Effects of wage-peak system on youth employment: Evidence from South Korea

ABSTRACT

After the increase in the minimum retirement age, South Korea introduced a wage-peak system to mitigate increases in firm costs due to the wage of elderly workers. In this study, we examined how the later retirement age has affected employment opportunities for younger workers. We also investigated the difference in impact of later retirement on employment between firms within and outside of the system. Using the difference-in-differences empirical method, we found that this system has increased employment opportunities for younger workers. Moreover, as the proportion of elderly workers increases, the effect of the wage-peak system on the proportion of young workers is enhanced.

KEYWORDS:

• wage-peak system
• retirement policies
• lump of labour fallacy
• youth employment

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• Classification codes: J18
• J21
• J26

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ In 2017, Korea had the highest poverty rate among the elderly in OECD countries, at 43.8% (OECD 2020a).

² For a theoretical discussion, please see Bertoni and Brunello (2017).

³ Freeman (1998) explained the weak aggregate employment effects of work-sharing by imperfect substitutes resulting from the substantial heterogeneity in skills between the unemployed and the employed.

⁴ A firm also has the option to reduce working hours instead of reducing wages under the wage-peak system.

⁵ We use the 2020 average exchange rate for USD to the KRW, which is 1,165.697 (OECD 2020b).

⁶ The $\mathrm{T}{\mathrm{G}}_{\mathrm{i}}$ is equal to 1 for all of 2011–2016 for companies that have adopted the wage peak system. Meanwhile, $\mathrm{Y}\mathrm{e}\mathrm{a}\mathrm{r}{2014}_{\mathrm{t}}$ has a value of 1 for both the treatment and control groups between 2014 and 2016 and 0 earlier than 2014. In a difference-in-differences method, the treatment effect is estimated by the coefficient of the intersection term of $\mathrm{T}{\mathrm{G}}_{\mathrm{i}}$ and $\mathrm{Y}\mathrm{e}\mathrm{a}\mathrm{r}{2014}_{\mathrm{t}}$.

⁷ The results of the joint test are available from the authors upon request.

Additional information

Funding

This work was supported by the Konkuk University.