Transferring the Cost of Wage Rigidity to Subcontracting Firms: The Case of Korea

Kwangho Woo and Joonmo Cho
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Kwangho Woo: Korea Economic Research Institute, Seoul 110-745, Korea
Joonmo Cho: School of Economics, Sungkyunkwan University, Seoul 110-745, Korea

Sustainability, 2016, vol. 8, issue 9, 1-15

Abstract: We select a Korean case with ample subcontracting practices and a rigid wage system. Workplaces with subcontract transactions would have reason to impute the additional wage incremental costs associated with the seniority-based wage system (Hobong in Korea) to subcontractors. Our empirical results identify the cost-transferring mechanism under which the cost of wage rigidity for contractors is transferred to subcontracting firms and aggravates the wage inequality among workers in contracting and subcontracting firms. We analyze the industrial difference in the intensity of this transferring mechanism and probe policy directions considering the improvement of both the subcontracting structure and pay system simultaneously. For the sustainability of firms, they need to reform a seniority-based wage system, an incentive-based wage system or a job-based wage system and the exploited subcontracting structure for creating share value.

Keywords: subcontracting practices; rigid wage system; cost-transferring mechanism; wage inequality among firms (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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