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

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RWP 22-13, November 2022

South Korea raised the nationwide minimum wage substantially in 2018 and 2019, and the minimum wage rose from 53 percent of the median wage to 63 percent. 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. To ensure that sector-specific factors do not drive our main results, we supplement our analysis with data sources covering the service sector. We find a significant negative 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). We also observe that labor productivity and wages increased more for firms with greater exposure to the minimum wage. Our empirical findings are consistent with a simple task-based production model emphasizing the substitution between labor of different skill levels.

JEL Classifications: J23, J31, J42