KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Research Monograph KOR Who is the Middle Class in Korea?

This study delves into significant discrepancies between the objective and subjective middle classes in Korea, potentially prompting a diverse range of grievances from different economic groups in middle-class discourse. It emphasizes the necessity of examining the multi-layered nature of the so-called "subjective middle class" and its impact on the discourse, together with the causes of such discrepancies and the various challenges that may arise.

The study employs an independent survey to gauge Koreans' class perceptions through two web-based panel surveys. The first survey, conducted in May 2023, queries participants on their objective income and asset levels, subjective class affiliation, satisfaction with living standards and prospects for upward mobility, perceptions of income distribution and inequality, and views on socioeconomic policies. It aims to analyze whether a systematic downward bias exists in self-assessment of one's position in income distribution, patterns of bias and their causes, and potential distortions such bias can cause in policy attitudes.

The subsequent survey, conducted in September 2023, incorporates an experimental component to observe the effects of information on social perception and policy attitudes. It identifies participants' objective class positions using data from the first survey and then shares this information with them. By randomly assigning participants to two groups and providing exact class standings on income distribution to only one group, this study enables an empirical analysis of differences in attitudes toward various social policies, including middle-class awareness and support for redistribution policies, between the feedback-receiving group (treatment group) and the group without feedback (non-treatment group).

The empirical analysis in this research draws from these surveys, with Chapters 2 and 3 based on the first survey (N=3,434) and Chapters 4 and 5 on the second (N=2,000). This report is organized as follows. Chapter 1 presents the necessity and direction of middle-class research, focusing on the concept of the middle class and discussions surrounding the middle-class crisis. Chapter 2 reviews previous studies on objective-subjective class inconsistency, conducts international comparisons using available data, and explores the determinants of subjective class consciousness among Koreans. Chapter 3 compares perceptions of class inequality and policy attitudes on various issues by reclassifying the category of the "socio-economic class" in consideration of the multi-layered nature of the middle class in Korea. Chapter 4 examines the changes after correcting perception biases through objective class information based on the experimentally designed results of the second survey. Chapter 5 assesses the varied cognitive structures and policy preferences within the multi-layered structure of the Korean middle class and examines whether this may lead to policy distortion in the context of discussions on the privileged middle class or elite hereditary succession. Finally, Chapter 6 summarizes the findings and discusses their implications.

Summary

KDI FOCUS Assessing Old-Age Poverty with Income and Assets: Generational Insights and Policy Directions

Korea’s old-age poverty rate, based solely on income, ranks among the highest in the OECD. While the rate drops slightly when assets are considered, it remains persistently high. There are marked disparities in poverty rates across different elderly birth cohorts, with older groups facing higher rates. A greater share of the low-income, low-asset segment also marks the observed inequality. To effectively address poverty among the elderly, policy efforts should prioritize support for the oldest members of this vulnerable low-income, low-asset segment. Concurrently, financial assistance for seniors in the low-income, high-asset group should be scaled back. A practical move toward this direction would be revising the eligibility criteria for the Basic Pension to include asset-inclusive pensionable earnings.

- Korea’s old-age poverty rate was 43.4% in 2018, the highest among OECD countries (average 13.1%).

- The old-age poverty rate varies markedly across the five elderly generations, with those born in the 1940s or earlier having the highest rates.

- The recent decrease in the old-age poverty rate and the disparities seen across age cohorts can likely be attributed to the growing proportion of individuals born in the 1950s who tend to be less impoverished.

- Given the nascent state of public transfers in Korea, asset accumulation is the likely channel of retirement planning, meaning income alone does not provide a complete picture of old-age poverty.

- When incorporating both income and assets into the analysis, the old-age poverty rate determined by asset incomization is markedly lower than that derived from income alone but remains elevated.

- Korea’s old-age poverty rate, evaluated using both income and assets, still ranks among the highest in the world.

