such a process is expected to entail substantial economic costs, so we also need to seek measures to reinforce the accountability of the supervisory authorities while maintaining the centralized system.
    For example, the government can establish an information-sharing mechanism wherein all regulatory agencies have free access to the information on the risks of financial firms, which is mainly held by the FSS in the current system.

    (Sunjoo Hwang, Fellow at KDI)
    This study is meaningful in that it analyzes the economic impact of the revolving door practice, which has long been subject to criticism. However, there are limitations and while we were able to fully use the data avaliable, we still lacked information in certain areas. One example is the operational risk indicator in relation to the financial supervisory regulations, which was used in this study. However, the indicator is limited in fully capturing the non-financial risks of financial firms. Therefore, following studies should collect further data to analyze the effects in more detail.