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3 ⅰ 목차 Ⅰ. INTRODUCTION 3 1. Kuznets in Korea 3 2. The overview of Korean economy 5 Ⅱ. REVIEW OF THE LITERATURE 10 Ⅲ. METHODOLOGY AND DATA 14 Ⅳ. RESULTS 19 Ⅴ. DISCUSSION 25 Reference 27 Summary 30

4 ⅱ 표목차 Table 1. The tendency of labor distribution in Korea manufacturing sector (1000) 8 Table 2. A descriptive statistics of firms between

5 ⅲ 그림목차 Fig. 1. The augmented Kuznets Curve 4 Fig. 2. GDP per Capital 7 Fig. 3. Pay Inequality of Korean Manufacturing Fig. 4. The Contribution of Firm sizes to Pay Inequality in Korea 21 Fig. 5. The Contribution of Individual locations to Pay Inequality in Korea 22 Fig. 6. The Evolution of Inequality across Manufacturing Sectors 23

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7 요약 1 요약 1. 연구의목적및필요성 1955년쿠즈네츠가발표한학설에의하면경제성장과 pay inequality의관계는일정한관계가있다. 물론경제성장을위해서는 inequality의어느부분은감수를해야하지만과거선진국의경제발전양상과 inequality의흐름을비교해볼때한국은과거와다른양상을뛰고있다. 즉, 쿠즈네츠의가설에의하면경제성장초기에는 inequality가높아지다가어느정도후에는점차감소를하게된다. 그러나다시일정한시간이지나면증가하게되는경향이있는데일본, 미국, 영국등많은선진국들이이런흐름의과정을거쳐왔다. 그러나한국은 1996년말외환위기를겪으면서 inequality가낮아지기도전에다시높아지는양상을보였는데이는경제성장에따라자연스럽게형성된것이아니라외환위기이후선진국의기준에적합하도록금융및제도적개편이진행되다보니 inequality가높아진것이다. 자연스러운 inequality의변화가아니라외부적인영향에의한변화라면사회적수준이나경제적능력은아직선진국이아닌데경제시스템만그기준에맞게개편된것이므로그것에따른부작용이생성될수있다. 따라서본연구에서는실제 inequality가어떤양상으로 90년대이후진행되었는지그것이경제성장흐름과어떻게관계되었는지, 어느분야및어느지역에서진행되었는지를살펴보고시사점을찾고자한다. 2. 주요연구내용 기존에불균형정도를측정하는인덱스로는 Gini coefficient등여러가지방법이있지만, 본연구는 University of Texas at Austin에서현재까지

8 요약 2 활발하게연구중인 Theil s T statistic을가지고불균형정도를측정하려고한다. 기존문헌에서는국가별또는개인별불균형정도를측정하였지만본연구는 plant 개념에적용시켜한국제조기업들의불균형정도는기업의 size별, 지역별, 연령및기타특성으로분류하여비교하고자한다. 지역별불균형정도를측정하는방법은많이있지만, 본연구의특징은 index화시켜서직접적인비교가가능하고불균형정도를도표화시켜서한눈에분석할수있다. Theil's T statistic은이미활발한연구가진행중인 inequality 분석방법이며아직까지국내제조업에이방법을적용시켜서분석한사례는없으며이것을쿠즈네츠의가설과관련시켜서비교연구한경우는아직없다. 따라서본연구는그분석방법적용및 90년대이후경제개편을추구한한국산업분석에있어서시사점이크다. 따라서본연구는 1993년부터 2003년의광공업통계데이터를이용하여 inequality를측정하고그것과경제성장및혁신에미치는영향을분석하고자한다. 3. 결론또는정책적시사점 많은선진국의사례에서우리는쿠즈네츠가설에따라경제성장에따른 inequality의변화를볼수있다. 그러나본연구의분석결과한국은경제수준은선진국에비해부족한반면 inequality의변화추이는이미일본, 미국, 영국등과같은흐름을보이고있다. 이는 90년대외환위기이후구조적개편을거치면서선진국의기준에맞추다보니불균형정도가심해졌다고판단할수있으며이에따라본연구는이런현상을기업규모별, 지역별, 산업별로분석하여그원인을찾고그에따른정책적시사점을찾고자한다.