- When incorporating assets into the analysis, the share of the low-income, low-asset varies significantly across generations, particularly among those born in the 1940s and earlier.

- The difference in levels of old-age poverty across generations can be attributed to the intergenerational income disparity caused by rapid economic growth and the differing maturity levels of retirement security systems for each generation.

- To provide targeted assistance for the most vulnerable, the Basic Pension should be based on asset-adjusted pensionable earnings, reducing the support for seniors in the low-income, high-asset category.

Summary

Research Monograph KOR Providing Social Protection for Self-Employed Workers

This study examines whether expanding the pool of beneficiaries for unemployment insurance (UI) to the self-employed is a way to ensure better social protection. First, we document the self-employed’s income variability, job security, and job transition paths after a business closedown, also comparing these factors to wage earners. Second, we use model simulations to analyze the effects of mandatory UI for the self-employed on labor market tightness, fiscal soundness, and self-employment rate.

Our comparison of the self-employed and wage-earning employees, based on the Korean Labor and Income Panel Study (KLIPS) and the Survey of Household Finances and Living Conditions (SHFLC), yields the following findings: (1) the self-employed are constantly exposed to fluctuations in business income, which may lead to business failure; (2) there is no substantial difference between the self-employment duration of the self-employed and the employment duration of full-time employees; and (3) a significant number of self-employed individuals choose to start new businesses after their previous businesses close down.

Such results imply that the government may increase the coverage rate of the self-employed by increasing the unemployment benefit level or decreasing the contribution level without harming fiscal soundness. However, establishing an income verification system for the self-employed should proceed or coincide with expanding insurance coverage for self-employed workers to address pertinent concerns, including adverse selection due to lack of income information and moral hazard due to the difficulty of evaluating involuntary business cessation. Moreover, additional assistance is necessary for the self- employed who re-start businesses after closedown.

This study employs a model-based approach to estimate the impact of UI on entrepreneurs. Building on the standard search and matching framework, it incorporates the decision-making processes of entrepreneurs. A model-based approach offers several advantages, enabling analyses of the direct effects of policy changes on the economy and the indirect effects through entrepreneurs’ adjustment to those changes. Our results suggest that extending UI to self- employed entrepreneurs would lead to increased business closures and reduced hiring, causing a slack labor market and higher unemployment. This, in turn, would put pressure on the UI budget, and social welfare would decrease overall. Longer duration of unemployment and reduced government transfers offset increased welfare for former entrepreneurs from receiving UI benefits. However, the study also finds that social welfare can be improved by the government subsidizing UI contributions for entrepreneurs, especially when targeted financial support is provided to low-income entrepreneurs. In that case, UI for entrepreneurs achieves greater social welfare improvement than other social protection systems, such as unemployment assistance.

Summary

Policy Study KOR The Impact of Increase in Pension Age on Employment, Income and Consumption

Due to population aging and a relatively low contribution rate relative to high pension payments, a pension fund in Korea is financially unstable. To improve financial stability, the Korean government passed a law in 1998 that gradually increased the pension age from age 60 to 65 between 2013 and 2033. The purpose of the reform was to prolong the retirement age and delay the pension payment among the elderly. However, as the statutory retirement age has remained at age 60 since 2016, the gap between the statutory retirement age and pension age has widened. This widening gap has brought the need to explore whether and how people have been supplementing their income and consumption in the time of income crevasse.

This paper uses cohort discontinuity regression to estimate the impact of the increase in the pension age on employment, income, and consumption in Korea by using a discontinuous jump in the pension age from 61 to 62 between the 1956 and 1957 cohorts. It finds that an increase in pension age from 61 to 62 leads to a rise in labor income and does not lead to a drop in disposable income and consumption at age 61, despite the decrease in pension amount. However, a heterogenous effect depends on the family characteristics, such as the rate of medical expense out of total consumption expenditure and the education level of the household head. In particular, the labor income of families with high rates of medical expense out of total consumption did not increase despite the decline in pension amount. Along with the decreased business and property income, they experience a drop in disposable income. Moreover, a family with a household head in high school but without a college degree does not increase the labor income. Along with the decline in business and property income, they experience a drop in disposable income and consumption.

