Skills and Labor Market Outcomes in Korea : An International Comparisons Study

This study explores the impact of improving individuals’ skills on labor market outcomes in Korea, analyzing how much skills could contribute to employment and wages. The major motivation behind the study is to explain the situation where the employment rate of the high-skilled group is not higher compared to the low-skilled group in Korea, which contrasts with other OECD member countries. Focusing on the demand-side factors, we propose the possibility that Korea could be in a state of low-skill equilibrium. In particular, skill depreciation of incumbent workers is considered as a major pathway towards low-skill equilibrium. While Korea is found to show the highest skill depreciation rate among OECD countries, our simulation results show that if the skill depreciation rates of Korean workers are reduced to the average level of OECD countries, the peculiar situation of Korean labor market will disappear. Moreover, it provides possible reasons for the low-skill equilibrium observed in Korean labor market through institutional analysis at the firm-level and macro level. Based on the empirical findings, it proposes policy recommendations for guiding the Korean labor market towards high-skill equilibrium. Analyzing by demographic groups, it is found that high cognitive skills lead to lower employment rates among the youth whose highest levels of educational attainment is a high school diploma or lower. In fact, many of those high-skilled youth are found to be in education rather than employment. High skills are not associated with high employment in other groups as well, even after taking into account the effects of schooling, suggesting that this is a challenge that applies to the whole labor market in Korea. We have focused on demand-side factors, such as low skills demand and utilization of firms, rather than supply-side factors, as the main cause of such a labor market problem in Korea. Comparing various indicators from PIAAC data, we find that Korea’s skills demand is among the lowest in the OECD countries and we also find positive correlation between skills demand and employment rate of the high-skilled at national level. Empirical analyses show that level of education improves the employment probability and wages significantly, whereas the effects of skills are not statistically significant, which is different from other OECD countries. ..