9 Ⅰ. INTRODUCTION 3 Ⅰ. INTRODUCTION 1. Kuznets in Korea Since Kuznets posited his now famous curve in 1955, the relationship between inequality and economic growth has troubled economists and social scientists. Normative questions about social equity aside, whether inequality and growth are correlated and in which direction, if any, causation flows have far-reaching implications for economic and social policy that cannot be ignored. `Is inequality an unfortunate but necessary ingredient for growth, or might equality and growth be compatible or, perhaps, even complementary? Such questions are symptomatic of a broader debate regarding the existence of a tradeoff between innovation and equality in general Okun(1975). This paper addresses these questions by examining the relationship between inequality and growth in Korea, and how that relationship has been affected by the structural economic reforms of the past years. Simon Kuznets hypothesized that the relationship between growth and inequality changes based on a country s development or degree of industrialization. In the initial phase of development, income diverges as the rural population migrates to the more unequal, higher wage urban industrial centers. As the urban proletariat matures, however, political institutions are created that increase lower-wage workers income shares and inequality decreases as industrialization deepens Kuznets(1955). For a given level of income(or industrialization), then, the relationship is assumed to be stable negative for most countries currently on the downward-sloping portion of the curve.

10 Ⅰ. INTRODUCTION 4 Although Kuznets hypothesized the effect of growth(or development) on inequality, later literature reversed this causal relationship. Empirical work seeking to confirm or reject Kuznets hypothesis has proliferated in recent years, using both pooled and panel data in attempt to shed light on the relationship across countries and time. Surveying twenty-three different studies, Benabou(1996) concluded that initial inequality is detrimental to long-run growth. Fig. 1. The augmented Kuznets Curve Recent work has found that a few rich countries specializing in high-wage, advanced capital goods have experienced a post-kuznets rise in inequality. While most developing and industrialized countries are found on the downward portion of Kuznets inverted U, inequality has been rising with increased income levels in highincome countries like Japan, the United States, and the United Kingdom.6 Conceição and Galbraith (2001) postulate that Kuznets original formulation might apply only as long as countries produce principally consumer goods, and might break down as industrial activity shifts into monopolistic, advanced technology goods for the world market. In that case, the richest and most advanced industrial

11 Ⅰ. INTRODUCTION 5 economies producing capital goods for export would be found on an augmented Kuznets Curve with an upward-sloping tail for such countries, as shown in Fig. 1. Away from the augmented curve s peak and trough, however, the relationship between growth and inequality is presumed to be a more or less stable function of income level. The present paper adds a new dimension to this research by showing that the relationship between growth and inequality may change, as it does in the case of Korea, as a result of structural reform. Although Korea s income level doesn t change appreciably during the final decades of the 20th century, data on manufacturing pay inequality show that the stable, negative relationship between growth and inequality predicted by Kuznets reverses at the peak of the reform period, thrusting Korea into a small group of otherwise wealthy and highly industrialized countries for whom inequality rises with economic growth. After a brief review of the reforms undertaken during Korea s finical crisis period, we will examine the evidence for this change and mechanisms by which it may have taken place. We conclude with implications and avenues for further research on the topic. 2. The overview of Korean economy As it is well-known, Korea in recent decades has experienced a dramatic economic development. From being one of the poorest countries in the 1960s, it became a member of the Organization for Economic Cooperation and Development(OECD) in The economy has made remarkable progress since the early 1960s, with

