What drives the labor share of income in South Korea? A regional analysis

This study takes a regional approach to analyzing what drives labor's share of income for South Korea over 2000–2014. First, we document empirically that changes in the labor share within a region are the dominant component of the change in the aggregate labor share of national income. To study the dynamic determinants of the labor share of income at the regional level, a panel vector autoregression (PVAR) model is estimated to examine how the regional labor share responds to innovations in an array of variables suggested by theoretical models. Consistent with theory, we confirm that technology, capital intensity and market concentration are the key variables explaining the labor share dynamics. Furthermore, we analyze the effects of trade openness and R&D expenditures on the regional labor share. Interestingly, we find that the labor share shows a different pattern of responses to the identified shocks depending upon the type of regions, that is, whether it is in the metropolitan or provincial areas. We also discuss the implications of our results for both theory and policy.