Author: Sun-Bin Kim(Yonsei University), Yongsung Chang(Yonsei University), Taesu Kang(Bank of Korea)

Abstract

It is now well-known that Korean labor markets are legally segmented into two tiers: one is for regular jobs and the other for non-regular jobs. Non-regular markets are characterized by lower wages and less restrictions on lay-offs. The expansion of non-regular jobs have two opposite impacts. It may reduce the labor costs and increase the total employment, while it may worsen the average welfare of workers which recently raise a major concern in Korean economy. This paper modifies the Mortensen-Pissarides matching model to evaluate the efficiency of the dual structure of the Korean labor markets. The quantitative analysis shows that non-regular jobs deteriorate efficiency but improve flexibility of the Korean labor markets. Policies that deteriorate the working condition of non-regular jobs, such as an decrease in the transition probability or an increase in lay-off probability, results in increases in job searchers and employments in the regular markets. As a result, the efficiency of the aggregate labor markets improves while the unemployment rate increases. Counterfactual labor market reforms that the dual labor markets are unified into a single market with non-regular jobs only or regular jobs only are also evaluated. Production, wages and unemployment rate are higher in the regular-jobs-only economy compared to non-regular-jobs-only economy.