12 Ⅰ. INTRODUCTION 6 GNP growth averaging 7.8% per annum between 1961 and In relatively short time period, the country was transformed swiftly from a poor traditional agricultural society to a modern industrial state. Comprehensive investment programs in technology and human capital made the manufacturing sector the engine of economic growth driven by an outward-looking, government-led development strategy pursued from the early 1960s. The national government intervened extensively in resource allocation, targeting industries to be promoted and provided necessary incentives for development and progress. Many researches including Amsden (1989) and World Bank (1993) chose to study the Korean case as one that could serve as a model for development for other developing countries and the Korean economy was thought to be strong. However the Korean won dropped in value by 50 percent between the end of December 1996 and the end of December Korea experienced a financial crisis in the mid The request by the Korean government for a three-year stand-by credit from the IMF amounting to about $21 billion was approved on December 5, ). The economic crisis in after three decades of unprecedented economic growth was evident. The outstanding external debt reached US$159 billion in December 1997, the real GDP growth rate declined by 7% and the unemployment rate exceeded 8% in early 1998 from being less than 3% in the early to the mid-1990s. The Fig. 2 shows, despite the economic crisis, the remarkable economic growth of Korea during period ( ) under the consideration in this paper. Per capita income has increased from 1) For details of the IMF program, see IMF (1997). For discussions directed to the effectiveness of the IMF program, see Feldstein (1998) and Fischer (1998).

13 Ⅰ. INTRODUCTION 7 $8,177 in 1993 to $12,720 in ). This rapid change gives an extraordinary chance to examine the relationship between economic growth and income distribution and income mobility in Korea. Fig. 2. GDP per Capital Although the Korean economy severely suffered from the Asian financial crisis, it was known for its rapid recovery from the crisis (Yoshitomi and ADB staff, 2003; Koo and Kiser, 2001). However, one can expect that the impact of crisis on firms would differ by various firms characteristics. The industrial policies for firms with different-sized classes changed dramatically, in the post-crisis period. As a result of the recovery policy, large scale enterprises (LSE) succeeded in necessary downsizing in the immediate aftermath of the financial crisis and grew rapidly in the post-crisis period, especially in the export market. On the other hand, small and medium enterprises(sme) were still suffering from the effects of the recession and, in particular, in the domestic market (Oh et al. 2005). Consequently, pay inequality increased over the entire industry and differences with respect to locations and industries were distinguished. Therefore, the relationship between the inequality and industry 2) Source: the Bank of Korea

14 Ⅰ. INTRODUCTION 8 growth is addressed in the current study. This paper examines pay structure and pay inequality in Korea manufacturing sector using Theil s T statistic between 1993 and This paper examines pay structure and pay inequality in Korea manufacturing sector using Theil s T statistic between 1993 and As shown table 1, manufacturing has one of the big partials of Korea industry. The data set is derived from the Annual Reporting on Mining and Manufacturing Survey in Korea and consists of five or more employees in 580 manufacturing industries at the KSIC (Korean Standard Industrial Classification) five-digit level. Table 1. The tendency of labor distribution in Korea manufacturing sector(1000) Total labor 12,245 12,583 13,634 14,006 13,470 12,416 12,920 13,604 14,109 14,608 14,729 Force in 1000 Manufacturing in 1000 (%) 3,884 (31.7) 3,695 (29.4) 3,708 (27.2) 3,748 (26.8) 3,312 (24.6) 2,986 (24.1) 3,170 (24.5) 3,333 (24.5) 3,415 (24.2) 3,392 (23.2) 3,411 (23.2) Mining (%) 51,788 43,589 39,748 35,806 29,888 23,962 21,971 21,406 20,895 20,405 20,537 (1.3) (1.2) (1.1) (1.0) (0.9) (0.8) (0.7) (0.6) (0.6) (0.6) (0.6) Hence we can investigate the location, size, diversification, R&D, export and business sectors of the firm in pay inequality. Also we evaluate how the Asian financial crisis and policies for recovery on pay inequality. This paper studies the change of pay structure and inequality from a comparative perspective. First of all, this paper looks the tendency of pay inequality with economic growth between 1993 and Second, we divide business sectors, locations and firm size etc, al. then find difference and characteristic. Finally, we compare the analyzed inequality distribution with economic growth, locate Korea's position according to Kuznet's theory and obtain the

15 Ⅰ. INTRODUCTION 9 relating implication The remaining of this paper is organized as follows. Section 2 presents a review of the previous studies for understanding the pay inequality and the Korea industry. Section 3 explains and critiques the methodology of Theil s T statistic. Also there is description of the manufacturing data and variable definition. Section 4 shows results and we discuss and conclude in section 5 with suggestion for further research in this area.