These results suggest that the vulnerable group from the increase in pension age policy might be the family who can-not extends labor participation due to health problems or the care-giver burden of the family member with the health problem. Moreover, the vulnerable group from the increase in pension age in Korea might not be the lowest and highest education group but instead those in the middle.

This paper suggests the following policy implication. First, the government needs to provide an income supplement to those who can not extend their employment in the period of income crevasse due to health problems and provide care-giving service to those who can not participate in work due to the care-giving burden between the statutory and pension age. Secondly, the government might want to implement a partial pension system that allows receiving early pension partially, which gives more flexibility in combining work and pension. Thirdly, to reduce the gap between the statutory age and pension age, the government might want to gradually extend the re-employment system while transforming the seniority-based wage system into one that reflects the productivity and task of the person's job. Fourth, the government might want to enhance the job-training program for the elderly by evaluating the program's effectiveness and grasping the need of both the employer and employee's side.

Summary

KDI FOCUS Building a New Safety Net for Sick Workers

The effective rollout of the Sickness Benefits as a social safety net for sick workers hinges on sick leave readily accessible in the workplace. To that end, sickness benefits should include assistance for firms vulnerable to extra costs incurred by sick leave. Also, the level of sickness benefits should be differentiated based on the duration and severity of illness or injury. To ensure the sustainability of Sickness Benefits, the scheme further requires measures to strengthen medical certification and to support workers’ return to work after a spell of sick leave.

- In the aftermath of COVID-19, Korea is pushing for a homegrown model of sickness benefits, but its scheduled pilot project seems to fall short as an effective safety net for sick workers.

- For the sickness benefit scheme to operate effectively, it is crucial to have institutional backing that allows workers to take time off work, such as short-term and longterm sick leave.

- Of regular workers in business establishments with 300+ employees, 72.2% are eligible for sick leave, contrary to only 7.1% for nonregular workers in businesses with fewer than 30 employees. This finding indicates a considerable gap in sick leave entitlements among workplaces of different sizes and job security.

- Amidst the disparity in accessibility to sick leave, there exists a health gap between regular and nonregular workers, and the systemic health divide goes further among non-regular workers by contract types.

- Exposure to harmful working conditions with potential negative health impacts shows systematic disparities depending on employment type.

- For sickness benefits to effectively protect vulnerable workers,the establishment of a sick leave system and the improvement of workers’ health and working environment are necessary.

- Workers with the experience of hospitalization, which defines health shock in this study, are found to experience a continued decline in their employment and income afterward.

- In particular, a prolonged decline in earnings is most pronounced among displaced workers by sickness, which suggests the need to support them to remain connected to the labor market, coupled with financial assistance.

- As workers experience varying impacts on their employment and income depending on the severity of sickness, the benefit coverage for those suffering from serious diseases needs to be further expanded for safety nets to provide more practical support.

- While improving the receptivity of employers by providing financial assistance to employment costs incurred by its adoption, unpaid sick leave, at least, should be made into law to prevent the sickness benefit scheme from operating in two modes.

- Repeated receipt of sickness benefits for shortterm minor sicknesses should be discouraged by applying different income replacement ratios per the severity of illness. At the same time, long-term severe diseases should receive more robust protection in the safety net.

- Stringent medical certification is required to mitigate the moral hazards of sickness benefits.

- The benefit scheme should add workability evaluation in its medical certification to move toward an active labor market policy that promotes returning to work.

