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KDI FOCUS Korea’s Middle Class: Current Status and Policy Challenges January 31, 2023

KDI FOCUS

Korea’s Middle Class: Current Status and Policy Challenges

January 31, 2023
  • 프로필
    LEE, Youngwook
This video provides English subtitles. Click on the video to watch more conveniently.
|   Related information   |
What do you think the middle class looks like?
KDI used economic indicators to look at the middle class in Korea.
Is the size of the middle class smaller or larger than before?

Check out the video! Author: Lee Young-wook, Fellow at KDI

▶Shortcut to the author's interview 02:51

#Middle class #income #poor #poverty #economy #polarization
|   Script   |
What do you think defines the middle class?
Owning a middle-class home, traveling abroad once or twice a year, or having a monthly income exceeding 2 million won?
 
There are no fixed criteria for defining the middle class, but we can get a sense of their trend based on various economic measures.
 
Statistics Korea defines the middle class as a population with an income between 50% and 150% of the median income.
 
According to this criteria, its proportion has experienced a modest increase over the past decade based on market income that encompasses both labor and capital income.
 
Then, based on disposable income, which excludes taxes from market income and adds welfare benefits, its proportion posted a marked increase.
 
Meanwhile, the proportion of both the poor with less than 50% of the median income and the upper income group with more than 150% of the median income has decreased.
 
Let’s use another criteria. Those in the middle 60 percent of all incomes can be considered the middle class. We tracked their income share as a measure of their income power.
 
Similar to previous findings, the middle class had a larger growth in their share of income based on disposable income, rather than market income.
This income increase is favorable relative to other countries.
 
In short, the middle class showed a rapid increase in their proportion and income share based on what's left after paying taxes.
This suggests that the government's expansion of income support has had a significant impact.
 
Then, how has the public's view of the middle class shifted?
 
Statistics Korea released a survey revealing a steady increase in the percentage of people who consider themselves as middle class, now standing at a staggering 60% as of 2021.
 
However, more concerning finding was about public perception about class mobility, not class identification.
 
Fewer people believe that their efforts will result in upward mobility in socioeconomic status over the past decade.
Furthermore, there is a marked decrease in optimism towards the future prospects of the next generation.

 
Looking at the state of class mobility and income mobility in Korea, income mobility has been continuously decreasing since 2011.
It suggests that
it is increasingly difficult for people to move up the socioeconomic ladder.

 
What factors have contributed to the movement from the middle class to poverty or from poverty to the middle class?
 
The analysis indicates that households wih more working members or an increase in incomes of the household head are more likely to experience upward mobility in terms of socioeconomic status.
 
Conversely, if there are fewer workers in the household or the household head’s income decreases, the chances of falling into poverty have increased.
 
This trend has been most noticeable among the middle-aged and elderly population who have retired from their main careers.
 
it is crucial for policymakers to focus on boosting the potential of the next generation for upward progress through hard work and productive endeavors.

Towards this goal, policy reforms should aim to create more high-quality job opportunities and eliminate barriers that affect households' ability to access employment.
In addition, by improving public education, education should facilitate upward mobility and break the cycle of class inheritance.
 

※ The provided materials below have been translated into English using computer-assisted translation.

Even with broader concerns over the collapse of the middle class, their demographic composition and economic power have remained stable or increased over the last one to two decades. However, as the prospects of future generations to secure middle-class status diminishes, policymakers should focus on improving social mobility rather than simply addressing income distribution, presenting a pressing need for quality job creation, employment expansion, and practical education.

Ⅰ. Issues

The collapse of the middle class came into the spotlight in the late 1990s due to job losses and declining household income through the Asian Financial Crisis (Yoo & Choi, 2008; Yoon, 2014). Recently, the shrinking middle class has emerged as a global concern as changes in industries and labor markets, including digital transformation, the fight against climate change, and the loss of middle-class jobs, continue to impact the share of individuals and households in the middle-income tier (OECD, 2019). The decline or collapse of the middle class means severe economic and social polarization, possibly hindering national progress based on social contracts. Considering the current need for economic and social reforms predicated on societal agreements, it is ever more crucial to address such a concern and delve deeper into the issue with a clear analysis of changing dynamics of the middle class. Accordingly, this study takes a closer look at the middle class by using its various definitions to track how the dynamics have evolved and offer policy suggestions to strengthen the middle-income stratum.


