KDI Korea Development Institute

SUMMARY The ongoing changes in demographic composition and the labour market continue to raise income volatility in our society. Given that the increasing income volatility following the financial crisis in the late 1990s has profoundly affected our daily lives, this study empirically analyzes and examines the magnitude and impact on economic welfare. Empirical results show that income volatility, particularly due to the permanent shocks, has a long-lasting negative impact. Not surprisingly, income volatility yields different welfare consequences depending on how successfully a household can respond with the appropriate measures. This study finds that the impact the permanent shocks have on household welfare could be greatly reduced by facilitating adjustments in the household labour supply. On the other hand, the effect of temporary shocks could be mitigated by raising the accessibility of households to the financial market. Accordingly, these two policy instruments could complement each other, meaning that they would yield more positive results working together than being implemented independently. Finally, presented are suggestions that the government should pay special attention on the groups vulnerable to income shocks such as the elderly and socio-economically disadvantaged households.