A quantitative study on endogenous formation of comparative advantage in South Korea

Abstract This paper incorporates search friction and human capital accumulation into an international trade framework to analyze the endogenous formation of comparative advantage induced by long-term employment relationship. The calibrated model demonstrates that the long-term employment relationship, by facilitating both human and physical capital formation, has contributed to South Korea's rapid ‘export-oriented industrialization.’ The counterfactual experiment reports that aggregate output in 2013 would have been reduced by one quarter, if South Korea had stayed as an autarky economy. Further counterfactual experiments find that had a typical worker's job duration been about two years from 1960s to 2010s, output in 2013 would have been reduced by more than 42 percent. Also, South Korea might have exported primary products, not secondary products with even shorter job duration or less efficient learning-by-doing.