Endogenous Formation of Ricardian Comparative Advantage and Labor Market Friction: A Quantitative Assessment of Structural Transformation in South Korea

Abstract

This paper incorporates search friction and human capital accumulation into an international trade framework to analyze the endogenous formation of comparative advantage induced by long-term employment relationship. The calibrated model demonstrates that the long-term employment relationship, by facilitating both human and physical capital formation, has contributed to South Korea's rapid `export-oriented industrialization.' The counterfactual experiment reports that aggregate output in 2013 would have been reduced by 25 percent and 10 percent, if South Korea had stayed as an autarky economy or pursued a protective trade policy, respectively. Further counterfactual experiments find that had a typical worker's job duration been 2.3 years from 1960's to 2010's, roughly one forth the actual average job duration, output in 2013 would have been reduced by roughly 43 percent. Also, South Korea might have exported primary products, not secondary products with even shorter job duration or less efficient learning-by-doing.