The Economic Reunification of Korea: A Dynamic General Equilibrium Model

Abstract

This paper constructs a dynamic specific factors model to examine the impact of the economic reunification of North and South Korea. We focus on changes in real wages and output as a result of several kinds of reunification and/or reform. We are interested in the differential impacts on wages of skilled and unskilled workers. As a baseline we assume autarky with internal market reforms in the North, and free trade in most goods for the South. Using both the long-run steady state and the short-run transition to it, we compare this baseline to several scenarios involving increasing levels of reform and unification. We find that skilled wages in the South depend critically on the nature of the reform or unification policy pursued. Wages in the North rise dramatically in almost every case.

Keywords: Factor mobility, dynamic general equilibrium, Korea

JEL Classification: F15, F22, F42