Naoyuki Yoshino: This paper addresses the welfare gains obtained from a Korea–Japan free trade agreement (FTA). The model considers search and matching frictions in the labor market. It incorporates country-level heterogeneity in production technology, population, and productivity endowment. When the two countries have the same population size, Japan receives greater benefits from a FTA because the more capital-intensive production of Japan allows much quicker adjustment upon trade liberalization. The size of the population of Japan is 2.5 times that of Korea, however, therefore Korea enjoys a greater surplus because of the market-size effect. There are various restricted assumptions in the model and real Korean and Japanese economies are somewhat different from the model described in the paper.
Japan and Korea have a large labor market for graduates from school. Many people work under the seniority wage rate rather than negotiate their salaries. Wage rates in Japan and Korea are based...