The Determinants of Inter-city and Intra-city Wage Differentials in Korea

The purpose of this paper is to identify the determinants of inter-city and intra-city wage differentials in Korea. To do so, it is first necessary to delineate the Korean Metropolitan Statistical Areas (MSAs). As there have not been much studies on both wage differentials across cities and economically-defined geographic areas, the regional differences in the standard of living have barely been analyzed. Since Koreaís rapid growth in the 1970s, more of the population has concentrated around the Capital area, Seoul. However, it is very difficult to find a concrete reason for this overconcentration in some sense. According to the Roback model, individuals in an open economy maximize their utility by choosing their location of residence with consideration of the regional average wage, cost of living, and amenities. The wage differentials is therefore a very important factor in the choice of where to live and work. In many cases, these wage differentials also represent regional competitiveness. Inter-city wage differentials are the comparison of average wage levels across cities, while intra-city wage differentials are the comparison of income disparities within cities. Therefore, it is both necessary and meaningful for regional policy to identify the determinants of inter-city and intra-city wage differentials. This research will use the Korean Occupational Employment Statistics (OES), a unique regional micro database for wages along with individual characteristics such as age, sex, education, and detailed working experience (including occupations and industries). Although it is not panel data, it provides valuable yearly labor income information on approximately 100,000 workers since 2001. There are a couple of important findings from the empirical work: First, inter-city wage differentials and intra-city wage differentials are bigger in large cities. Second, wage does not seem reflective to an economy much, which means wage is substitutable not only to the cost of living but also something else. The third, intra-city wage differentials have a negative relationship with the employment of knowledge based manufacturing industries.