II. The Middle Class: Definitions and Trends

While the middle class lacks a clear and universally accepted definition, it is nevertheless possible to observe trends of the middle class as measured in a set of different measures widely used in the relevant literature. This study intends to examine changing middle class in terms of its share by income level, income share ratio, and consumption level. 

1. Percentage of the Population within 50~150% of the Median Income

The middle class, representing an income bracket of 50~150% of the median, saw a slight increase in size per market income but a marked rise per disposable income.

Figure 1 shows population percentages earning 50~150% of the median income, a commonly adopted definition of the middle class by the OECD and Statistics Korea.  According to the annual data of the Survey of Household Finances and Living Conditions from 2011 to 2021, there is a slight increase from around 50% when measured by market income and a noticeable increase from 54.9% in 2011 to 61.1% in 2021 when measured by disposable income. The difference is primarily due to transfer payments by the government, and the latest data suggests that the expansion of income support has significantly increased the percentage of the middle class as to disposable income.

Declining population shares of lower- and upper-income classes accompany this rising share of the middle class in terms of disposable income. Figure 2 tracks the path of the changing middle class as to disposable income, and the percentage of the poor, defined as 50% or below the median income, dropped from 18.6% in 2011 to 15.1% in 2021. Meanwhile, the proportion of the upper class earning more than 150% of the median also declined from 26.5% in 2011 to 23.8% in 2021.

그림1 중위소득 50~150% 인구 비중

Whereas the growing number of older households reduced the percentage of the middle class, the larger population share of the middle class in the working-age and elderly groups per disposable income increased the middle-class percentage in the total population.

In order to measure the impact of population aging on the population share of the middle class, this study compares working-age and elderly populations, as shown in Figure 3. Those in the middle-income range in the working-age group take up approximately 60%, and about 40% in the elderly group. The older population has a smaller share of the middle class in absolute terms, meaning it is likely that their increased percentage will structurally shrink the whole middle-class pie. However, the size of the middle class in both groups is growing in terms of market income and disposable income, which results in a larger share of the middle class in the total population. More seniors are participating in the labor market, leading to a rise in their middle-class composition as to market income but a much higher increase per disposable income, mainly due to the expansion of government income support. The working-age group shows a similar pattern, with stagnation or a slight rise in the middle class when measured by market income and a noticeable increase per disposable income.

그림3 근로연령층과 고령층의 중위소득 50~150% 비중

The population share of the middle class in Korea stands at a similar level as the OECD average. 

Meanwhile, the OECD (2019) has recently defined the middle class as households within the income range between 75% and 200% of the national median and conducted international comparisons with the new criteria. As per its definition, the proportion of the middle class in Korea is 61.1%, slightly lower than but similar to the OECD average of 61.5% (Table 1). However, the percentage of the Korean poor making less than 50% of the median than the OECD average, while that of the upper-income class (over 200%) and the middle and lower-income groups (50~75%) is lower. This disparity reflects the major challenge of prevalent elderly poverty in Korea. 

표 1 국가별 중위소득 75~200%의 인구 비중

2. Income Share of the Middle 60%

The income share of the middle 60% remains steady in terms of market income and disposable income and is considered relatively sound compared to other countries.

Instead of population proportion by income, income share can be used to examine the changing trend of the middle class. This section sets the middle class as 60% of the total population, excluding individuals whose income falls between the top and bottom 20%. It analyzes the trend of their economic strength by evaluating the share of their income relative to the total income,  hence fixing the population pie of the middle class at 60%. 

In Figure 4, the income share of the middle 60% remains more or less the same in terms of both market income and disposable income. The market income shows a modest increase from 50% in 2011 to 51.5% in 2021, while disposable income rises slightly further from 50.4% to 53.3% over the same period. The stratum's upward trend in income share relates to the downward trend in the upper-income class, as seen in Figure 5. The income share of the top 20% is heading down from 44.6% in 2011 to 40% in 2021, while the bottom 20% shows a slight increase from 5.3% in 2011 to 6.7% in 2021, similar to the middle 60%. 

