Income distribution and poverty in Korea: An overview

Levels and trends of inequality and income poverty

Since the 1997 Asian financial crisis, issues of income inequality and poverty feature high on Korea’s research and policy agenda [see for instance, Park and Kim (1998) and Hyun and Kang (1999)]. At the latest date for which data are available (2010 or closest), the level of income inequality in Korea is very close to the OECD average, with a Gini coefficient of income concentration of 0.311 (Figure 2.1). However, Korea’s relative poverty rate - the share of people living with less than half the median income - is the eighth highest in the OECD at slightly over 15%.

During the past six years, relative poverty remained stable at a level of around 14% to 15%, while absolute poverty oscillated between 7% and 8%. The age profile of poverty is different in Korea from other OECD countries insofar as the elderly face a very high risk of poverty (Figure 2.2). The poverty rate of people aged 66-75 is 45%, three times higher than the rate for the total population. On average across the OECD, there is no significant difference between these age groups. Furthermore, 37% of the elderly were in absolute poverty (Jones and Urasawa, 2012). One reason for high elderly poverty in Korea is that the National Pension Scheme, introduced in 1988, has not matured yet. Another reason is the “legal supporter criterion”: many elderly do not qualify for the BLSP because they have younger relatives who could support them - though many actually do not.

Figure 2.1. Levels of income inequality and poverty, OECD countries, 2010 or latest year available⁰

Note: Countries are ranked in ascending order of the Gini coefficient of income inequality which ranges from 0 (perfect equality) to 1 (perfect inequality). Relative poverty rates are defined as the share of individuals with income less than 50% of the median for the entire population. Data refer to the distribution of household disposable income in cash across people.

• a) Data refer to 2006 for Japan, 2007 for Turkey, 2008 for Greece and Switzerland, 2009 for Austria, Belgium, Chile, the Czech Republic, Estonia, Finland, Hungary, Iceland, Ireland, Italy, Luxembourg, New Zealand, Poland, Portugal, the Slovak Republic, Slovenia and Spain, and 2011 for Korea.
• b) Unweighted average of the 34 OECD countries.
• c) Information on data for Israel is available at: http://dx.doi.org./10.1787/888932315602.

Source: Calculations based on OECD Database on Income Distribution and Poverty, www.oecd.org/els/social/inequality, Preliminary data.

Figure 2.2. Relative and absolute poverty by age groups, Korea, 2006-11

Note: Relative poverty rates are defined as the share of individuals with income less than 50% of the median for the entire population. “Absolute poverty” refers to persons below the minimum cost of living. “Children” refer to persons below 18-years old. “Older people” refer to the 66-75 age group (no data available for people aged 76+).

Source: Calculations based on the OECD Database on Income Distribution and Poverty, www.oecd.org/els/social/inequality, Data (for 2010 and 2011, Preliminary data), and Statistics Korea.

While no progress on elderly poverty was made during the past six years - the poverty rate climbed from 42% to over 45% - children in Korea have a relatively lower poverty risk. Furthermore, it fell slightly from 11% to 10%. In a majority of OECD countries, child poverty rates are somewhat higher (12.6% on average) than those for the entire population (11.1%).

A crucial factor limiting poverty risks is the extent of work intensity in a household: in 2011, relative poverty among couple households in which both adults had a job was as low as 2.5%. At the same time, having a job per se is often not sufficient to escape poverty. Among couple households where only one adult is working, poverty is higher than the average for all working-age persons (OECD Database on Income Distribution and Poverty, www.oecd.org/els/social/inequality, Data).

While both relative and absolute poverty, overall, remained broadly stable in recent years, income inequality increased since the early 2000s and at least until 2010, when it slightly fell for the first time in seven years (Figure 2.3). While earlier Korean data are not comparable with other countries as they cover only urban households with at least two persons, the trend suggests that inequality grew since the early 1990s and, in particular in the aftermath of the Asian financial crisis. It is worth noting that Korea is not an exception, as inequality increased in three-quarters of OECD countries since the mid-1980s, including in traditionally egalitarian countries such as the Nordic countries.

Figure 2.3. Trends in income inequality in selected OECD countries

Note: The Gini coefficient ranges from 0 (perfect equality) to 1 (perfect inequality). Data refer to the distribution of household disposable income in cash across people.

• a) All households.
• b) Urban households.
• c) Unweighted average of the 34 OECD countries to 2008. Provisional estimate for 2009 based on 28 OECD countries.

Source: Calculations based on the OECD Database on Income Distribution and Poverty, www.oecd.org/els/social/inequality, Preliminary data.

Income inequality can increase because the poor got poorer, or the rich got richer, or both. In general, it is the second of these scenarios which characterised the trend in most OECD countries that experienced rising income inequality up to the Great Recession: incomes of the top decile and the top quintile grew faster than both middle and low incomes (OECD, 2011a). The recent development in Korea was different. For the period where data are available (2006-11), Korea stands out in that income growth of the lowest incomes (the bottom 20%) lagged significantly behind that of all other income groups (Table 2.1). During that period, total household incomes grew by 1% annually on average, with similar rates for the top four quintiles. Incomes for the lowest 20% group, however, stagnated during that period.

Table 2.1. Trends in real household income by income groups,“ Korea, 2006-11

Average annual percentage change

a) Data refer to the distribution of household disposable income in cash across people.

Source: Calculations based on the OECD Database on Income Distribution and Poverty, www.oecd.org/els/social/inequality, Preliminary data.

Income inequality increased in most OECD countries over the past two decades. OECD (2011) looks at the causes of this trend: the single most important driver has been greater inequality in wages and salaries. The labour markets of all countries have gone through profound transformations driven by globalisation, technological changes and policy reforms. For example, technological progress has clearly been a key motor for economic growth; but highly skilled workers have benefitted much more than others. Labour market outcomes have also been significantly shaped by policy and regulatory reforms, both in the markets for goods and services where competition was strengthened and in labour markets, which were made more adaptable. These reforms have promoted productivity and economic growth and brought more people into work, in particular many women and low-paid workers. But the consequence of more part-time and low-paid workers is a widening distribution of wages. Moreover, tax-benefit systems have become less effective at redistributing incomes in many OECD countries, e.g. because transfers to the lowest income groups failed to keep pace with earnings growth.

On average, around two-thirds of all income in Korean households is made up of net wages and salaries. When adding earnings from self-employment income, the share is 90% - the highest among OECD countries. It is therefore important to look more closely at trends in labour earnings to fully understand the drivers of income inequality in Korea. The remainder of this chapter therefore focuses on the working-age population: patterns in wage distribution; the redistributive capacity of the tax and transfer system; and the impact of the social safety net in terms of income adequacy and in terms of work incentives.