An empirical analysis of the effects of a change in market structure on production and employment in the Korean economy

Abstract

This paper examines the effects of a change in market structure on production and employment. Changes in market structure are captured by variations in the markup ratio, which is the degree of imperfect competition in product markets. First of all, this paper finds that the markup ratio in the Korean economy is relatively high among the OECD countries, which implies that domestic product markets are much concentrated. The paper also estimates the effects of a rise in the markup ratio on production and employment in the Korean economy by using structural vector autoregressions that can identify a permanent markup shock. The results show that a permanent rise in the markup ratio lowers both production and employment. Moreover, when the analysis is carried out for the manufacturing and service sectors, the same results can be found even at the sectoral level. The empirical findings of the paper suggest that reducing the degree of market concentration is important in raising both economic efficiency and employment.