The Korea Herald


Widening income inequality heightens call for policy change

By Kim Kyung-ho

Published : Nov. 26, 2018 - 13:41

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Official data showing a continuous widening of income inequality have strengthened calls on the Moon Jae-in administration to scrap its income-led growth policy.

Economists urge President Moon and his economic aides to focus on accelerating regulatory reforms and other efforts to reinvigorate corporate activity rather than sticking to the policy that they say has increased the problems of poorer people.

According to data released by Statistics Korea last week, the average monthly income of the poorest 20 percent of households dropped 7 percent on-year to 1,318,000 won ($1,165.7) in the third quarter of this year. By contrast, the corresponding figure for the richest 20 percent rose 8.8 percent to 9,736,000 won over the cited period.

As a result, the ratio of the fifth quintile’s disposable income to the first quintile’s, a key gauge of income inequality, widened to 5.52 in the July-September period of 2018, the highest level for the quarter in 11 years.

The decrease in income earned by the lowest-earning 20 percent of households came despite government measures taken in September to increase basic pensions for seniors aged over 65 and pay child care allowances to 90 percent of households with children.

(Yonhap) (Yonhap)
Economists note the income reduction is attributable largely to the disappearance of many low-paid jobs mostly held by low-income householders. Affected by steep hikes in the minimum wage, nearly 230,000 jobs were lost at wholesale and retail businesses, lodging facilities, restaurants and facility management services in the quarter that ended Sept. 30.

Data from the state statistics office showed the average number of employees in the lowest quintile of households fell from 0.83 in the third quarter of 2017 to 0.69 in the same period this year, while the corresponding figure for the richest quintile rose from 2.0 to 2.07 over the cited period.

Cho Jang-ok, an economics professor at Sogang University in Seoul, said steep minimum wage increases might benefit employees at workplaces that could absorb additional labor costs, but would reduce the whole earned income as many employers are pushed to cut payrolls.

In the first quarter of the year, wages earned by the poorest 20 percent of households declined 22.6 percent from the year before, offsetting a 19.9 percent increase in transfer incomes for them, including government-paid allowances.

Economists say the widening income inequality testifies to the failure of the Moon administration’s income-led growth policy, which envisions bolstering incomes of low-income families by raising the wage floor and expanding state support would lead to boosting consumption, employment and economic growth.

“The income-led growth policy has only resulted in aggravating economic polarization,” said Kim Hyung-gi, an economics professor at Kyungpook National University in Daegu, calling for a departure from the failed approach.

The Moon administration seems embarrassed by the unintended negative impact of its signature policy, with a presidential aide describing the latest data on household income as “grave and painful.”

But it has shown no sign of changing its policy direction.

In a meeting with members of presidential advisory groups last week, Moon called on them to move from designing national policy agenda to acting to help achieve them.

Critics say the policy design itself needs to be overhauled to redress the widening income inequality and overcome other economic difficulties faced by the country.

Kim Hyun-chul, a key economic aide to Moon, rebuffed such criticism in a speech at a recent seminar, cautioning against what he called as moves to “nip reforms in the bud” by painting an overly gloomy picture of the country’s economy.

“It is deplorable that all economic discourses end in calls for encouraging corporate activity,” he said.

But the Moon administration has fallen short of carrying out what it has promised to do with regard to deregulation and changes to labor rules.

Little progress has been made in regulatory reforms it has vowed to push through to develop new growth engines. Moon and the ruling Democratic Party of Korea have backed down from an agreement with opposition parties on a more flexible application of the shortened workweek in the face of intensifying objections from labor organizations and civic groups.

In a meeting with reporters last week, ruling party leader Lee Hae-chan expressed concerns about the decreasing income of low-income households, saying social security policies as well as economic policies need to be complemented.

But the Moon administration’s expanded welfare programs have increased non-consumption spending by households, which includes taxes and pension payments, at a steep pace, reining in household consumption expenditure.

Non-consumption spending by households increased 23.3 percent on-year in the third quarter of the year, while overall household spending rose 4.6 percent. As a result, disposable household income edged up 0.3 percent.

Nearly a quarter of income earned by the poorest 20 percent of households was paid in non-consumption spending, leaving them with slightly over 1 million won in monthly disposable income.

There are growing concerns that a possible interest rate hike by the Bank of Korea later this week would put greater debt burdens on low-income households. A recently analysis by the National Assembly Budget Office estimated that a 1 percentage point increase in borrowing rates would raise the ratio of interest payments to disposable income by 5.8 percentage points for the poorest 20 percent, compared with 1.6 percentage points for the richest 20 percent.

By Kim Kyung-ho