Summary

Research Monograph KOR Redesigning Safety Nets as a Response to New Challenges

The safety net faces new challenges. Non-regular workers are increasing with diversifying forms of employment, but the current safety net does not protect these new types of workers. The COVID-19 crisis highlights the lack of protection for these workers in our existing safety net. Also, the transition to a digital and eco-friendly economy is expected to trigger drastic changes in jobs and put burdens on the most vulnerable workers, which requires strengthening the safety net.

This study examines the limitations of the current safety net in rapidly changing economic and social conditions and provides ways to restructure it in response to new challenges. This study consists of four chapters: income support system, employment safety net, adult education and training, and safety net for sick workers. These four fields have revealed major problems in the COVID-19 crisis and need to be addressed and strengthened to build a comprehensive safety net.

Chapter 1 examines the effectiveness of the income support system during the COVID-19 period and provides an overall evaluation of the system in terms of inclusiveness, poverty reduction, economic responsiveness, and consistency. Chapter 2 analyzes what causes blind spots in the employment safety net and estimates a structural model, including unemployment insurance for the self-employed and unemployment assistance, to suggest policies for a comprehensive employment safety net. Chapter 3 investigates the characteristics of users and non-users of adult education and training voucher programs and examines why the most vulnerable groups in need of the programs do not use vouchers. Chapter 4 analyzes the state of the safety net supporting sick workers and examines the impact of health shock on employment and income to provide implications for the design of sickness benefits.

These four chapters share a common concern about the safety net's wide blind spots, especially for vulnerable workers, and discuss policy tasks. First, the employment safety net does not provide protection for temporary, non-regular workers and the self-employed due to limited unemployment insurance coverage. Also, income support programs for the working-age group are not responsive to economic needs, and support against economic difficulties is insufficient. This study suggests strengthening unemployment assistance for the low-income and vulnerable workers to enhance the inclusiveness and economic responsiveness of the safety net. Second, although anyone can participate in adult education and training institutionally, the actual participation rate of the vulnerable is low. This study points out that it is important to induce their actual participation, not simply an external expansion. Third, insecure workers are less likely to access sick leaves than secure workers. Due to the disparity across workers, sickness benefits under discussion for adoption may also have practical blind spots for vulnerable workers. This study discusses policies that need consideration when designing sickness benefits to provide a secure safety net for sick workers.

Summary

Research Monograph KOR Structural Reforms in Response to Demographic Changes in Korea

This study examines the demographic trends in Korea and explores various structural reform measures to cope with future demographic changes. After World War II and independence, the Korean population surged along with the rapid growth of its relatively young population, one of the strong drivers of economic growth. However, after unprecedented rapid economic growth due to rapid population growth, the Korean population structure will enter a period of rapid contraction, leading to rapid aging of the population and a decrease in the absolute population. Because these drastic demographic changes could affect the economic and social environment, the current system needs adjustment to mitigate negative demographic impacts before they appear. Therefore, this study aims to evaluate reform measures from various perspectives, focusing on improving the efficiency of human resource utilization and enhancing the sustainability of the government’s role. It also looks at supplementary policy measures that could reduce possible side effects of the reform process.

Part 1 presents structural reform measures to improve the efficiency of using older workers. In a situation where the total population, especially the working-age population, is declining, how efficiently the elderly population is utilized is an important policy issue. For the productive role of the elderly, the gradual and effective extension of the retirement age is required as an institutional prerequisite for the labor supply of the elderly. In addition, in the process of preparing an adequate old-age income security system, it is necessary to provide sufficient incentives for the elderly to participate in economic activities. Furthermore, the government should support the maintenance of labor productivity of the elderly through lifelong education and enhance the flexibility of the labor market so that companies can create demand for the elderly by reflecting the labor characteristics of the elderly.

