Using a set of time-series (1972-1989) and cross-sectional data on eig
ht two-digit Korean manufacturing industries, we examine the variabili
ty of South Korea's employee bonus system and the effect of the employ
ee bonus on productivity A test of the variability of the bonus showed
that the bonus rate (ratio of the bonus to the wage) was positively i
nfluenced by industrial output, so the bonus is not merely a disguised
wage. An augmented Cobb-Douglas production function estimation shows
that the bonus has a positive and significant productivity effect. Cap
ital-intensive and labor-intensive industries did not have significant
ly different productivity effects due to the bonus. Lastly, Korean uni
ons reduced labor productivity and negatively affected the productivit
y effect of the bonus. Also, compared with the previous period, the pr
oductivity effect of the bonus has become negative since the 1987 Grea
t Labor Offensive.