Labor market rigidity at home and multinational corporations’ flexible production reallocation abroad

Abstract

An unprecedented regime change following the 2017 presidential impeachment led to a dramatic shift to more rigid labor market policies in the Republic of Korea, represented by consecutive double-digit hikes in the minimum wage in the next two years. Using a firm-level data set with detailed information about foreign affiliates over the period of 2013$\sim$19, this paper assesses the employment consequences of stricter labor market regulations. The empirical evidence uncovers an underexplored mechanism through which domestic labor market rigidity can reduce domestic employment as multinational firms with flexible internal networks reallocate production tasks across borders.