Can Innovation City Policy Alleviate Skill Mismatch and its Wage Effects? Evidence from Korean Labor Market

Abstract Under Korea’s Innovation City Policy, public institutions in Seoul were relocated to provincial regions to address regional imbalances. These institutions were required to meet specific local talent hiring quotas for their new recruitment. Using difference-in-differences analysis with individual-level data from 2010 to 2019, we compare labor market outcomes between graduates from top-ranked provincial universities and those from Seoul-based universities. The policy significantly reduced skill mismatch for provincial graduates; however, this effect was concentrated among humanities and social science (HSS) graduates and female graduates, while science, technology, engineering and mathematics (STEM) graduates and male graduates saw no improvement. The wage penalties associated with skill mismatch remained same after implementation, especially for HSS graduates but worsened for STEM graduates. This disparity stems from the policy generating primarily administrative positions well-suited to HSS graduates’ transferable skills, while failing to create sufficient STEM-related jobs, forcing these graduates into positions unrelated to their academic field.