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BOK Working Paper No.2018-42, Minimum Wage and Productivity: Analysis of Manufacturing Industry of Korea

Economic Research Institute (82-2-759-5425) 2018.12.14 3772

Title : Minimum Wage and Productivity: Analysis of Manufacturing Industry of Korea

Author : Kyoo Il Kim(Michigan State University), Seung Whan Ryuk(BOK)


Recent discussions on minimum wage increase (MWI) and its influences on the economy have mainly focused on the quantitative aspects such as labor cost and employment. However, on the qualitative aspects, MWI could have positive effects by enhancing firm productivity and crowding out marginal firms in the market. These positive effects of MWI can offset, to some extent, its potential negative effects – the increase of labor cost and the decrease of employment among others. In this regard we empirically examine the impact of MWI on the firm productivity (total factor productivity).

Using firm level panel data in the manufacturing industry of Korea, we calculate the influence rates of minimum wage by sector and by size (number of workers) and analyze their effect on the firm productivity. In particular the production functions of the firms are estimated by the way of taking into account endogeneity among input factors, in order to resolve the drawbacks of existing studies – underestimating capital factor coefficient and overestimating labor factor coefficient.

This study finds that the influences of MWI on wage, employment, and productivity differ across sectors and firm sizes. While MWI has shown positive influences on the productivity growth in the manufacturing industry as a whole, each sector demonstrates different direction of effect and the degree of productivity change is also varying by sector. The impacts of MWI on the firm productivity are estimated generally to be more negative for smaller firms but for some sectors the effects are found to be positive. In addition, the wage increases resulted from MWI seem to cause productivity enhancement throughout all sectors in the manufacturing industry.

The policy implications of this study are as follows.

Considering the empirical finding that MWI causes the increases of productivity in many sectors of the manufacturing industry, it will be desirable to evaluate not only the negative side effects but also the positive effects of MWI for designing future minimum wage policy. Moreover, in spite of the uniform minimum wage, this study finds that the diverse influence rates of minimum wage across firms have differential impacts on wage, employment, and productivity across sectors or different sizes of establishment. This finding could be conducive to discussing about the differentiation of minimum wage scheme by sector or by size.

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