An Analysis on the Determinants of the Wage Gap by Education and Income Inequality in the Korean Manufacturing Industry

Abstract

Purpose - The purpose of this paper is to explore determinants that have a great impact on the wage gap of labors by education(wH /wL), and which factors lead to the extension of this and promote income inequality among workers in the Korean manufacturing industry since the 1990s.
 Design/Methodology/Approach - Based on human capital theory, labors are divided into highly-educated and low-educated labor. The effective labor function was established as a form of the CES function. The estimation equation consisting of the labor ratio by education(LH / LL), technical progress, and globalization can be derived as factors affecting the wage gap by education. Based on this estimation equation, an empirical analysis was implemented to analyze the wage gap factors of labors. A fully-modified ordinary least square was used as the method of estimation.
 Findings - In the Korean manufacturing industry, the absolute wage gap by education expanded while the relative wage gap narrowed due to an increase in LH / LL. It also expanded due to the effect of exogenous factors such as technical progress and globalization. Since the international financial crisis, the effect of LH / LL has decreased, and those of technical progress and globalization have increased, widening the relative wage gap which strengthens income inequality among workers.
 Research Implications - Currently, the wage gap by education has widened in the manufacturing industry, and income inequality has become a social issue. Under the de-manufacturing industrial structure, there are policy implications to promote technical progress that can create employment by expanding investment in the service industry and increasing the productivity of low-educated labor.