Labor Market Distortion with Discouraged Worker Effects in Korea

This paper examines skill mismatch problems in regional labor markets due to discouraged worker effects in South Korea. In Seoul metropolitan areas (SMAs), supply surplus for highly educated workforce among the youth is evident and causes serious distortion not only in SMA but also in national labor market. On the contrary, the shortage of low-skilled workers in Korea due to overinvestment in human capital forces out establishments to other countries with cheaper labor costs. Proposed regression models in this study specify how the share of discouraged workers in a regional labor market can be determined by various factors such as demographic structures, labor market conditions, and migration pattern with regional and/or temporal fixed effects. The regional-temporal fixed effect model found to be the most important factor in explaining how these factors determine the relative stock of discouraged workers in a region. Among the variables describing regional labor market conditions, only two, labor force participation rate of young cohort (aged between 15 and 29) and that of highly educated population (college graduate or higher), directly influenced regional labor market distortion by determining the regional stock of discouraged workers. With more active participation of these groups in a labor market, the overall discouraged worker effect in a region reduces, leading to enhanced labor market efficiency. Migration pattern does not play any role on regional discouraged workers. This indicates the limited role of interregional migration on factor price equalization among regional labor markets in Korea.