Job Market Paper

Abstract

Using confidential Korean firm-level data, this paper investigates the employment behavior of business groups in Korea, also known as Chaebols. I document two ways in which the hiring rules of Chaebol firms differ significantly from those of non-Chaebol firms. First, Chaebol firms are much less responsive in employment to firm-level total factor productivity shocks than non-Chaebol firms. Second, Chaebol firms respond to positive and negative shocks symmetrically at the same magnitude, whereas non-Chaebol firms respond more strongly to negative shocks. Also, at the group-level, I provide evidence for spillover effects and internal labor markets for Chaebols, given the heterogeneous roles of firms within-group: central firms act as pools for internal labor markets at the group level, responding to the shocks of other firms in the same group. Next, I propose a new model of business groups that can explain key empirical facts about the hiring rules of business groups and show that firing costs at the group level can explain the slow employment response of business groups and the labor hoarding of the central firms, suggesting that government policies for job security may cause substantial economy-wide efficiency losses.