Dynamic decomposition of regional wage differentials in Korea

•We decompose dynamic changes of regional wage differentials in Korea.•Between 2000 and 2004, changes in observed components widen wage differentials.•In this period, however, changes in unobserved components narrow them.•Between 2004 and 2008, both components move together to narrow wage differentials.•In both periods, unobserved components play more crucial role in reducing wage gap.

Using a Juhn–Murphy–Pierce (JMP) decomposition, this study analyses the dynamic changes in regional wage differentials between the Seoul Metropolitan Areas and other regions in South Korea. Data from the Korean Labor and Income Panel Study for three years (2000, 2004, and 2008) is used. JMP decomposition provides information about the components that explain changes in regional wage differentials over time. Between 2000 and 2004, the variations in observed and unobserved components are associated with counteracting effects on regional wage differentials. While changes in observed components contribute more to widen regional wage differentials, those in unobserved components narrow them. However, between 2004 and 2008, both observed and unobserved components move in the same direction to narrow regional wage differentials. Based on our empirical results, we discuss some policy implications.