The shaky Korean middle class

Self-employed persons, who make up a pillar of the middle class, have been crumbling fast.

Lee Sang-ryeol

The author is an editorial writer of the JoongAng Ilbo. Data suggests that approximately 60 percent of Koreans are in the middle class. That means six out of 10 households are in the middle class here. Statistics Korea defines people earning 50 percent to 150 percent of the country’s median income as the middle class. In terms of disposable income, including social benefits such as pensions and subsidies, 61.1 percent of people were in the middle class as in 2021, according to state think tank Korea Development Institute. The finding suggests that the economy is well-proportioned by international standards. Since the monthly median income of a four-member family that year was 5.3 million won ($3,970), households earning between 2.7 million won and 7.9 million won a month could be considered the middle class.

However, many Koreans cannot agree with the label. That’s because in this case, the middle class’ household income — or 2.7 million won a month — is just a bit more than the minimum wage of 1.8 million won a month in 2021. One should feel economically stable — and comfortable — to be identified as a member of the middle class. The data showing 60 percent of the population in the middle class is incongruent with general sentiment. According to a survey by NH Investment Securities in September last year, 45.6 percent who fell in the middle class category in fact regarded themselves as poor. In a 2020 poll, 40.5 percent of them said they actually viewed themselves as poor. The survey was based on the OECD’s standard for the middle class — or people earning between 50 percent and 150 percent of the median income.

The Korean middle class had been struggling ever since the Asian financial crisis in the late 1990s when macroeconomic conditions and economic growth sharply weakened. The economy is heavily indebted. Household debt reached 1,867 trillion won by the end of 2022, adding 400 trillion won from the late 2017. In the second quarter of last year, Korean households spent 13.4 percent of their monthly income to meet debt obligations, according to the International Monetary Fund (IMF). Leveraged investment in real estate, stocks and cryptocurrencies during the asset boom helped debt to balloon, with their financial burden aggravated by the sharp increase in interest rates.

Self-employed persons, who make up a pillar of the middle class, have been crumbling fast. Self-employed debt hit a whopping 1,020 trillion won by the end of last year. 1.73 million of self-employed persons, who borrowed money from multiple institutions, owe more than 400 million won in debt on average. The strict social distancing measures during the pandemic landed particularly hard on the self-employed. The grace period on rollovers for the self-employed is supposed to end by September. The debt bomb will most likely crush many of the self-employed.

Excess debt certainly worsens economic growth. Consumption will fall due to less affordability after debt financing, weakening domestic demand and income which will further dampen income and consumption. The economy must run well to increase income to pay off debt. But debt is hampering growth. In the double whammy, exports have been contracting for the seventh straight month.

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The Korean economy has fallen into the slow-moving growth trap. The IMF estimates Korea’s growth for this year at 1.5 percent, more than 1 percentage point off the global growth outlook of 2.8 percent. Since 2011, the economy has been underperforming global growth. Concerns are growing about the Korean economy decoupling from the global economy.

The middle-class crisis cannot be solved if the economy grows at 1 percent. Breaking out of low gear is the fundamental way to strengthen the middle class. The Yoon Suk Yeol government has not been able to turn out an impressive growth strategy. The traditional fiscal and monetary stimuli means to fight an economic downturn was abused by the past liberal administration. The conservative government cannot increase fiscal spending since national debt has surged tremendously. An interest rate cut also is out of the picture due to strong inflation. Structural reform is the remaining tool to stimulate the economy, but the government has made little progress on this front too.

All governments strive to bolster the middle class to boost the economy, as the middle class are key to social stability. National pension, employee shareholder associations, “nest-egg” savings, new town projects, and retirement extension have been some of the measures to aid the middle class. Yoon’s approval rating stuck in the 30 percent range could mirror the disappointment and frustration of the middle class.