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A Study on the Determinants of Regional Labor Market Outcomes

  • Journal of Regional Studies and Development
  • Abbr : JRSD
  • 2015, 24(1), pp.37-83
  • Publisher : Institute for Poverty Alleviation and International Development: IPAID
  • Research Area : Social Science > Area Studies > Regional Studies in general > Comparative / Statistical Regional Studies

Cho, Insook 1,  고석관 2

1연세대학교
2한국은행

Accredited

ABSTRACT

Since global financial crisis, job creating ability of Korean economy has been significantly lowered. This lower job creating potential has been discussed as the major source of various labor market issues such as youth unemployment and higher employment instability. The number of jobs grows slower than any other time period in history due to lower economic growth rate. Manufacturing industry, which was once an employment powerhouse in Korean economy, is not creating as many jobs as it used to. While the proportion of jobs available in service sector is increasing, many criticize that quality of employment in service industry must be improved. Moreover the gap in labor market performances among regional labor markets is widened, which is related to a widening gap in economic growth patterns across regions. Understanding regional labor market is a critical to create more jobs and to improve quality of employment quality. Using a set of macroeconomic indicators of 16 metropolitan cities and provinces in Korea from 1989 to 2013, this study explores macroeconomic determinants of the overall performance of regional labor markets. One of the major features of this study is that it adopts the dynamic panel analysis model proposed by Arellano and Bond (1991). The use of a dynamic panel model helps the authors to overcome two major limitations of previous studies. First, it overcomes endogeneity problem due to the correlation between labor market indicators and other macroeconomic indicators. Second this study was able to avoid the potential bias issue which occurs when dependent variables have time series characteristics. Another important feature of this study is to analyze the determinant of labor market outcome by industry. This study categorizes each economy into different groups by industry and examine the job creating ability of each industry as well. The empirical results from dynamic panel model provide new evidence onmacroeconomic determinants of regional labor market outcomes. First this study shows that an increase in real GDP per person has a positive impact onemployment rate. Also a higher economic growth is positively related to employment rate. This result indicates that the size of economy matters. As thesize of economy grows faster, it provides more derived labor demand in the region. Second, (capital) investment intensity also has a positive impact onemployment rate. This suggests that the productivity growth due to greater capital investment has been big enough to offset the reduction in the number of jobs because labor is replaced by capital investment in Korea. Third, an increase in labor productivity has a negative impact on employment. Forth, an increase in proportion of service industry employment has a negative effect on employment rate. This implies that expansion in service industry does not necessarily mean improvement in labor market performance in the long run. In one hand, expansion of service industry can lower overall quality of employment of region because a large proportion of service industry jobs pay lower wages and provide poorer working condition. On the other hand, productivity level in service industry is significantly lower than that of other industry, which may harm overall productivity level of regional economy. Finally, this study shows that an increase in R&D investment expenditure tends to raise the size of employment in manufacturing sector. These findings provide two important policy implications on the regional labor market issues. First, it is important to expand investment on R&D in high technology sector in order to raise employment in manufacturing industry. Second, improving labor productivity in service industry is key to make more and better jobs in service sector.

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