Regional economic variables and local employment growth: the case of Korea

Abstract

This paper examines the effects of regional economic variables on local employment growth using panel data from 1998 to 2013 in South Korea. The employment equation is derived from a Constant Elasticity of Substitution (CES) production function. Employment growth is specified as a function of wage rate, output, local public expenditure, and research and development expenditure as a proxy for innovation. The demand for labor takes into account dynamics since the cost of adjustments in the demand for labor will be induced in the long-run. A Dynamic Panel Regression Model is employed considering the effect of lagged employment using regional panel data. The results show that public expenditure has positive effects on local employment growth and that the effect of public expenditure in the manufacturing sector is more elastic than that of the service sector. A one percent increase in public expenditure increases industrial employment in manufacturing by 0.14 percent and industrial employment in services by 0.04 percent. Total gross value added per capita (labor productivity) has a positive effect on employment growth in the manufacturing sector and a negative effect on the same in the service sector. Total fixed capital formation has positive effects on total industrial employment and industrial employment in the service sector. The effects of wage rates on employment growth in all industry sectors are negative.