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[2014-12] Analysis fo Causes of Widening Income Gap between Households and Corporations

Research Department 2015.01.12 1528
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   The corporate-household income ratio has risen since 2000 as the growth of households incomes (5.7% from 2001 to 2012) has fallen far short of that of corporations (9.8%). This is attributable mainly to the morbidity of the incomes and operating profits of the self-employed, a decrease in interest income in the household sector and the only lackluster increase in employee income compared to the rise in added value in the corporate sector.

   The decline in the share of labor income is found, from an empirical analysis of the underlying factors, to have been affected by the increased weight of external transactions in the Korean economy, the strengthened market power of corporations and the increased proportion of highly-educated workers. The significant relationship between the proportion of highly-educated workers and the decline in the share of labor income is interpreted as having arisen from the large effect of the expansion of the supply of highly-educated workers on the decline in wages.

   Analysis of the corporate-household income ratio also shows that it is positively related with decreases in interest rates, the strengthened market power of corporations and the economic growth rate. The rationale for these positive relationships may be interpreted as reflecting the fact that household debt has grown to a larger extent than corporate debt, that the operating profits of the self-employed have been lackluster while those of corporations have grown significantly, and that recent Korean economic growth has been led by export-oriented firms, which have little trickle-down effect on household incomes. 

   If the income gap between the household and corporate sectors continues to widen, the Korean economy will become more sensitive to domestic and external shocks and maintaining stable growth will become problematic. In this regard, continued efforts are needed to narrow the income gap between the two sectors. To this end, the share of labor income should be increased by improving households’ income conditions and creating more quality jobs. Furthermore, efforts for economic structural reform should also be sustained, such as stabilizing household debt, easing excessive competition among the self-employed and increasing the trickle-down effect in the export sector.