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

Abstract

South Korea raised the nation-wide minimum wage substantially over the past two years (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 the decades, the rapid pace 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 also supplement our analysis using other data sources covering the service sector to ensure that sectorspecific factors do not drive our main results. We find a significant negative employment effect of the minimum wage hike for 2018-2019 compared to its modest increase in the 2015-2017 period as the fraction of firms exposed to the minimum wage shock substantially increases and these firms respond to the shock by adjusting through both intensive (layoff) and extensive (plant closing) margins. We also observe labor productivity and wages increased more for firms with higher exposure to the minimum wage. A simple task-based production model emphasizing the substitution between labor of different skill levels is consistent with our empirical findings.