Labour supply elasticities in Korea: estimation with borrowing-constrained couples

ABSTRACT

This paper aims to provide reliable estimates for labour supply elasticities in Korea. Following Bredemeier et al. (2019), we exploit information on a worker’s relative contribution to household earnings when estimating the Frisch labour supply elasticity to mitigate the downward bias in the presence of borrowing constraints. Using the Korean Labour and Income Panel Study data (2000–2018), we find that the labour supply elasticity in Korea is 0.23. In addition, elasticities are estimated to be 0.27 for men and 0.21 for women, confirming a greater bias for men than for women when the borrowing constraint is ignored.

KEYWORDS:

• Frisch labour supply elasticity
• borrowing constraint
• Korea

JEL CLASSIFICATION:

• E24
• E32
• J01
• J22

Acknowledgments

The authors thank the anonymous referee for helpful suggestions. Shim and Yang acknowledge the financial support from Yonsei University (Yonsei University Future-Leading Research Initiative (2020-22-0088 and 2019-22-0201, respectively)). Hye Rim Yi provided excellent research assistance.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ In this paper, labour supply elasticity refers to the Frisch elasticity.

² A few exceptions are Moon and Song (2016) and Hur and Rhee (2020).

³ We thank an anonymous referee for pointing this out.

⁴ For example, an analysis with different periods (2000–2008/2009-2018) to consider the financial crisis hardly changes results.

⁵ Self-employed workers, unpaid family workers, unemployed individuals, and observations whose wage or hour is below 0 and earnings contribution $\ge$ 1 are excluded.

⁶ In the U.S., the elasticity is usually higher for women than men. Our finding indicates that the individual-based tax system might lower women’s elasticity in Korea as the system does not substantially affect the marginal tax rate.

Additional information

Funding

This work was supported by the Yonsei University [2019-22-0201,2020-22-0088].