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Report VOD

Wage Inequality: How and Why it has Changed over the Decades
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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 12results

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    ○ 우리 경제는 2020년에 민간소비와 수출이 큰 폭으로 위축되며 0.2% 성장한 후, 2021년에는 양호한 회복세를 나타내며 3.9% 성장할 전망임.

    ○ 소비자물가 상승률은 기대인플레이션의 하락세가 지속되는 가운데, 경기 위축과 유가 하락 등이 겹치면서 2020년에 0%대 중반을 기록하고, 2021년에도 0%대 중후반의 낮은 상승률을 지속할 것으로 예상됨.

    ○ 취업자 수는 대면접촉이 많은 서비스업에서 발생한 충격을 정부정책이 부분적으로 보완하면서 2020년에는 2019년과 유사한 수준을 유지한 후, 2021년에는 고용 부진이 완만하게 회복되며 20만명 정도 증가할 전망임.
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    □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
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    For the first time ever,
    Korea’s consumer prices fell to negative territory.

    The price drop was especially noticeable in products
    that are affected by temporary shock factors
    such as agricultural and petroleum products.

    In fact, when these two product categories are excluded,
    the inflation rate stands above 0%.

    This implies that a rebound is possible when the impact of temporary factors fades.
    It also means that there will be little chance of deflation.

    Then, why are we seeing a continued decline in the inflation rate in
    2019?

    To answer this question, KDI conducted an analysis on
    the causes of disinflation from a supply and demand perspective
    based on the fact that two-thirds of all product categories
    experienced a disinflation.

    In terms of supply,
    when lower production costs drive down prices and inflation,
    production and consumption are driven up
    and economic growth is positively affected.

    On the other hand, in terms of demand,
    when consumers tighten their purse strings,
    sales and prices are driven down
    and economic growth is negatively affected.

    Accordingly, as the growth rates for inflation and the economy both fell in 2019,
    it can be concluded that the cause of this year’s disinflation
    is rooted more in demand than supply.

    When global trends are examined,
    it is revealed that while major countries have seen
    their inflation rate bounce back since the global financial crisis,
    Korea’s rate continues to spiral down.
    Indeed, Korea’s disinflation is spurred by short-term factors
    such as the temporary fall in agricultural and petroleum product prices
    and the downturn in the mid- to long-term trend.

    This implies that the inflation rate could temporarily fall below 0%
    even on general shocks in supply and demand.

    So, can the long-term inflationary trend be controlled with monetary policies?

    (Interview with the author)
    The long-term trends in the inflation rate are determined through monetary policy. However, the current management system restricts these policies from focusing on price stabilization due to an article which stipulates that attention must also be given to fiscal stability.

    In fact, despite the low inflation rate and stagnant economy, the monetary authority decided to raise the base rate last November in consideration of fiscal stability which includes household debt.

    Because price stabilization cannot be achieved through any other policy than monetary policy, a reexamination of the management mechanism is needed to stop the continued downturn in prices.
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    “Has this place changed again?”
    “Another chicken place?”
    “How many franchises are there on this street?”

    Conflicts between franchisors and franchisees are growing.

    To examine the causes, KDI conducted an analysis of the relationship between the contract conditions and conflicts.

    Firstly, the results revealed that franchisees paid an average of 120 million won in setup costs to the franchisor―half for the interior and half for other costs that include franchise and training fees and the deposit, among others.

    In terms of the interior, franchisors have come under fire for forcing franchisees into contracts with specific firms in order to secure the revenue from the rebate.

    Franchisees are, of course, allowed to chose their own interior design firm but the high supervising fee that is demanded by the franchisor means that there is little or no cost-saving.

    Additionally, if interior costs become a main source of revenue for a franchisor, the focus is placed on increasing the number of stores rather than helping franchisees with their sales.

    Franchise fees are a reflection of a brand’s reputational capital, and generally increase with the number of stores and number of years in business.

    It was found that franchisees experienced a rise in sales as the fee increased in line with the amount of knowhow and prestige transferred.

    Next, an examination was conducted on the monthly royalty payments that are paid after a store opens.

    Seven out of ten franchisor stores entered a royalty contract during the analysis period, and the majority were fixed-sum, which is not contingent on sales figures, than a fixed-percentage.

    Often, franchisors would entice franchisees into a purchase contract for raw materials and equipments with royalty discounts.

    But, it was found that the bigger the discount, the higher the intial royalty fee was, necessitating a closer examination of whether such discounts are actually effective.

    In terms of the effect royalties have on sales, the fixed-percentage, which encourages more active assistance from the franchisor to franchisee, had a positive impact while no significant impact was found for the fixed-sum royalty.

    Finally, on an investigation of closed territories, the analysis discovered that the wider the territory, in which a store would have monopoly, the higher the sales would be.

    Then, how do contract conditions affect the sales and operating profits of either party?

    A rise in the franchise fee and royalty contributed to the sales and profits of franchisors and the sales figures of franchisees, but not thier operating profit.

    In addition, a rise in the number of stores and competition led to higher costs in relation to sales.

    Contract conditions had a contradictory effect for the parties, ultimately resulting in conflict.

    Meanwhile, while the sales and operating profits of franchisees increased with the growth of a closed territory, thanks to more customers, that of the franchisor’s decreased due to the limitation on the number of stores.

    Based on the above findings, it is expected that the heated debate over closed territories will continue.

