The Korean Economic Review
Macroeconomic Shocks and Dynamics of Labor Markets in Korea
Tae Bong Kim (Ajou University), Hangyu Lee (Dongduk Women’s University)Year 2016Vol. 32No. 1
A New Keynesian model with labor friction, in which involuntary unemployment can beendogenized, is estimated with the Korean macroeconomic data using a Bayesian estimationapproach. The model is extended by specifying a small open economy with tradable andnontradable goods sectors to characterize the Korean labor market empirically. Results ofempirical analyses based on the estimated model can be summarized as follows. First, thesectoral reallocation of labor plays an important role in the adjustment of the Korean labormarket, which responds to macroeconomic shocks, particularly foreign shocks. Second, thehistorical decomposition analysis demonstrates that the cyclical fluctuations ofunemployment in Korea are explained by key domestic shocks, such as domestic productivityshocks and preference shocks. A relatively small contribution of foreign shocks to aggregatelabor market variables is partly caused by the sectoral shift of employment rather thanextensive changes in aggregate employment and labor force.