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Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

Income Polarization: What Causes It and What to Do about It?

Income Polarization: What Causes It and What to Do about It?

MIN Seung-Kyu, KIM Yong-Ki, LEE Kap-Soo, KIM Keun-Young, SOHN Min-Jung, YANG Jun-Ho

Sept. 15, 2006

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The term 'polarization' is used so indiscriminately that it causes a controversy in Korea. Now the word refers to any gap occurring in household income, and companies of different sizes and types.

The biggest confusion surrounding the term is that people use the words income polarization and income inequality interchangeably. In reality, the two words are quite different and thus call for different policy measures. Income polarization means the declining number of the middle class while income inequality uneven distribution of income.

The polarization indexes above show that income polarization in Korea had been on the mend from the mid-1980s to the financial crisis in 1997. This was due largely to the rising number of middle-class households on account of wage increases afforded by fast-growing economy and the strengthening bargaining power of labor.

But the financial crisis reversed the course, which shrunk the number of middle-class households and increased that of lower-income families. Although the index seemed to have peaked in 2000, it began rising again from 2003. Fortunately for Korea, the nation's income inequality is not as bad as income polarization during the same period.

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