On the relationship between lemon effect and worker characteristics: evidence from Korea

Layoffs can negatively affect a worker’s wage in the presence of incomplete information on the worker’s productivity (‘lemon effect’). This study examines whether such an effect is present in Korea by utilizing the Korea Labor and Income Panel Study (KLIPS) data from 1998 to 2021 with a two-way fixed effects model. We find supporting evidence for the lemon effect: The drop in wage is generally greater for workers who experience layoff than those displaced due to firm closure. This observation is more evident for those (1) who worked at a small-to-medium firm, (2) who got re-employed in a different industry and occupation, and (3) who were laid off during economic booms at which information asymmetry is more pronounced.