16 Ⅱ. REVIEW OF THE LITERATURE 10 Ⅱ. REVIEW OF THE LITERATURE Although Kuznets hypothesized the effect of growth(or development) on inequality, later literature reversed this causal relationship. Empirical work seeking to confirm or reject Kuznets hypothesis has proliferated in recent years, using both pooled and panel data in attempt to shed light on the relationship across countries and time. The majority of this empirical work found a consistent, negative relationship between inequality and growth, typically based on multivariate cross-country regression models in which inequality is one variable determining growth. Birdsall, Ross and Sabot (1995), for example, found that egalitarianism was a key ingredient in the recipe for rapid growth in East Asia. Surveying twenty-three different studies, Benabou(1996) concluded that initial inequality is detrimental to long-run growth. In 1998 Klaus Deininger and Lyn Squire disrupted the emerging consensus with a study based on their ambitious new global inequality data set compiled for the World Bank from disparate household surveys of 108 countries since Based on the new data, Deininger and Squire (1998) found no evidence for Kuznets inverted U. Using the same data and panel specification, Forbes (2000) found that initial inequality leads to higher subsequent rates of growth. Several authors pointed out severe problems with the new data, however, casting a shadow over conclusions drawn from it.5 Galbraith and Kum(2002) show how problems with the Deininger and Squire data lead to multiple and contradictory conclusions about the

17 Ⅱ. REVIEW OF THE LITERATURE 11 relationship between inequality and growth(ranging from upright U to inverted U to positive linear and negative linear). Thus the negative relationship for most countries appears to remain intact, questions regarding causality and endogeneity notwithstanding. The efficiency wage theory argues that paying a wage premium may be profitable for firms because high wages can reduce monitoring costs, discourage turnover, attract a higher quality pool of applicants, and foster employee loyalty. Hence, wage dispersion across firms is observed when firms differ in their ability to monitor or motivate their workers, to bear the cost of turnover, or to measure labor quality. The theory of insider controls provides another institutional explanation for demand-related wage variation. If firms have product market power and their workers can bargain for a share of the rents, cross-firm differences in rents or in workers ability to extract rents generate wage differentials between firms. Although efficiency wage and insider theories explain why wages may be set above their market-clearing levels, their predictions for the impact of a wage premium on firm performance differ. Efficiency wages are compatible with profit maximization because they are intended to increase labor productivity. However, rent-seeking activities of insiders undermine the financial performance of the enterprise because these activities have no effect on worker performance. These competing theories of between-firm wage dispersion have been tested empirically but the extent to which wage dispersion is attributable to competitive versus noncompetitive factors remains unresolved. But we just look the tendency of inequality in Korea between 1993 and Comparing with sectors and regions gives many implications to Korea industry policy. The issues of efficiency wage policy will be discussing in further study.

18 Ⅱ. REVIEW OF THE LITERATURE 12 There has been large volume of studies on pay distribution in Korea since late 1970s. Although estimates of pay inequality slightly different depending upon the data used, most studies agree that pay inequality increases in 1990s, especially after the financial crisis 3) wealth is far less equally distributed than pay (Lee & Hwang, 1998; Lee, 2000). There is no consensus on the direction of pay inequality over the path of economic growth: rising inequality (Kim & Ahn, 1987); inverse-u type (Choo, 1993); falling inequality (Kim & Topel, 1995; Fields & Yoo, 2000). Despite the controversy over the direction of pay inequality, it is believed that factors such as education, industry, occupation, and experience, are important factors in determining the level of inequality over time. Since a financial crisis, certain institutions expressing the interests of the enterprises such as the Federation of Korean Industries ask further flexibility of labor market(federation of Korean Industries, 2000), it is doubtful whether its argument would be appropriate for the Korean economy, where job mobility has been quite restricted compared with most of developed economies. Regarding pay inequalities, Stiglitz(1999) admits that: pay inequality tends to rise in periods of economic crises, structural adjustment and output contractions. Although all available measures show widened pay inequalities during (Yoo and Kim, 2002) due to the increase in the number of the irregular workers and the unemployment rate, interpretations on the situation of pay inequalities since 2000 appear to depend on the survey methods. For instance, a measure such as the Gini coefficient based on urban workers households shows that the Gini coefficient increased from in 1996 and in 1997 to 3) Lee(2000), using the Family Income and Expenditure Survey reports the Gini coefficient for 1997(0.261) and for 1999(0.286).

