Bonuses,unions, and labor productivity in South Korea

Using a set of time-series (1972–1989) and cross-sectional data on eight two-digit Korean manufacturing industries, we examine the variability of South Korea’s employee bonus system and the effect of the employee bonus on productivity. A test of the variability of the bonus showed that the bonus rate (ratio of the bonus to the wage) was positively influenced by industrial output, so the bonus is not merely a disguised wage. An augmented Cobb-Douglas production function estimation shows that the bonus has a positive and significant productivity effect. Capital-intensive and laborintensive industries did not have significantly different productivity effects due to the bonus. Lastly, Korean unions reduced labor productivity and negatively affected the productivity effect of the bonus. Also, compared with the previous period, the productivity effect of the bonus has become negative since the1987 Great Labor Offensive.