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KDI Policy Forum
Wage Inequality: How and Why it has Changed over the Decades

August 22, 2019

  • Author Youngsun Koh
  • Series No. KDI Policy Forum No. 274 (2019-03), eng.
  • Language English
PDF
KDI Policy Forum
Wage Inequality: How and Why it has Changed over the Decades

August 22, 2019

  • Author Youngsun Koh
  • Series No. No. 274 (2019-03), eng.
  • Language English
PDF
    1. Changing Trends in Income and Wage Inequality

    2. Decomposition of Wage Inequality

    3. Changes in the Relative Labor Supply and Demand by Educational Attainment

    4. Discussion

    5. Policy Implications
KDI Report VOD
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.
■ From 1980 to 2016, Korea exhibited ups and downs in wage inequality and a slowdown in wage
growth.

- Wage inequality fell in the 1st phase (1980-1994), rose in the 2nd (1995-2007), and fell again in the 3rd (2008-2016).

- The annual growth rate of the real median wage plummeted from 9.2% in the 1st phase to 4.0% in the 2nd and then to 1.1% in the 3rd.

■ So far as wages are a form of compensation for the skills provided, wage inequality is affected by the changes in the supply of and demand for skills.

- An important indicator of skill is the educational attainment of workers. The demand for high-school graduates rapidly increased in the 1st phase, weakening the wage premium of college graduates and reducing wage inequality. The situation reversed in the 2nd phase with a sharp upturn in the demand for college graduates, in their wage premium, and in wage inequality. In the 3rd phase, the wage premium of the latter dipped again as their supply continued amid the subdued demand for them.

- The large demand for high-school graduates observed in the 1st phase may derive from the rising demand for mid-skilled workers by the heavy and chemical industry while the growing demand for college graduates observed in the 2nd phase may be the result of an increasing demand for high-skilled workers driven by technological progress.

■ To accelerate the wage growth while keeping wage inequality in check, technological progress should be encouraged and the quality of higher education upgraded.
 
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The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.

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