Korea's labor markets under structural adjustment

Korea is an interesting case study in long-term and short-term adjustment. The country's rate of economic growth after 1965 was high at a time of rapid, fundamental economic restructuring. It's open, export-oriented economy was exposed to oil price shocks and interest rate hikes. To keep up the rate of investment, Korea borrowed heavily in the world market, and had a history of walking a tightrope between inflationary pressures and balance of payments deficits. The author concludes that wage behavior in the formal sector played a significant role in adjustment, but not because there was an elastic supply of labor at a stagnant wage during expansion. On the contrary, real wages rose impressively throughout the period of growth; but real wage increases lagged behind the growth rate of labor productivity. The wage-setting mechanism seems to have been strongly influenced by state guidelines, which encouraged wage increases as incentive payments but kept them with the limits of productivity increases. The key to the success of Korea's labor policies was the high rate of total factor productivity growth. This also allowed for continued nominal devaluation of the won without triggering secondary pressures on domestic costs or damaging external competitiveness.