Implications of Rising Income Inequality for the Korean Economy

Abstract

The recent literature has found that rising income inequality in many countries is harmful for their sustainable growth (Dabla-Norris and others (2015), Easterly (2007), Ostry, Berg, and Tsangarides (2014). In Han, Kim, and Lee (2016), we narrow down the scope and quantitatively study the effect of rising income inequality in China, Japan, Korea, and the U.S. on the Korean economy. To do that, we first relate the empirical proxies corresponding to income inequality to data on consumption, investment, and employment. The proxies are income shares held by the highest 10 percent, the highest 5 percent, the highest 1 percent, the highest 0.1 percent, and the inverted Pareto-Lorenz coefficient from the World Wealth and Income Database (WID). Our regression results show that there might be opposing forces at work in the effect of rising income inequality on consumption, investment, and employment. An increase in either income held by top 10 percent or 0.1 percent tends to have negative effects on consumption, investment, and employment. On the contrary, the income share held by top 1 percent tends to have positive effects. As a result, our predicted effect of an increase in top income shares, arising from rising inequality, on consumption, investment, and employment depends on the combination of the predicted path of top income shares weighted by the estimated coefficients. In addition, the inverted Pareto-Lorenz coefficient, which represents a country's degree of income inequality, does not have any significant effect.