On the relationship between lemon effect and worker characteristics: evidence from Korea

ABSTRACT

Layoffs can negatively affect a worker’s wage in the presence of incomplete information on the worker’s productivity (‘lemon effect’). This study examines whether such an effect is present in Korea by utilizing the Korea Labor and Income Panel Study (KLIPS) data from 1998 to 2021 with a two-way fixed effects model. We find supporting evidence for the lemon effect: The drop in wage is generally greater for workers who experience layoff than those displaced due to firm closure. This observation is more evident for those (1) who worked at a small-to-medium firm, (2) who got re-employed in a different industry and occupation, and (3) who were laid off during economic booms at which information asymmetry is more pronounced.

KEYWORDS:

• Layoff
• wage
• Korea
• two-way fixed effects

JEL CLASSIFICATION:

• J23
• J24
• J63

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ We will call South Korea as Korea through this article.

² We divide nominal wage by Consumer Price Index (CPI, 2020 = base year).

³ According to Ministry of Employment and Labor in Korea, the union organization rate stood was 14.2% in 2021, which is comparable to our entire sample. See Kim (2019) for related discussions.

⁴ Krashinsky (2002) showed that, when controlling for the size of the previous workplace, the wage loss difference due to layoffs and firm closures is almost reduced. Our results contradict his findings.

Additional information

Funding

Myungkyu Shim acknowledges the financial support from Yonsei University and Yongwoon Scholarship Foundation [Yonsei-Yongwoon Research Grant No. 2023-11-1234]. Seoyoon Jeong provided excellent research assistance.