19 Ⅱ. REVIEW OF THE LITERATURE in 1999, but decreased to in 2000 and 2001, presumably due to the increased public transfer and decreased unemployment rate; meanwhile, most other measures indicate that the Gini coefficient has been more or less stable since 1999(Park et al., 2002; Yoo and Kim, 2002). Most of previous research, however, mainly focuses on pay inequality at a point of time measured by inequality indices. Although this snapshot view of pay inequality receives attention from the public, it tells us little about the nature and the direction of pay inequality. Different from the previous studies, this paper attempts to analyze pay inequality by using Theil s T statistics through comparing with several between and within units. First of all, this paper looks the tendency of pay inequality with economic growth between 1993 and Second, we divide business sectors, locations and firm size etc, al. then find difference and characteristic. Finally, the effects of firm dynamics on pay inequality will be analysis in this paper.

20 Ⅲ. METHODOLOGY AND DATA 14 Ⅲ. METHODOLOGY AND DATA Theil s T statistic provides a useful alternative approach to measuring the change in earnings inequality within a single country, and to comparing degrees of change across countries. Theil s T statistic relies not on surveys, but on the regularly gathered official measures of income by region and sector. This method is to compute the between-groups component of Theil s T statistic across province-sector cells for both locations and business sectors. Theil s T is a very simple measure of inequality, relying only on two bits of information about each cell: its weight in total population(or employment), and the ratio of average income within the cell to average income in the country as a whole. The following formulae give the algebra behind Theil s T statisti c 4). While these particular equations use income as the variable of interest, Theil s T can address any number of qualifiable phenomena. When household data is available, Theil s T statistic is: n 1 y * p y *ln p T = p= 1 n μ y μ y (1) where is the number of individuals in the population, is the income of the person indexed by, and is the population s 4) Equations (1), (2), and (3)closely follow: Pedro Conceição, James K. Galbraith, and Peter Bradford; The Theil Index in Sequences of Nested and Hierarchic Grouping Structures: Implications for the Measurement of Inequality through Time, with Data Aggregated at Different Levels of Industrial Classification, Eastern Economic Journal, Volume 27 (2000), Pages

21 Ⅲ. METHODOLOGY AND DATA 15 average income. If every individual has exactly the same income, T will be zero; this represents perfect equality and is the minimum value of Theil s T. If one individual has all of the income, T will equal ln n this represents utmost inequality and is the maximum value of Theil s T statistic. If members of a population can be classified into mutually exclusive and completely exhaustive groups, then Theil s T statistic is made up of two components, the between group element ( ) and the within group element ( ). ' w T = Tg + T g (2) When aggregated data is available instead of individual data, can be used as a lower bound for the population s value of Theil s T statistic. The between group element of Theil s T can be written as: m pi yi yi T ' g = * *ln i= 1 P μ μ (3) where indexes the groups, is the population of group, is the total population, is the average income in group, and is the average income across the entire population. is bounded above by, the natural logarithm of the total population divided by the size of the smallest group. This value is attained when the smallest group holds all the resource. When data is hierarchically nested (i.e. every municipality is in a province and each province is in a country) Theil s T statistic must increase or stay the same as the level of aggregation becomes (i.e. ). Theil s T statistic for the population equals

