Saving the Shrinking Middle Class

The share of Korea’s middle class, except for single households and those in rural areas, accounted for 66.7 percent of all households last year based on disposable income, down from 70.1 percent in 2003. Over the same period, the share of the poor grew from 11.6 percent to 13.1 percent and that of the upper class from 18.3 percent to 20.2 percent. Income-class polarization in which the middle class people declines and the gap between the lower and upper classes widens will trigger social conflict and amplify economic instability.

The shrinking of the middle class is a worldwide trend largely attributable to the aging population and technological advancement. Economic crises also accelerate the collapse of the middle class. The Organization for Economic Cooperation and Development said the share of the poor in member countries grew from 9.3 percent in 1985 to 10.6 percent in 2005. In Canada, Finland, Germany, the United States and Italy, the gap between the upper and middle classes has widened.

Korea’s middle class, however, is shrinking faster than other OECD member countries. The share of the middle class in Korea was 66.7 percent in 1982, peaked in 1992 at 75.2 percent, and declined to 63.3 percent in 2008. The income gap has also widened. The income disparity index grew from 3.72 in 1997 to 4.74 in 2007, the largest rise in the OECD. The share of low-income workers was also an OECD-high 25.6 percent in 2007.

The fastest collapse of Korea’s middle class is due to job losses stemming from the global economic crisis, but also because of the rapid speed of population aging and technological development. Technological advances have led to an increase in the need for a high-quality workforce and less demand for low-skilled workers. Middle class people who have failed to get jobs and keep up with technological development are growing poorer. The income gap between high and low-skilled workers is growing. Jobless senior citizens who live alone are also falling into poverty.

The collapse of the middle class not only aggravates class conflict and social instability, but also undermines fundamentals of the national economy. If the middle class suffers, the domestic consumption base weakens and saps economic vitality. More welfare spending will curb the shrinkage of the middle class and narrow the wealth gap between the haves and the have-nots. This is not a fundamental solution, however. To expand the middle class, the government presented in March last year a “human new deal” intended to raise household income and reduce the burden of educational and medical costs. No visible results have been made, however. Instead, the government should reduce the number of “technological dropouts” by fostering new growth engines and the service industry.