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

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.