그림4 중위 60%의 소득점유율

On the other hand, the income share of Korea's middle 60% is considered relatively sound compared to other major OECD countries. As depicted in Table 2, Korea exceeds the US, Japan, the UK, and France, where the upper class earns a larger share of income. It is comparable to or slightly lower than Nordic countries like Sweden and Finland. 

표2 국가별 중위 60%의 소득점유율

3. Consumption Levels

The population share and economic power of the middle class have been held constant by and large while its share per consumption recently increased slightly.

Lastly, this section examines the change in the middle class size based on consumption, which provides a better reflection of their lifetime earnings compared to relying solely on current income. In accordance with the Permanent Income Theory, the capacity for income over a life cycle is better reflected in consumption than in a short-term income. Hence, by defining the middle class based on their consumption levels, it may be feasible to estimate the percentage of the middle class and their economic strength based on lifetime earnings, rather than just income over a specified period of time (Yoon, 2013). Figure 6 displays the trend in the percentage of the middle class who earn 50~150% of the median income, as well as the trend of the middle 60%’s income share, respectively. The author used the Survey of Household Finances and Living Conditions and the Household Income and Expenditure Survey for data on consumption expenditure, which offer in-depth information on household consumption expenditures. 

Foremost, the proportion of the middle class with consumption expenditure ranging from 50~150% of the median is steady or rising. According to the Household Income and Expenditure Survey, its share has been constant at around 73%. The Survey of Household Finances and Living Conditions shows a similar trendline with a slight upward trend since 2018 after staying at around 70%. Furthermore, this group has remained stable at around 54% in the Household Income and Expenditure Survey and 50% in the Survey of Household Finances and Living Conditions. 

 

그림 6 소비 기준 중산층 추이


III. Changing Trend of Subjective Perception about the Middle Class

Contrary to the recent gradual increase in the share of people with middle-class consciousness, personal belief about upward social mobility is on the decline.

To sum up, the population percentage and income share of the middle class had remained largely unchanged in terms of market income, but their disposable income had markedly increased. Despite widespread concern about Korea’s shrinking middle class, pertinent datasets do not back up its decline. 

However, in the absence of universally accepted criteria for defining the middle class, it may be crucial to understand individual subjective perceptions of their class identification. Figure 7 demonstrates the changing views of class awareness among middle-income households using the biennial Social Survey conducted by Statistical Korea, which focuses on class consciousness and mobility. 

The number of people with middle-class consciousness has continued to increase since 2013. In this study, those who answered as belonging to the middle out of lower, middle, and upper strata to a question about their “social and economic status per income, occupation, education, and asset” are classified as middle class. Prior to 2013, self-identification of class as belonging to the middle class had been decreasing, but afterward, such an awareness steadily rose to 58.8% in 2021, up from 51.4% in 2013. Like its population share per disposable income, subjective middle-class consciousness has been on the rise in recent years. 

On the contrary, individual perception of achieving upward mobility has been growing more pessimistic, and such pessimism is more pronounced as it concerns the next generations than their own. The combined percentage of respondents who rated the possibility of upward mobility through personal efforts as “very high” or “relatively high” declined from 28.8% in 2011 to 23% in 2019, slightly increasing in 2021 afterward. In addition, the percentage of those with the belief that their children’s generation will be able to climb up the socioeconomic ladder decreased from 41.7% in 2011 to 30.3% in 2021, exhibiting a greater decline. 

Despite the growing number of individuals with middle-class consciousness, negative attitude toward social mobility is gaining ground, and this underlines the importance of paying attention to declining inter- and intra-generational mobility instead of approaching it as a problem of perception. What can be inferred is that even though the government has been sustaining the middle class via transfer payments, this policy effort has not boosted their productivity or expectation of moving up the social ladder, and they are losing hope for moving up in society. 