22 Ⅲ. METHODOLOGY AND DATA 16 the limit of the between group Theil component as the number of groups approaches the size of the population. Theil s T has properties that make it attractive for this type of calculation; in particular it is possible to sum row and column elements so as to arrive at cross-sector and cross-province measures of inequality. It is also possible to look directly at the contribution to overall inequality of each cell, sector or province, and to gauge the change in that contribution from year to year. Of course, the general comparison of the Theil index methodology is made by estimating pay inequality for individual person between countries or regions. In the current study, we however compare the pay inequality for each firm between regions as well as sectors by applying Theil T statistic to firm level. Dong (2005)analyzed wage inequality and between-firm age in the 1990 s employing the Theil methodology, where data of rural and urban firms were used. Galbraith (2004) evaluated pay inequality of 1979 through 1998 in the Indian manufacturing sector and inequality. Hence, we examine the pay inequality of the Korean manufacturing industry according to sector, region, and firm size with firm level data of 1993 to The data used in this study was the unpublished plant-level data assembled from the Annual Report on Mining and Manufacturing Survey in Korea. The data covers all plants with five or more employees in 580 manufacturing industries at the KSIC(Korean Standard Industrial Classification) five-digit level. It was an unbalanced panel data with about 76,341 to 103,126 observations for each year from 1993 to In the survey data, the entry and exit of plants were identified based on the plants appearing and disappearing over time. Entry and exit of plants due to spin-off, split, merger, and acquisition could not

23 Ⅲ. METHODOLOGY AND DATA 17 be identified with the available plant level data base. During the analysis period, a total of 300,916 distinct plants were observed. As such, the data contains entering, exiting and surviving plants. The data are available at the five-digit industrial classification level for All Korea manufacturing industry The total number of observations was 1,030,643. Plants that had more than 300 employees were denoted as firm 5. When the numbers of employees were between 300 and 100, the plants were classified as firm 4. And firm 3 has employees from 50 to 100, firm 2 has less than 50 and more than 20. The last part is firm 5. The annual changes in the number of firms, the aggregated firm characteristics and the number of employees for each group were described here.

24 Ⅲ. METHODOLOGY AND DATA 18 Table 2. A descriptive statistics of firms between Year Observations Variables Mean St.D Sum Numbers worker cost income worker cost income worker cost income worker cost income worker cost income worker cost income worker cost income worker cost income worker cost income worker cost income worker cost income

25 Ⅳ. RESULTS 19 Ⅳ. RESULTS First of all, we look the tendency of pay inequality with economic growth between 1993 and We begin by examining the information in the KSIC data at the five-digit classification level, for Korea as a whole. Fig. 3 presents the Theil statistic resulting from this exercise. Fig. 3. Pay Inequality of Korean Manufacturing We find out the inequality trend that Theil value remained stable and consistent in the early 90's. and that it was slightly on the decline. However We observe that the graph shows a sharp upswing in the year , remains fairly steady till , then jump up rapidly in Thereafter inequality in manufacturing pay remained steady till the year , at which point it began creeping upward. This is definitely different from the augmented Kuznets Curve that ineqaulity increases with an increase in economic levels as found in the US, Japan, and UK. The Korean economy

26 Ⅳ. RESULTS 20 didn't reach up to the economic level of developed countries but we just reformed and maintained the economy. Hence, if the economy had been stabilized and reformed properly, the inequality should have become similar to the one before or decreased stably. However, as seen in Fig. 2, the ineqaulity increase drastically after a financial crisis. The radical economic reform for too short time period does not result in concurrence of economic growth and inequality but more increased inquality than economic growth. Therefore, this type of reform will be expected to cause some problems stated above. So, based on political consideration of these facts, we have to think over wag distribution and economic development plans. To further examine whether inequality in Korea is primarily a geographic or a location issue, we aggregate the location-sector elements into two distinct categories, locations on the one hand and sectors on the other. The two digit industrial classification available at the location level is similar to the three digit classification available at the national level. The data are available for sixteen categories across 5 major states for this period. As explained above, we have inequality across sectors within states, inequality across locations, inequality across locations within sectors and inequality across sectors. Through this trend of Theil values, we find that in this data inequality has been steadily increasing since 1996 when the Korean economy faced financial crises, and that in the 2000s pay inequality has continued to increase, taking a sharp jump in the final year observed to levels higher than in the early 1990s. Thus the pattern suggests that the regional element of inequality in Korea started to rise before purely sectoral increases became pronounced and also before the major economic reforms. The next issue we examine is which of the specific regions

