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Changes in the Real Purchasing Power by Income Quintile and the Implications

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KDI Brief No.93 (April 12, 2017)

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Changes in the Real Purchasing Power by Income Quintile and the Implications

Implications of the Rapid Increase in Pre-sale Apartments
AUTHOR
Sora Chon
Fellow, Department of Macroeconomic Policy, KDI
Seong Tae Kim
Fellow, Department of Macroeconomic Policy, KDI
 
 
The discrepancies in the real purchasing power of different income quintiles is due to the varying growths in nominal income created before the financial crisis. As for CPI inflation, it is very similar across all income levels.
 
   ○ CPI inflation has stalled at around a low 2%-range on an annual average basis for all income quintiles since 2003, and as such, no asymmetry has been found.
 
   ○ However, the nominal income gap widened significantly during the pre-crisis period and the resulting gap in purchasing power persists today.
 
   - The real income of low-income households, in which the proportion of seniors has soared, has been almost stagnant compared to 2003, diminishing both economic and consumer sentiment.
 
The above findings imply that improving the income of low income households should be an essential part of policy to reduce the imbalance between consumption capacity and real income.
 
   ○ Certain policy measures, for instance, increasing imports of foreign agricultural, livestock and fishery products to counter the reduced supply of domestic products resulting from meteorological changes, are deemed inevitable to an extent as they are necessary in maintaining stable prices. However, those that intentionally control the prices of a few specific products based on an increase in the perceived inflation, are not recommended since they could distort the distribution of resources throughout the overall economy.
 
   ○ The purchasing power gap between income quintiles should be narrowed by improving income conditions, particularly for low-income households, most of whom are seniors.
 
   - The quality and quantity of EITC programs should be enhanced to strengthen work incentives for the working poor and to expand indirect support such as vocational placement and training to enhance the abilities of able-bodied persons, including seniors.
 
   - Additionally, the income disparity must be addressed by strengthening the mid- to long-term policies on income redistribution for the overall economy.
 
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