The Bank of Korea: "If Labor Is Efficiently Allocated, Income Levels Rise by About 5%"

[Asia Economy Reporter Eunbyeol Kim] It has been found that if the allocation of labor (human capital) across industries in Korea is carried out efficiently, the overall income level of the economy could increase by about 5%.

On the 20th, the Bank of Korea stated in its "Measurement and Evaluation of the Efficiency of Labor Allocation Across Industries" report that "If human capital allocation is efficiently conducted, it is estimated that Korea's income level could increase by approximately 4.1 to 5.3%."

Changhyun Park, head of the Employment Analysis Team at the Bank of Korea's Research Department, explained, "We estimated the optimal income level for the entire economy assuming efficient human capital allocation without inherent wage gaps between industries, and compared it with the actual income level obtained by summing individual wages."

By comparing the theoretically attainable optimal income level with the actual income level, the gap was estimated to be about 4.1 to 5.3%, depending on the criteria. Using the supplementary survey on types of employment by Statistics Korea, the optimal income gap rate was estimated at around 4.1%, while using the Korea Labor Panel Survey, which includes non-wage workers, the optimal income gap rate rose to as high as 5.3%.

Park said, "The optimal income gap rate has been around 4.1 to 5.3% over the past two to three years," adding, "This means that through the reallocation of labor between high-productivity and low-productivity industries in Korea, the overall economic income level could be increased by up to about 4.1 to 5.3%." He also expected that a higher income level would have an impact on the increase of the Gross Domestic Product (GDP).

In Korea, wage gaps between industries persist, and the proportion of people working in low-wage industries is large, leading to inefficient labor allocation. As of 2018, the average wage in the top 30% wage industries was 2.3 times that of the bottom 30% wage industries, a level similar to that in 2011 (2.4 times). The proportion of workers in low-wage industries such as accommodation and food services and retail trade is high at 42.4%. Although wage gaps between industries persist, labor has not sufficiently moved in a way that reduces these wage gaps, which is evidence of inefficient allocation.

Even when human capital such as education and experience is the same, estimated wages differ depending on the industry of employment, and it was found that inherent wage differences between industries are large and persistent.

High-wage industries such as finance, insurance, IT services, and manufacturing have maintained higher inherent wages compared to low-wage industries such as health and welfare and educational services. The inherent wage ratio of the bottom 30% compared to the top 30% industries was 1.56 times last year, the same level as in 2001. This indicates that the inherent wage gap between industries has not decreased.

Park emphasized, "Efficient allocation of human capital alone can raise the overall income level of the economy," and pointed out, "Policies are needed to facilitate smoother labor mobility." He also stated, "Increasing educational attainment may lead to excessive human capital input in low-productivity industries and cause productivity slowdown," adding, "It is necessary to consider improving the educational environment to achieve an appropriate balance between career paths and educational attainment."

This content was produced with the assistance of AI translation services.