Chapter 2 analyzes the effect of sequentially raising the retirement age by the revised 2013 Elderly Employment Promotion Act and shows that changes in the legal upper age limit have heterogeneous effects on employment according to age, gender, and education background. The analysis finds that the retirement rates of female high school graduates and male college graduates or higher degree holders, both aged 55 years old, rather were higher than before, after the implementation of the revision. This suggests that abrupt changes to the statutory retirement age may have unintended and undesirable side effects if the burden on companies is not thoroughly reviewed. In order to extend the tenure of senior workers effectively, this chapter proposes a comprehensive and gradual extension of the retirement age in consideration of the corporates’ burden.

Chapter 3 analyzes the impact of the relaxed 2015 earnings test in the national pension scheme. The analysis reveals that those groups with relaxed earnings testing tend to supply more labor, especially those with higher education levels to a statistically significant extent. Under the assumption of the public pension's fiscal sustainability and gradual increase of the pension age, these findings suggest that abolition of the earnings test may improve the work incentives of the elderly.

Chapter 4 analyzes the survey results on applicants to the Lifelong Education Voucher Program in 2019. According to the analysis, the voucher program effectively motivates participation in learning activities to a meaningful extent. However, active voucher users are different from the active applicants of the program support, so we need to consider better-targeted support to enhance policy effectiveness. Since the learning motives of basic livelihood support recipients and those in the next lower income class are relatively low, it is necessary to consider additional policy measures in addition to the small voucher incentives.

Chapter 5 analyzes the Korean workplace panel survey (WPS). According to the results, firms with a large share of older people in the workforce show the higher the portion of part-time workers, the higher the level of workforce productivity. On the contrary, the lower workforce productivity, if a labor union exists at such firms. The analysis also shows that operating profit decreases when the proportion of older workers in companies with a labor union increases. This may be because, given the current seniority-based wage structure, it is more difficult to dismiss or adjust the wages of older workers due to obligations to agree with the labor union in a situation where they are more likely to receive real wages than labor productivity. In addition, in the case of companies with a high proportion of part-time workers or replacement workers, overall labor productivity increases along with the proportion of older workers. In this sense, the flexible working system can be useful both individually and as a company to increase labor productivity and encourage companies to retain and hire older workers.

Part 2 examines structural reform measures for sustainable fiscal management. Fiscal spending on the aging population increases, but tax revenue may decrease due to a decrease in the working-age population, raising concerns about the government's fiscal sustainability due to the aging and decline of the population. Not only that, the decrease in the youth population may lead to a reduced supply of military forces, adding another layer of uncertainty for the national defense amid the long-standing tensions on the Korean peninsula. In order to achieve the policy goal of sustainable fiscal management, it is necessary to enhance the effectiveness of resource allocation continuously through efficient expenditure restructuring and to expand the tax base as a source of revenue to provide sufficient government resources.

Chapter 6 shows that when calculating the age of the elderly based on the remaining life expectancy, there is a possibility that the threshold age of the elderly could continuously increase by about one year over the next ten years. Considering the burden of disease and disability, gender, region, and income gap, we propose a long-term plan to gradually raise the threshold age of the elderly. A case analysis of the urban railroad senior fare discount system examines the policy considerations for such a long-term age adjustment plan. For the policy goal of securing mobility of the elderly, we propose to increase the age gradually, taking into account the demographic characteristics of the region, the elderly's usage behavior, and the degree of congestion. In addition, we can consider complementary policies such as supplementary transportation vouchers.

Chapter 7 underscores efficient public spending on education through a sensible teacher supply policy, as the overall population, together with the school-age population, will decline. If we train and hire teachers according to the existing teacher supply plan, we expect the class sizes to continue to shrink as the school-age population decreases. We find that a smaller class size improves the academic performance of some elementary and middle school students and has positive effects on elementary students' non-cognitive ability, but the magnitude of the positive effects is not significantly large. Given the recently disclosed number of teachers by age and the published target number of students per teacher, this suggests the possibility of hiring fewer new teachers without compromising the quality of education in the future.

