The Economic Effects of a Rapid Increase in the Minimum Wage: Evidence from South Korean Experiments

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RWP 22-13, November 2022; updated August 2023

South Korea’s minimum wage rapidly rose from 53 percent of the median wage to 63 percent between 2017 and 2019. While the minimum wage has been increasing steadily over decades, the rapid pace in 2018-19 was largely unexpected and driven by a sudden shift in the political environment. We study the economic effects of this minimum wage hike on employment, wages, and labor productivity using South Korean manufacturing firm data. We find a significant negative employment (3% decline in domestic employment) effect of the minimum wage hike for 2018-19 compared with its modest increase in 2015-17, as the fraction of firms exposed to the minimum wage shock substantially increased and these firms adjusted to the shock through both intensive margins (layoffs) and extensive margins (plant closings). The negative employment effect is also found in the supplementary analysis of firms in the service sector. At the same time, labor productivity and wages increased more for manufacturing firms with greater exposure to the minimum wage. Our empirical findings are consistent with a task-based production model with firm-level heterogeneity emphasizing the substitution between low skill labor and other production factors.

JEL Classifications: J23, J31, J42