Temporary Employment and Increasing Earnings Inequality

Temporary workers make up a sizeable part of the labor force in many countries, including Korea. This paper uses an extension of a standard efficiency wage model to explain the wage gap between temporary and permanent workers. Temporary workers have a chance to become permanent; this possibility – combined with the existence of an employment rent for permanent workers – gives short-term workers an incentive to work hard. Thus, a high wage to permanent workers serves a dual purpose: it affects the effort of both permanent and temporary workers. Applying the model to the Korean experience, we discuss the effects of labor market reforms on inequality.