Possible Economic Implications of 2018 Inter-Korean Summit on North Korea’s labor market

By: Ace Chua, Agrima Jain

Research Head: Tanvi Johri

Editor: Praharsh Mehrotra

Illustration by Chen Hsuan Ju

Abstract

The April and September 2018 Inter-Korean summit between North Korea’s dictator Kim Jong-Un and South Korea’s president, Moon Jae-In, also known as the Panmunjom declaration of peace, prosperity and unification of the Korean Peninsula, discussed about the cessation of military hostility and disarmament of nuclear missile sites (Haas, 2018), along with promised economic exchanges such as cross-border transport infrastructure and opening of trade between the two Koreas (NCNK, 2018).

This article will discuss the possible economic implications on North Korea’s labor market as a result of the 2018 Inter-Korean summit agreements, using skills matching and value chain theories.

1. Background Information of North Korea’s economy North Korea is a closed, state run economy under the Kim dictatorship, and had very few trading partners such as Russia and China. It’s economy grew in the 1970s with its investment in heavy soviet style industrialisation process, and later took a sharp decline due to rising international debt, the collapse of the soviet union, and international trade sanctions imposed on it (Bajpai, 2019). Famines and droughts also worsened the economic impact by leaving many North Korean citizens malnutritioned and impoverished (Evans, 2019).

Table 1 compares the production share of North and South Korea’s economy. North Korea’s economy is mainly industrial-driven, such as manufacturing military products, mining of minerals and raw materials (CNN, 2013) which can be worth up to USD10 trillion (Weller, 2017), while South Korea’s economy is mainly service and industrial driven, mainly in the areas of electronics and automobile production, research and development, healthcare, tourism and education (Bajpai. 2019). Unlike South Korea’s key production sectors requiring use of advanced technology and skilled labor, most of North Korea’s production is generally unskilled, labor intensive. This can also be seen in Fig 1 where South Korea has a higher university enrolment rate than North Korea.

2. Economic Analysis Two theories, namely Kremer & Maskin’s skills matching, and Ho & Hoon’s value chain analysis, will be used to derive the possible implications on North Korea’s labor market.

3. Skills Matching (Kremer & Maskin, 2006) The matching theory suggests that workers of the same skill level can self-match among themselves, and workers of different skill levels can cross match, and cross matching is always the superior option as long as the skill disparity between the workers is not too wide. 4. Application of the theory to North Korea’s labor market Before the 2018 Inter-Korean Summit, South Korea has a relative abundance in skilled labor, whilst North Korea has a relative abundance of unskilled labor. This implies that some of the North Korean unskilled labor have to self-match, while their skilled labor can choose the better between cross-matching with the unskilled, or self-matching among themselves. After the 2018 Inter-Korean Summit agreements, there will be an increase in demand for North Korean skilled workers to cross match with South Korean’s unskilled workers, on the assumption that the skill disparity between the two Korean workers are not too far off. This will lead to an increase in wages for North Korean skilled workers, and also improves North Korea’s economic productivity from the transfer of knowledge and expertise between the workers. However, when North Korean skilled workers cross-match, they substitute their own unskilled workers for South Korean unskilled workers, and this will lead to a fall in demand for North Korean unskilled workers, and more are being forced to self match. As such, the unskilled wages of North Korean will fall, leading to a weakly persistent income inequality. 5. Value Chain Analysis (Ho, Hoon, 2003) This theory mentions that the production of one good can be outsourced between two countries, which are capital intensive and labor intensive. North Korea, abundant in labor and natural resources such as minerals, takes up the bottom share of the value chain from 0 to k, such as industrial and manufacturing, and South Korea, a skilled labor-intensive country, takes the top share of the value chain from k to 1, focusing mainly on the service-related sector, such as sales and exports, that requires use of technology, requiring skilled labor. An amount of bk aggregate services (i.e. call centers, administrative work) will be utilised for a unit of goods produced. The equations below summarises how the production chain is distributed between North and South Korea.

North Korea’s relative abundance in unskilled labor implies that North Korea has a relatively lower labor cost in unskilled labor, implying comparative advantage in unskilled labor, and the industrial sector. Symmetrically, the South would have comparative advantage towards the service sector. With openness to trade between the two Koreas due to the 2018 Summit, there will be an induced demand for North Korean unskilled workers due to it’s labor abundance, and thus a wider range of production will be outsourced to North Korea. This will enable North Korea to move up the value chain, and simultaneously induce a demand for aggregate services, resulting in an increase in wages for both skilled and unskilled labor in North Korea. There will also be an increase in job opportunities in North Korea, reducing unemployment. 6. Conclusion Based on the two theories, it is likely that North Korea’s economy will be better off following the results of the 2018 Inter-Korean Summit, due to the cross matching of North and South Korean workers that will lead to knowledge and expertise transfers, thus increasing productivity and growth in North Korea’s production economy.

The value chain analysis suggests that due to North Korea’s abundance in labor, there will be more job opportunities for North Korea from South Korea’s outsourcing, thus implying a reduction in unemployment. The induced demand on North Korea’s labor force from both theories implies an increase in wages, which means workers may be better off due to the increase in income. While the skills matching theory may imply a weakly persistent income inequality in North Korea, this is likely to be offset by the effect on employment and increase in wages. However, non-economic factors, such as difference in cultures and receptiveness of accepting North Korean workers by South Koreans, may affect the possible outcomes of North Korea’s labor market from the summit agreements.

References

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