    [Interview with the author]
    In order to succeed in the franchise business, franchisors must have first-hand experience in the market. Regardless, 60% of franchisors do not have directly-managed stores which means that numerous business risks could be transferred onto franchisees. Franchisor’s should be made to clearly disclose their experience operating stores to enable entrepreneurs to chose a brand wisely. Regarding the franchise contract, the usage of the fixed-percentage royalty should be expanded. To make this possible, a data-processing infrastructure is needed so that franchisors are able to gain a fuller understanding of their sales.

    Also, items that do not fit in with the uniformity of the product should be excluded from the purchase agreement by establishing clear guidelines on what the essential items are.

    And, with the exception of the basic logistical costs, additional margins should be included in the royalty rather than the purchasing price.
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    Korea saw a sharp increase in the housing supply from 2015 to 2017.

    An analysis by KDI reveals that during the past 30 years,
    the housing supply has exhibited rapid recurring up- and downturns
    every 4 to 5 years.

    Homes in Korea are generally supplied via construction
    and designation of residential sites,
    following a time gap through apartment pre-sales.

    And because residential sites are intensely sold by
    the government during specific periods,

    and because construction firms wait, sometimes long periods,
    until conditions in the housing market improve to start construction,
    the housing supply can be highly volatile.

    Construction firms are able to execute their projects on
    large-scale apartment complexes using the funds
    they obtain through down and intermediate payments from apartment pre-sales.

    In addition to the supply side, demand-side factors
    such as low interest rates and loan regulations are
    also driving the rapid increase and decrease in the housing supply.

    Problems arise when new unsold housing supply grows
    on the back of rapidly increasing household supply
    and then reverses to a rapid decline again.

    In fact, the surge in the housing supply in 2007
    left a huge number of new housing unsold two years later.

    In the process of resolving these problems,
    many construction firms suffered from bankruptcies
    despite their cutting of pre-sale and sale prices.

    And, this in turn severly weakened the soundness of
    the financial industry with numerous savings bank-branches suspending operations.

    According to the analysis results,
    a 10% increase in the number of pre-sale homes would ramp up
    the number of unsold new homes by an estimated 3.8% three years later.

    It is expected that due to the surge in the housing supply from 2015 to 2017,
    30,000 new homes will remain unsold by 2020,
    again raising concerns over the financial soundness of
    the financial industry and construction firms.

    Moreover, the housing market will also be adversely affected.

    In 2019, provincial areas in particular saw their jeonse prices fall.

    If this trend continues, a situation in which
    lessors are unable to return deposits due to
    the fall in jeonse prices,
    known as a reverse-jeonse phenomenon, is expected

    (Interview with the author)
    Korea’s housing market has surpassed the growth stage and entered the mature stage.

    The housing supply ratio has exceeded 100% and in preparation for the increase in single-person households and an aging population, a demand-centric, rather than a large-scale, provision of housing is needed.

    Also, construction firms should be bound by a higher equity burden and supplementary systematic measures are needed to strengthen the responsibility of financial institutions.
  • 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
    Can we send our children to child care centers without having to worry?

    (Interview with the author)
    Children should be able to attend quality child care centers
    regardless of the region they live in or their economic background.
    This study examined the operations and evaluation systems of child care centers in Norway and the Netherlands, and the direction of their early childhood education and care (ECEC) service programs to discover specific measures that would provide each individual child with high-quality child care.

    Firstly, measures should be sought to enable parents to substantially contribute to the operations of child care centers.

    Currently, parents are able to participate in the efforts to improve center operations and programs through the centers’ operations committee. But, their roles are limited.

    As in the Netherlands and Norway, parents in Korea should be allowed to observe their children’s time in care at any time.

    And, budget execution in terms of meal balance, teacher placement and program implementation, among others, should be made transparent.

    This will give parents the opportunity to present their suggestions and give them a tangible role in improving the quality of care for their children.

    In addition, center evaluations should be detail-oriented to encourage centers to seek improvement measures on their own accord.

    The use of ambiguous terminology under the current evaluation system, for example, ‘high level’ and ‘fairly good,’ makes it difficult for teachers to grasp what they need to change.

    Therefore, reports must be drawn up with specific details on the field inspector’s observations, similar to the Netherlands.

    This will not only help centers to upgrade their operations and teachers to enhance their capabilities, but parents will also be able to use the reports to gain deeper insight into their children’s wants and needs.

    The leadership of the center head should be evaluated on whether there is sufficient communication and agreement between the head and teachers to enable standards to be maintained in the classroom.

    A breakdown in communication can widen the gap between teachers’ abilities, and inspectors will be able to spot this discrepancy.

    If teachers are exhibiting varying abilities in their performance, center heads should be provided with manger support programs to enable them to support the development of the faculty.

    Finally, the direction of care and education at child care centers must be compatible with the demands of future society.

    As parents’ participation in centers operations becomes more active, more demands could be made in relation to the children’s acquisition of knowledge.

    However, teachers must design their programs, through discussions with parents, to support the children’s desire to self-learn and to enable them to maintain this enthusiasm throughout their lives.

    For example, teachers should insert the children’s own experiences into their programs to enable them to talk about their observations and thoughts and expand their curiosity.

    Through such methods and discussions with teachers, parents will be able to gain more information on their children’s interests.

    They will also be able to apply such techniques at home and help their children develop other interests.

    If any extra costs are incurred while designing programs to fit the children’s interests, parents can decide to raise the fees through negotiations with the operations committee.

    Also, the government could provide differentiated support based on the parents’ income level.

    By guaranteeing parents’ participation and improving the capabilities of teachers, every child wil be able to receive the care and education that is needed to support and encourage their learning. This in turn will enhance the quality of child care centers and ease the concerns of parents.
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    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.
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    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.
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    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.
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    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.
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    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.