Macroeconomic impacts of increasing the minimum wage: The case of Korea

Abstract

In the late 2010s, the Korean government substantially increased the minimum wage to help low-income workers and stimulate the economy. This study quantifies the long-run effect of increasing the minimum wage on major macroeconomic variables in Korea by using a large-firm search and matching model. Results indicate that increasing the minimum wage reduces employment, primarily among workers with low productivity. However, the average labor productivity for employed workers increases, thereby facilitating firms to increase capital investment. The latter effect is not substantially large to dominate the former effect. The results imply that increasing the real minimum wage by 15%, as in 2018, eventually reduces the total employment and gross output by 3.5% and 1.0%, respectively.