Wage Inequality and the Contribution of Capital, Differential Labor Quality and Efficiency to Economic Growth in Korea, 1965-2007

We show that skilled and unskilled labors are imperfect substitutes and that capital and skilled labor are complementary in production. The Korean economy has experienced skill-biased technical changes. The capital stock growth is found to be the main source of the economic growth. The contribution of the efficiency and labor input growth of skilled workers is the second most important source. The rate of contribution of TFP growth to GDP growth has increased from 27% in 1991-1996 to 36% in 2001-2007. This paper shows that Korea’s policy of educating its workforce has boosted productivity and growth and it prevented a widening in wage inequality.