In this blog post, we’ll examine what inequality means in our society, explore the difference between poverty and inequality, review various measurement methods, and assess the level of inequality in South Korea based on domestic and international statistics. We’ll also summarize various perspectives on inequality.
Poverty and Inequality
When discussing inequality, the first thing to keep in mind is to distinguish between the issues of poverty and inequality. While the two are closely related, they are not the same concept.
Poverty refers to problems arising from the fact that many people have a low absolute standard of living. In contrast, inequality refers to problems caused by excessively large gaps in income or wealth between people. In other words, poverty is a matter of absolute levels, while inequality is a matter of relative distribution.
For example, if the incomes of low-income groups increase, leading to improved living standards, the problem of poverty is alleviated. At the same time, if the gap with the upper class also narrows, the problem of inequality can also be mitigated. Conversely, if only the incomes of the wealthy increase significantly, there will be little change in the problem of poverty, but inequality may worsen. If the government expands support for the poor, it can expect two effects simultaneously: poverty alleviation and a reduction in inequality. Furthermore, if the government increases taxation on high-income earners, this can be interpreted as reflecting the government’s policy commitment to actively addressing the issue of inequality.
Of course, in reality, it is difficult to completely separate the issues of poverty and inequality. In studies examining the negative effects of inequality, the impacts of poverty—such as rising crime rates, deteriorating health, and decreased life expectancy—often appear alongside them. Additionally, it is not easy to clearly distinguish and analyze the two issues statistically.
Some argue that poverty is the only problem and that inequality itself is not an issue. However, if inequality becomes excessively severe, social mobility decreases, and the gap between the wealthy and the poor can widen further. Furthermore, people may perceive income disparities as unfair, and this perception could lead to social conflict and political instability. Since market economies and capitalist systems operate on the basis of trust among members of society, excessive inequality can negatively impact the stability of the economic system. Therefore, inequality must also be kept below a certain level.
Various Forms of Inequality
When discussing issues of equity, it is necessary to distinguish between different types of inequality.
First, we can consider the relationship between businesses, capital, and workers. The modern economy is structured such that businesses produce goods and employ workers, while households provide labor and capital and consume the produced goods. Therefore, business activity is essential for economic growth. However, there is also criticism that, on the one hand, businesses and capital are reaping excessive profits, while workers’ share is shrinking. While this discussion is also an important topic, we will focus here on inequality among households.
It is also necessary to distinguish between income inequality and wealth inequality. Income refers to earnings generated over a specific period, such as wages, business income, financial income, and interest income. In contrast, wealth refers to the value of assets held by an individual, such as real estate, stocks, and savings.
Generally, people with higher incomes can save or invest the money left over after consumption, so their wealth often increases over time. However, income and wealth are distinct concepts. For example, a young professional may have little accumulated wealth even if their current income is high. Conversely, a retiree may have substantial assets but limited income.
Furthermore, assets are generally more difficult to quantify accurately than income. This is because valuing real estate and unlisted stocks is challenging, and it is difficult to fully account for overseas assets. Consequently, many studies tend to focus more on income inequality, which is relatively easier to measure.
In addition, inequality manifests in various forms. Representative examples include wage gaps based on educational attainment and gender, inequality within and between generations, and disparities between regular and non-regular workers. Furthermore, in South Korea, where economic functions are concentrated in the Seoul metropolitan area, regional disparities between the metropolitan area and non-metropolitan regions can also be viewed as a significant issue of inequality.
How can inequality be measured?
Since inequality is composed of the distribution of income and assets among a large number of people, different measurement methods can yield different results. For the sake of clarity, this discussion will primarily focus on income, but similar methods apply to asset inequality as well.
One of the most common indicators is the 10th percentile distribution ratio. This is calculated by dividing the total income of the bottom 40 percent by the total income of the top 20 percent. As inequality worsens, the share of the lower income groups decreases, so the 10th percentile distribution ratio declines.
Another method involves measuring what percentage of total income is accounted for by the top 20 percent, top 10 percent, or top 1 percent. Recently, as interest in income concentration among the top 1 percent or top 0.1 percent has grown, these indicators have been used frequently.
The Lorenz curve and the Gini coefficient are also representative measures of inequality. The Lorenz curve illustrates the relationship between the cumulative percentage of the population and the cumulative percentage of income. If everyone had the same income, the curve would coincide with the line of perfect equality. Conversely, the more income is concentrated among certain groups, the more the curve curves downward. The Gini coefficient is calculated using the area between this curve and the line of perfect equality; a higher value indicates greater inequality.
In addition, the median is sometimes used instead of the average income to measure the size of the middle class. A society with a large proportion of the middle class is often evaluated as having a relatively stable income distribution.
Meanwhile, there is also debate surrounding methods for measuring inequality. Traditionally, the method of collecting sample data through household surveys and using it to estimate the overall income distribution was widely used. However, recently, researchers including economist Thomas Piketty have emphasized the importance of analyses using income tax data.
Tax data is effectively close to a census, offering the advantage of providing a more accurate picture of the top income brackets. Consequently, it allows for a more precise analysis of income concentration among the top 1 percent, top 0.1 percent, and top 0.01 percent.
However, while tax returns in South Korea are filed on an individual basis, people often live in households. Furthermore, since the circumstances of single-person households, multi-person households, dual-income households, and single-income households all differ, discrepancies may arise between inequality measured at the individual level and that measured at the household level. Consequently, there is an ongoing debate over which method more accurately reflects reality.
Furthermore, there may be income that goes unrecorded in statistics, and there is ongoing discussion regarding the scope and methodology of the data released by the government.
Is inequality severe in South Korea?
If so, to what extent is inequality present in South Korea?
It is not easy to answer this question clearly. This is because the criteria and data used to measure inequality vary, and results can differ depending on which indicators are used.
OECD statistics, a leading source of international comparative data, are compiled by combining sample surveys and administrative data. In contrast, the World Inequality Database (WID) primarily uses tax data. Consequently, even when analyzing the same country, different results may emerge depending on the data and measurement methods used.
Nevertheless, when synthesizing various international statistics, it is difficult to view South Korea as a country with relatively low income inequality among OECD member states. While its level of inequality is lower than that of South American countries, it ranks among the higher levels when compared to several European nations, including those in Northern Europe.
At one point, it was even claimed that South Korea was among the most unequal countries in the world. However, based on a synthesis of international statistics released to date, there is insufficient evidence to support this claim. In the early stages of the World Inequality Database’s development, the number of countries available for analysis was limited, which led to South Korea ranking high; however, as data from more countries were subsequently added, it became clear that a significant number of developing countries exhibit higher levels of inequality than South Korea.
Ultimately, while it is difficult to say that inequality in South Korea is among the highest in the world, it is also difficult to conclude that the situation is problem-free. Moreover, inequality is not an issue that can be judged by a single figure alone. This is because various aspects—such as income inequality, wealth inequality, intergenerational gaps, and regional disparities—must be considered together.
Therefore, rather than drawing conclusions based on a single statistic, it is necessary to comprehensively review multiple data sources and consult the analyses of experts who have studied this issue for a long time. This is because inequality is not merely a matter of numbers but a critical issue related to the direction in which society is headed.
