Why Do Real Wages Stagnate in Japan and Korea?

Abstract

This study investigates the reasons behind the slowdown in real wages for Japan and Korea based on the aggregate and industry-level data for the respective countries. The findings suggest the following. First, both at the aggregate and industry level, there is a significant slowdown in both countries in the post-1995 period regarding labor productivity, which explains the overall slowdown in real wages. Second, the main reason for the gap between the growths in real wages and labor productivity is found to be the changes in the labor's terms of trade, which is defined as the consumer price index to GDP deflator ratio. Thus, the wage–labor productivity gap is not systematically connected to changes in labor income shares. Finally, the fall in the labor's terms of trade may be potentially related to an emphasis on exports and strong technological upgrading toward higher productivity growth products in both countries’ economic development.