Macroeconomic Shocks and Dynamics of Labor Markets in Korea

Abstract

A New Keynesian model with a labor market friction, where involuntary unemployment can be endogenized, is estimated with the Korean macroeconomic data using a Bayesian estimation approach. In order to characterize the Korean labor market more realistically, the model is extended by specifying a small open economy with tradable and nontradable goods sectors. The results of empirical analyses based on the estimated model can be summarized as follows. First, it is confirmed that the sectoral reallocation of labors plays an important role in the adjustments of Korean labor market responding to some macroeconomic shocks, particularly foreign shocks. Second, the historical decomposition analysis demonstrates that the cyclical fluctuations of unemployment in Korea are mostly explained by key domestic shocks such as domestic productivity shocks and preference shocks. A relatively small contribution of foreign shocks onto aggregate labor market variables is in part due to the sectoral shift of employment rather than changes in aggregate employment and labor force at extensive margins.