Labor Market Matching Efficiency and Koreas Low Post-Pandemic Unemployment

Abstract

Following the COVID-19 pandemic, Korea’s unemployment rate has remained significantly lower than pre-pandemic levels. This paper examines the dynamics of unemployment through a framework of labor market flows incorporating a matching function and identifies a sustained increase in labor market matching efficiency as the primary driver of persistently low post-pandemic unemployment. The framework further suggests that, barring an unlikely reversal of these efficiency gains, the unemployment rate is likely to remain below 3 percent in the medium term. Notably, despite heightened labor market tightness, post-pandemic wage growth in Korea has been modest. The paper develops a variant of the Diamond-Mortensen-Pissarides model, demonstrating that increased labor market matching efficiency helps account for this apparent paradox.

Keywords: unemployment, labor market matching efficiency, labor market tightness, wage growth

JEL Classification: J60, J64