그림 7 중산층 계층의식 및 계층이동에 대한 인식

 


IV. Factors Influencing Income Mobility and Class Mobility

Is the decline in income mobility observable? Figure 8 demonstrates changing income mobility as per the income mobility index by Fields and Ok (1999).  This analysis controls for the effect of population aging by only considering household heads aged between 18 and 65. Measuring changes in household earnings like market income and disposable income after the first and second year of the base year, it finds a persistent trend of downward movement from 2011 until recently. Between 2011 and 2015, both market income and disposable income shrank in absolute terms. One-year-term market income relative to the base year changed by 30.4% in 2011 and 26.2% in 2015. From 2016 to 2020, income mobility continued to decline. Although two-year-term changes relative to the base year show somewhat higher mobility than the one-year term, the overall trend remains downward.

그림 8 소득이동성 추이

As income mobility continues to decline, the prospect of upward mobility weakens.

Earlier studies also show that income mobility in the 2010s declined (Sung, 2018) or moved in a way that lowered social welfare, even after controlling for the effect of population aging (Kim, 2020). Furthermore, wealth inequality has been on the rise, especially in real estate, since the mid-2010s (Jeon, 2022). All these circumstances have intensified the passing on the socioeconomic status from parents to children, widened the educational gap, and, in turn, undermined confidence in upward mobility and what individuals can achieve through efforts (Kim, 2015).

Identifying necessary policy for society requires an assessment of primary factors for moving across the income and social ladder. Table 3 shows key drivers of social mobility between two groups divided by consumption based on 2018~2019 data, the middle class (50~150% of the median income) and the lower class (50% or below the median).  By looking into moving up the ladder to the middle, this study finds that the number of employed household members and the income of household heads engaged in economic activity considerably impact middle-class mobility. The rising number of working household members and earnings of working household heads typically accompany the transition from poverty to this stratum. By age group, the middle-aged and elderly who have retired from their primary occupation exhibit a relatively low percentage of upward mobility. Conversely, the descent from the middle class to poverty is most evident among households with decreased number of employed members and income of the household head participating in economic activity. Furthermore, the retirement age group displays an apparent downward mobility.

표 3 계층이동에 영향을 미치는 요인

V. Policy Implication for Strengthening the Middle Class

Measures to build a stronger middle class should aim to improve upward mobility through productive activity.

Discussions in this study call attention to policy measures for the middle class that can strengthen upward social mobility through productive activity, given the present situation. Solely relying on the government’s transfer payments for middle-class expansion does not guarantee sustainability, with a clear limitation in promoting social mobility. Also, a closer look at key factors affecting middle-class mobility reveals that creating quality jobs and increasing the number of working household members is crucial. 

Quality job creation and employment promotion for able household members are vital for a robust middle class.

Accordingly, policy support should target those with better prospects of getting hired or those willing but unable to join the labor force. Quality job creation takes priority for the working-age population as labor income takes the lion’s share of their household income. For low-income families, employment promotion for available manpower is the primary channel to climb up the ladder. More specifically, policymakers should extend the employment period for middle-aged and older people before they retire from primary careers. At the same time, employment barriers for female spouses should be lowered, and better support is needed for single-parent families. A strategy tailored to offer high-quality education and care services utilizing the talented workforce and existing infrastructure within the public education sector is necessary to address care shortages for school-aged children. 

It is also imperative to rethink the role of education to alleviate the financial burdens of private education spending and better upward mobility.

Also, it is essential to redefine the role of education to promote social mobility before considering the recommendations mentioned above. For education to serve as a social ladder for upward mobility rather than a means to pass on social status, education reform in its substance is vital, coupled with stronger public education to reduce the financial burden of private education in the middle class. 
 


CONTENTS
  • Ⅰ. Issues
     
  • Ⅱ. The Middle Class: Definitions and Trends
     
  • Ⅲ. Changing Trend of Subjective Perception about the Middle Class
     
  • Ⅳ. Factors Influencing Income Mobility and Class Mobility
     
  • Ⅴ. Policy Implication for Strengthening the Middle Class
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