27 Ⅳ. RESULTS 21 and sectors have contributed the most to rising inequality. We first examine the contribution to Theil index of individual states. Fig. 4 and 5 presents this information. Fig. 4. The Contribution of Firm sizes to Pay Inequality in Korea Fig. 4 shows the contribution of firm size to pay inequality in Korea. Firm sizes divided by the number of employees. There are total five firm sizes and the standards of firm s employees are 5, 30, 50, 100 and 300. Firm sizes whose pay rates exceed the average form elements above the zero line, while states with pay rates below the national average form elements below the zero line. The size of the component attributable to each region and firm sizes represent the combined influence of labor force and relative income, and it is the change in these influences which the figure highlights. The firms are ranked by the size of their contribution to interstate inequality in the first year under observation. Through this figure we can find that the pay inequality of small size rapidly increased since This result related with the industrial policies for firms with different-sized classes changed dramatically, in the post-crisis period. As a result of the recovery

28 Ⅳ. RESULTS 22 policy, LSEs succeeded in necessary downsizing during the immediate aftermath of the fiscal crisis and to grow rapidly in the post-crisis period, especially in the export market. In the case of LSEs, its portion does not change even if the overall equality increases. On the other hand, the portion of SMEs increases with an increase in the entire inequality. It is shown that SMEs takes an amount of the position. Nevertheless, the fact that the portion has increased since 1997 indicates that SMEs were still suffering from the effects of the recession especially in the domestic market. Fig. 5 shows the contribution of firm s regions to pay inequality in Korea. Locations divided 5 areas. There are nearby Seoul, Kyungsang, Julra, Chungchong and rest areas. Area 1 makes the largest contribution to inequality during the entire period. This should not come as a surprise as it is the most advanced industrial area in Korea all the leading industrial houses have established manufacturing facilities in the Korea. Labor in Area1 is also highly organized; therefore almost all industrial groups in Area 1 have pay-rates above the All-Korea average. Fig. 5. The Contribution of Individual locations to Pay Inequality in Korea

29 Ⅳ. RESULTS 23 On examining the negative Theil elements we find that two of the Areas have rapidly changes. Pay rates of Area 2 and Area 5 below the national averages in some period. This could be primarily due to the lack of large enterprises from either the public or private sectors in these two states. Most of the industrial establishments in these areas are quite small and belong to such traditional sectors as food processing. Finally, most of the smaller states make either no contribution or make a small negative contribution to the Theil index. The smallness of their contribution in absolute value is an artifact of their small weight in overall manufacturing employment in Korea. Fig. 6. The Evolution of Inequality across Manufacturing Sectors The increase in Theil index from 1997 is primarily due to an increase in the Theil element of generation of electrical energy, distribution of electrical energy, manufacture of computers and computer based systems, manufacture of general purpose non electrical machinery and manufacture of motor cars.

30 Ⅳ. RESULTS 24 All of these got a boost after the liberalization of policies regarding production capacities and industrial licensing. We infer from this evidence that one effect of the reforms was to strengthen the market position of those sectors which were already comparatively strong, and so to increase the dispersion of manufacturing pay across Korea as a whole since Asia Crisis. The figure shows the firm s distribution of 2-digit enterprises like basic metal industries, rubber, plastic, petroleum and coal, and electricity generation & distribution, as well as the large-scale modern enterprises in chemicals, transport equipment, and machinery and equipment (both groups 35 & 36). These are the major winners and contributors to the inequality of manufacturing sector incomes. Sectors like digit 32 and 20 manufacturing are the long-standing losers. Of particular interest is the increasing contribution of the Theil element in the electricity sector over the years, particularly as the sector has become deregulated and increasingly able to assert its monopoly power. Indeed the rise of the power of the power sector is the single largest and perhaps the only significant contributor to the rise of intersectoral inequality in Korean manufacturing under the rule of reform.