Chapter 8 shows that it is necessary to consider the reforms of the local budget system in order to improve the fiscal sustainability and efficiency of local governments amid changing demographic trends. We anticipate that Korea's demographic challenges of aging and shrinking population will unfold unevenly by region. Against this backdrop, since local governments receive support for local education expenses as a fixed percentage of national tax revenues, the education spending per student will increase steeply and unevenly by region. Accordingly, we recommend revising the methods of allocating local education subsidies in consideration of the school-age population and the number of teachers by region. In the longer term, we propose to streamline local education subsidies and local government general budgets by consolidating them into a single category. This measure will help remove silos among different budget holders and enable comprehensive budgeting for local authorities, eventually securing fiscal efficiency and accountability at the local level.

Chapter 9 emphasizes the importance of military forces trained over an extended period. Because it is impossible to maintain the current large-scale military force due to population decline, it is necessary to reorganize military force from labor-intensive to capital-intensive. Through international comparative analysis, we show that the probability of choosing the volunteer military service system increases as the proportion of the working-age population decreases, and the probability of choosing the compulsory military service system increases as the number of experiences in conflict increases. Given the declining working-age population, the voluntary military service system may be a viable option. However, the confrontation with North Korea and the fairness of military service are obstacles to a full-scale voluntary system. Therefore, we suggest gradually shortening the period of military service to put the skills and talents of young people to productive use while maintaining the current conscription system. At the same time, we propose to devise a plan to gradually expand the training of professional military soldiers and extend the retirement age of senior officers.

Chapter 10 emphasizes the need to prepare a mid- to long-term tax policy to secure sufficient financial resources in response to changes in the social demand for fiscal spending driven by demographic changes and examines alternative financing methods with a focus on value-added tax (VAT). Compared to major countries, Korea’s income tax and VAT burdens are relatively low, and the VAT revenue base will shrink due to demographic changes, especially consumption patterns by age. This chapter proposes increasing the basic tax rate and abolishing some tax reductions to maintain the current VAT revenue. Considering the income distribution effect of the abolition of tax reductions, we propose abolishing the tax reductions for education, finance, and medical care as well as introducing and maintaining a reduced tax rate system for essential consumer goods and services for vulnerable groups, which can make the VAT less regressive. It is desirable to establish a reasonable system of tax reduction through social consensus along with an increase in the value-added tax rate.

Summary

Policy Study KOR Policy Issues and Challenges in Welfare Policies for Elderly Care

With rapid aging, pubic expenditure on long-term care (LTC) is expected to increase significantly. The financial burden on LTC will be even greater as women’s active economic activities and weakening social norms of elderly care are expected to reduce informal care by families. However, currently projected LTC expenditures do not take into account the decline in informal care, and as such, is highly likely to be underestimated. This study examines the relationship between informal care and formal care for the elderly, and projects future LTC expenditure according to the change in informal care. Also, this study investigates the implicit costs of informal care, such as a decrease in the economic activity and quality of life of caregivers, and discusses policy directions to reduce these costs and support informal care.

The empirical results show that informal care by the children serves as a partial substitution to formal care, and this effect is more evident among those aged 75 or older. Given the estimated substitution effect between informal care and formal care, the reduction in informal care is expected to increase LTC expenditure by 17 to 19%. On the other hand, informal care is provided at the expense of family members. The results show that the provision of informal care decreases the labor force participation rate and increases the probability of retirement. Also, the provision of informal care has a negative effect on the quality of life of caregivers. The cost of informal care increases as the period of care is prolonged.

Informal care is important in that it can reduce government expenditures related to elderly care and help the elderly maintain their lives at home. However, we need to take into account the costs paid by caregivers. In this sense, the support for informal care needs to be strengthened. It is necessary to encourage the use of family leave and short-term care to provide temporary respite to caregivers, and to expand psychological counseling and treatment for them. Also, family care leave and work-hour reduction for family care should be promoted at work. In order to achieve sustainable and high-quality elderly care, it is important to make policy efforts to properly share the role of elderly care between the government and informal sector.

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