In this blog post, we will calmly examine the difference between poverty and inequality, measurement indicators, and international comparisons to determine whether inequality in Korean society is indeed severe.
How severe is inequality in Korea?
We previously explained that efficiency and equity are important. Efficiency refers to increasing GDP, but how can we judge equity? What does it mean to be unequal? And since inequality is a concept indicating degree, what level reflects a reasonable range based on people’s differing abilities, and where should we draw the line for what constitutes a serious state? These questions have long been important research topics consistently explored by economists. Let’s examine this issue step by step.
The Poverty Problem and the Inequality Problem
When examining the inequality problem, the first point to note is distinguishing between the poverty problem and the inequality problem. While the two issues are closely intertwined, they are distinctly different in a strict sense. The poverty problem, or absolute poverty problem, refers to issues arising from the existence of many people who are poor by absolute standards. Conversely, the inequality problem, or relative poverty problem, refers to issues arising from an excessively large gap between the wealthy and the poor.
For example, if the incomes of poor people increase beyond a certain level, allowing them to escape poverty to some extent, both the poverty problem and the inequality problem improve. Conversely, even if the incomes of the wealthy increase significantly, this has little effect on the poverty problem but actually exacerbates the inequality problem. If the government strengthens subsidies for the poor, it can help solve the poverty problem and also reduce inequality. However, if the government intentionally imposes higher taxes on the wealthy during this process, this could be interpreted as reflecting a policy will to more actively address the inequality problem.
Of course, these two issues need not be strictly separated. Many studies discussing the negative effects of inequality often include the adverse impacts of poverty, such as increased crime rates or reduced life expectancy. Moreover, clearly distinguishing and interpreting poverty and inequality issues is challenging in actual research.
Some argue that only poverty is problematic, not inequality itself. However, deepening inequality lowers social mobility, widening the gap between the wealthy and the poor. This fuels widespread dissatisfaction and heightens the potential for political instability. Many people perceive the high incomes of the wealthy as unjust, and this process also intensifies conflicts and clashes between people. As this discontent accumulates, trust in the market economy and the capitalist system itself can be shaken. Therefore, inequality must also be managed and controlled to a certain extent.
Various Forms of Inequality
When considering issues of equity, several aspects must be considered together. First, the relationship between businesses or capital and workers must be examined. A nation’s economic system operates through businesses producing goods, employing workers, households consuming goods, and providing labor and capital to businesses. Thus, vibrant business activity is essential for a country’s overall economic development. However, there is also the criticism that while businesses monopolize profits and capital reaps the rewards, workers are increasingly impoverished. However, we will not delve deeply into this point here. Instead, this article will focus on examining the inequality that occurs between households.
It is also necessary to understand the distinction between income inequality and asset inequality. Income refers to wages received as compensation for labor, or financial income and interest income earned by managing assets already held. Assets refer to the value of property held by individuals, such as stocks or real estate.
Individuals with higher incomes can more easily save or purchase assets by reducing consumption, often leading to increased assets over time.
However, while income and assets are closely linked, they are not identical concepts. For example, someone just starting their career will inevitably have fewer assets, while a retired person with sufficient income may have substantial assets but limited current income. Furthermore, assessing asset holdings is significantly more challenging than measuring income. For these reasons, while people show considerable interest in asset inequality, they tend to focus more on income inequality, which is relatively easier to accurately measure.
Meanwhile, diverse research analyzes the units within which inequality occurs. Studies examining wage gaps by education level, wage gaps by gender, and differences between inequality within the same generation and intergenerational inequality are also important topics. Particularly in South Korea, where diverse functions and resources are concentrated in the capital region, the gap between the capital region and non-capital regions can also be seen as a significant form of inequality.
How can inequality be measured?
Because inequality is composed of the distribution of countless individuals, it can be expressed through various indicators depending on the specific point of focus. For the sake of explanation in this article, the discussion centers on income, but the same interpretive approach can be directly applied to asset inequality.
First, the 10th percentile distribution ratio refers to the ratio of the total income of the bottom 40 percent divided by the total income of the top 20 percent. The more severe the inequality, the lower this indicator becomes. Alongside this, the share of total income held by the top 20%, top 10%, or top 1% is also calculated. That is, different income distribution indicators are utilized depending on the societal concern: whether the concentration of income in the top 10% is the problem, or whether the concentration in the top 1% is more problematic.
Furthermore, the Lorenz curve and Gini coefficient are representative methods for measuring inequality through the shape of the income distribution. The Lorenz curve becomes more concave as income concentrates in fewer hands, and approaches a diagonal line as income distribution becomes more equal. The Gini coefficient, calculated using the proportion of area under this curve, increases as inequality worsens. Beyond this, inequality is also assessed by calculating the proportion of the middle class based on the median income rather than the average.
Debate also surrounds the data measurement methods. The long-established, commonly used method is the household survey approach, which involves collecting income data from a fixed sample of households to estimate the overall distribution, then calculating inequality indicators and the Gini coefficient based on this. However, recently, several economists, led by Thomas Piketty, have pointed out the limitations of this household survey method and are attempting to measure inequality using income tax assessment data. Income tax assessment data is effectively close to a census, offering the advantage of relatively accurate information on the top 1%, top 0.1%, and top 0.01% – the extremely small number of top earners.
Meanwhile, in South Korea, tax filings are made on an individual basis rather than a household basis. This creates a discrepancy between the household-level income inequality people perceive and the individual-level income inequality shown in statistics. Households are divided into single-person and multi-person households, and each household may have one income earner or multiple. Therefore, household-level inequality is difficult to accurately gauge using only individual-level income data. This has led to ongoing debates about the most appropriate methods for processing the data. Furthermore, the existence of income not captured during surveys and the government’s insufficient disclosure of all data also remain points of contention regarding the reliability of the statistics.
Is inequality severe in South Korea?
So, how severe is inequality in South Korea? It is not easy to make a definitive statement on this. As previously noted, the criteria for assessing inequality vary, and the rankings and interpretations between countries differ depending on which data and measurement methods are used. Among international comparative data, OECD statistics combine sample survey data with administrative data, while the World Inequality Database, primarily built by Professor Piketty, calculates inequality mainly based on tax data.
Synthesizing these data sources, South Korea generally ranks in the lower-middle tier among the 38 OECD member countries in terms of income inequality, often placed around 10th to 12th. While inequality is relatively less severe compared to Latin American countries, it is notably more pronounced when compared to European welfare states.
While some claim South Korea has one of the highest inequality indices globally, no consistent and reliable statistical data exists to support this assertion. In the early stages of the World Inequality Database, the limited number of surveyed countries resulted in South Korea ranking relatively high. However, the database now includes data from many more countries, showing that numerous developing nations exhibit more severe inequality than South Korea. Therefore, the prevailing view is that it is difficult to definitively assert that inequality in South Korea is among the most severe globally. However, as this issue remains a subject of active debate, it is necessary to consult diverse data sources rather than blindly trusting a single survey result while dismissing others, and to heed the analysis of experts who have accumulated extensive research on this topic over many years.
