The Dual Process of Korean Labor Market Transformation: Decomposing the Size-Wage Gap, 1982~2004

Abstract

This study aims to understand the nature of the structural change in the Korean labor

market by analyzing the wage gap between large firms and small to medium-sized firms

between 1982 and 2004. The result reveals that Korea experienced two historical moments

in which the size-wage gap surged: one in 1987, the year of mass labor strikes spurred by the

democratization movement, and the other in 1997, the year the Asian financial crisis began.

Whereas the first moment was a temporary phenomenon lasting only until the early 1990s,

the second moment led to a continuous wage-gap increase. The result of an Oaxaca-Blinder

decomposition of the wage gap shows that the factors contributing to the widening of the

wage gap since the economic crisis were different between the manual sector and the nonmanual

sector. For manual workers, the increase of the size-wage gap was mostly induced

by compositional effects, specifically the increased share of long-tenured workers in large

firms. For non-manual workers, however, it was a price effect. In light of the current debate

on the transformation of the internal labor market, we conclude that a corporate internal

labor market exists persistently, although reduced in size, in the manual sector, whereas the

corporate boundary is significantly weakened in the non-manual sector. This dual process of

labor market transformation, however, results in an increased size-wage gap in both sectors,

although for differing reasons.