S. Korea’s inequality is more rooted in real estate than income gap, think tank concludes

Posted on : 2020-06-30 16:53 KST Modified on : 2020-06-30 17:29 KST
Top 10% of earners own 42.1% of net assets
An apartment complex in Seoul’s Jamsil neighborhood. (Yonhap News)
An apartment complex in Seoul’s Jamsil neighborhood. (Yonhap News)

Amid serious disparities in assets with the top 10% of earners in South Korea owning 42.1% of net assets, the rise in real estate prices is impacting economic inequality even more than the income gap, a report by a state-run think tank has concluded. The report went on to suggest that mitigating income equality will require stabilizing real estate prices and increasing taxation on real estate earnings and other income.

On June 29, the Korea Institute for International Economic Policy (KIEP) published a report titled “Analysis of the Influence of Changes in Asset Prices on Economic Inequality and International Economy Variables.” The report referred to a “persistent possibility of rising prices in the real estate market due to a combination of demand to obtain residential spaces as necessary consumer goods and natural constraints on supply.”

“The current intensification of income inequality may be due to the steep rise in real estate prices,” it suggested. The report described a severe asset inequality situation in South Korea, where the top 1% of earners own 11.3% of net assets and the top 10% of earners account for 42.1% of assets. “Not only does this skewing of wealth undermine the legitimacy of the wealth acquisition process, but it is also a factor that weakens the momentum of economic growth,” it said.

Based on an analysis of the impacts of rising asset prices on income inequality, the report observed that rising housing prices and unemployment exacerbate income equality in countries such as South Korea with a low level of fiscal policy progressivity. Among the 34 members of OECD, South Korea had the second-weakest level of fiscal policy progressivity after Mexico, the report said, adding that the effects were even more pronounced in South Korea because the top-earning demographic owns more real estate as opposed to financial assets.

Amid a year-to-year decline in South Korea’s marginal propensity to consume (MPC) -- referring to the rate of increase in consumption as income rises -- the report observed that the decline was sharper for the higher-income segment. The MPC index for the fifth income quintile (representing high earners) dropped from 0.52 for the years 1990-1994 to 0.37 for 2015-2016, while the index for the first quintile fell from 0.74 to 0.57 over the same period.

“Marginal propensity to consume declines as the income level rises,” the report said.

“Intensifying wealth inequality has a negative effect on the increase in total domestic consumption,” it added.

Based on this analysis, the report called for proactive redistribution policies and stronger fiscal policy progressivity.

“As income inequality intensifies, it becomes detrimental to economic growth and decreases domestic consumption. This is a situation that requires proactive redistribution policies,” said senior research fellow Yoon Deok-ryong.

“We need to increase the progressivity of fiscal policy and implement policies to increase real income for lower-earning segments by measures such as greater taxation progressivity and increased spending on social services,” he advised.

By Lee Jeong-hun, staff reporter

Please direct comments or questions to [english@hani.co.kr]


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