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Development Overview

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Overview of Korea’s development experience

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Development Overview
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Employment

First turning point

Over the last 60 years, there were three notable turning points in the Korean labor market. The first of these occurred in the mid-1970s when the world of unlimited labor supply as described by Lewis (1954) came to an end (Moo-Ki Bai, 1982). During the first phase of economic development from the 1960s to the mid-1970s, a significant amount of the underemployed labor force was in rural areas and manpower continued to flow in a steady stream into urban areas. The economic powerhouses at this time were labor-intensive industries such as those producing wigs and shoes that only required simple, low-skilled labor. This type of labor was readily supplied by vocational high schools and the corporate training centers of large enterprises.

Figure 6-13. Unemployment rate


As the unemployment rate declined rapidly from 8 to 4 percent (Figure 6-13), however, the seemingly unlimited labor supply began to dry up, signaling the end of the Lewisian world. In the second half of the 1970s, the transformation of the economy to one based on heavy and chemical industries (HCIs) somewhat lowered the growth elasticity of labor demand in the manufacturing sector. But this was countered by the increased demand from the construction sector that experienced booms in the domestic market and in the Middle East. The shortage of construction labor actually led to steep wage hikes in this sector (Figure 6-14). Overall wage growth outstripped output growth by a large margin in 1976-1978 (Figure 6-15).

In 1980, the economy, and the labor market in turn, entered difficult times due to a combination of factors including the second oil shock, rice crop failures and political instability. The unemployment rate shot up to 5.2 percent and stayed above 4 percent throughout the first half of the 1980s. HCIs in particular had to go through restructuring in this period. Nonetheless, the economy was able to regain its balance before any irreversible damages were done to the labor market thanks to its high wage flexibility.

Figure 6-14. Growth of unit labor costs



Figure 6-15. Growth of wages and output

Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.

References

· Bai, Moo-Ki,“ Structural Changes of the Korean Labor Market,” Journal of Economics, Vol. 21 No. 1, Seoul National University, 1982, pp.571-621 (in Korean).

 

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