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The Socioeconomic Consequences of Korea's Shrinking Middle Class

The Socioeconomic Consequences of Korea's Shrinking Middle Class

KIM Yong-Ki

Oct. 14, 2010

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Originally released on August 12, 2010

Although a popular consensus has emerged on the importance of the middle class in promoting economic growth and social integration, little objective evidence has ever been provided for such claims. Accordingly, this study attempts to analyze the sociopolitical and economic effects of changes in the status of the middle class, both in absolute numbers, and in share of total national income. This study found that a strong middle class plays a positive role in cultivating democratic citizenship, and curbing the influence of special interest groups. Furthermore, a strong middle class contributes to economic development by promoting quality improvements in public policy that enable private sector development.

According to this study, the share of middle class households dropped by 4.9 percentage points over the past six years and currently accounts for 55.5% of all households in Korea . During the same period, the income share for middle class households among total income also dropped by 5.9 percentage points. Growth in median income for the middle class stood at 3.2%, far below the average increase in overall income of 7.4%. Growth in middle class income has plainly failed to keep pace with the average increase in total income.

This study found that within the middle class, the core earnings bracket (i.e. those lying between 75 and 125% of median income) has been deteriorating in terms of its absolute share of total households as well as its share of income. For the past six years, the share for the core middle class fell by 3.4 percentage points, whereas the share for other earnings brackets (e.g. the "lower class," or those lying between 50 and 75% of median income, and the "upper class," or those lying between 125 and 150% of median income) decreased by 1.1 percentage points and 0.4 percentage point respectively. In particular, during the late 2000s financial crisis, median income fell by 2.1% between 2007 and 2009, while both the share of middle class households and the share of middle class total income also shrank. When viewed in terms of defining factors for class identification, the middle class depends much more on wages (as opposed to welfare payments, rent, or interest) than the other classes, and household heads in the middle class are typically both younger in age and higher in education than those of the lower class.

Even though labor income is the essential criterion in defining middle class status, this does not mean that middle class growth depends solely on labor market participation. This is because both wage differentials and the share of low-wage labor are relatively high in the labor market of Korea vis-a-vis advanced OECD countries. In fact the share of low-wage workers, who receive less than two thirds of the median wage, was 25.6%, ranking highest among all OECD countries. It is thus appropriate to consider the introduction of a goal-focused policy that fosters the growth of the middle class, while maintaining existing pro-growth policies. Educational wage differentials that reflect discrimination unrelated to productivity should be narrowed, while the expansion of income transfers (e.g. welfare measures) should be carefully pursued in light of the experience of advanced countries. When public transfer payments are provided, they should be implemented through means that broaden the middle class (including family allowances that provide child care support and maternity benefits, and increase participation in unemployment insurance). Likewise, it is also critical to enhance middle class quality of life by reducing burdensome housing costs and educational expenses, which have sapped the disposable income of middle class households.

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