This study investigates the reasons behind the slowdown in real wages for Japan and Korea based on the aggregate and industry-level data for the respective countries. The findings suggest the following. First, both at the aggregate and industry level, there is a significant slowdown in both countries in the post-1995 period regarding labor productivity, which explains the overall slowdown in real wages. Second, the main reason for the gap between the growths in real wages and labor productivity is found to be the changes in the labor's terms of trade, which is defined as the consumer price index to GDP deflator ratio. Thus, the wage–labor productivity gap is not systematically connected to changes in labor income shares. Finally, the fall in the labor's terms of trade may be potentially related to an emphasis on exports and strong technological upgrading toward higher productivity growth products in both countries’ economic development.

This paper establishes two facts about cross-border vertical integration and intra-firm trade of firms in Korean and Japanese manufacturing industries. First, the intra-firm trade between a parent firm and its affiliates is highly concentrated in a small number of large multinational corporations. Second, the input–output coefficient between the parent firm's industry and the affiliate's industry is weakly related to the presence and magnitude of intra-firm trade between the parent firm and its affiliates. Furthermore, these two characteristics are also found in domestic vertically integrated firms. In particular, the second point identifies a need for further research on the motivation of cross-border vertical integration between two manufacturers, the final good producers at home and the input suppliers abroad.