31 Ⅴ. DISCUSSION 25 Ⅴ. DISCUSSION Using data sets , this paper analyzes income inequality in Korea. By Theil T statistics, it is shown that overall income inequality increased and the persistent component dominantly shapes income inequality. The result shows some patterns of pay inequality between locations and firm sizes. We can safely conclude that inequality in Korea manufacturing sector wages have increased since the 1996: both all-korea and locations measures agree on this point. Korea manufacturing however retains many of the characteristics of a planned and a dual economy, with a strong influence of the firm structure and on relative wages. In this paper, we can find a positive and significant relationship between firm pay inequality and size, region, R&D, export, diversification and business sectors, even when we controlling for individual, time period and firm characteristics. The decomposability property of Theil index enables us to show that manufacturing pay inequality in Korea has risen both across sectors and across regions, though more strongly across sectors. We also show that the rise in inequality accelerates in the period following the introduction of reforms, after controlling for changes in the level of real per capita income. It appears that a large part of rising manufacturing pay inequality in the post-reform period can be attributed to rising relative pay in the electricity sector. The differential region of these industries in the different states contributes strongly to the patterns of inequality between regions. Thus even industrially backward regions have manufacturing wages

32 Ⅴ. DISCUSSION 26 above the national average, due to the presence of large-scale public sector undertakings within their boundaries. Although certain parts of Korea are very much richer than others, Korea does not show a pattern of rising regional inequality in the last decades in this data. Instead, the rise in inequality appears at least within the manufacturing sector to be a phenomenon of rising relative incomes in sectors with power, and particularly in the utility and especially the electricity sectors. Overall, though, inequality has been increasing in manufacturing pay since the 1996, with particular increases since the formal beginning of the reforms. This increase cannot be accounted for strictly by increasing average incomes, as the rise in inequality persists even when changes in average income between regions is fully controlled for. In further study, we will investigate the firm dynamics with pay inequality in the same period and find the effect of firms characteristics according to R&D, export and organization of firms.

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36 SUMMARY 30 SUMMARY [Title] Analysis of Pay Inequality and its Impacts on Growth, and Performance in Korean Industry ㆍ Project Leader: Yunhee Kim Abstract This paper examines the relationship among pay inequality, economic growth and innovation in Korea. So we estimated pay inequality in Korea s manufacturing sector using panel-level data for the period 1993 to The objective is to estimate pay inequality by using Theil s index and to identify the factors determining pay inequality and find the relationship with economic growth and innovation. We first review changes in industrial trend, production, and investment patterns over the period and how those changes led to the creation of a relatively pay inequality between and within regions and sectors. We then compare annual changes in manufacturing pay inequality and annual GDP growth, finding that the previously stable, negative relationship predicted by Kuznets broke down at the height of the period of structural reform in Korea, giving way to a positive relationship after On the basis of Theil s T statistics, results shows a positive relationship between firms pay inequality and size, location, R&D intensity, export, diversification and business sectors. The relation holds even when we control individual, time period and firm characteristics. The decom-posability property of the Theil index enables us to show that manufacturing pay

37 SUMMARY 31 inequality in Korea has risen both across sectors and regions, though more strongly across industrial sectors. Despite controlling for changes in the level of real per capita income, the rise in inequality accelerates in the period following the introduction of reforms. It appears that a large part of rising pay inequality can be attributed to rising relative pay in the ICT sector. The findings support the hypothesis of an augmented Kuznets Curve according to which some developed countries are found on an upward-sloping addendum to Kuznets original formulation. Keywords: Pay Inequality, Korea, Financial Crisis, Kuznets curve, innovation

38 저자 ㆍ김윤희ㅣ서울대학교ㅣ : : 정책자료 한국산업의지역별소득불균형분석과산업의성장및성과에대한영향력연구 2007년 9월일인쇄 2007년 9월일발행 著者ㅣ김윤희發行人ㅣ정성철發行處ㅣ과학기술정책연구원서울특별시동작구보라매길 44( 신대방동 ) 전문건설회관 26층 Tel: 02) FAX: 02) 登錄ㅣ 2003년 9월 5일제20-444호組版및印刷ㅣ레드씨 Tel: 02) FAX: 02)