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[Editorial] Income disparities

Misguided policy results in reducing earned incomes of poorest households

Since assuming office in May 2017, President Moon Jae-in’s administration has pushed an income-led growth policy, which it hopes will help narrow the income gap between rich and poor households.

However, official data released last week showed the misguided policy continuing only to widen income inequality in the country.

The average monthly income of households in the bottom 20 percent income bracket remained at 1.32 million won ($1,083) in the second quarter of the year, unchanged from a year prior, according to data from Statistics Korea. In contrast, the figure for households in the top 20 percent range increased 3.2 percent to 9.42 million won in the April-June period.

In particular, the lowest 20 percent saw a 1.3 percent decrease in their monthly disposable income, compared to a 2.3 percent rise for the highest 20 percent.

Accordingly, the ratio of the first quintile’s disposable income to that of the fifth quintile, a measure of income disparities, reached 5.3 in the April-June period of the year. The figure marks the highest for any second quarter since 2003, when the government began to compile relevant data. A higher figure points to a wider degree of income disparity.

The widening income gap is attributable mainly to a growing difference in earned income between poor and rich households.

The monthly earned income for the lowest 20 percent bracket shrank 15.3 percent in the second quarter from a year earlier, compared to a 4 percent increase for the top 20 percent range.

Without a 9.7 percent rise in transfer income -- which refers to money given by a government through welfare and employment programs -- the bottom 20 percent would have seen their overall monthly income falling for six consecutive quarters in the three months to June. The average monthly transfer income amounted to 652,100 won for the lowest quintile of households in the second quarter, far exceeding the average monthly earned income of 438,700 won.

The fall in earnings of low-income households results mainly from a loss of jobs affected by steep minimum wage hikes over the past two years.

In a bid to back the income-led growth drive, the country’s minimum wage rose 16.4 percent in 2018, followed by a 10.9 percent increase in 2019.

The sharp wage hikes have pushed employers -- particularly small business owners -- to cut their payrolls to cope with mounting personnel costs.

Over the past year alone, the number of employees working more than 36 hours per week decreased by about 380,000. In July, the number of jobless people was nearly 1.1 million, with the unemployment rate standing at 3.9 percent, the highest since 2000.

The income-led growth policy envisions a virtuous circle in which hikes in wages, particularly those of low-paid workers, lead to increased spending, which in turn boosts economic growth. The assumption has just proved wrong, as a loss of jobs has reduced earnings of low-income households.

Creating low-paid temporary jobs by using taxpayer money would do little to help prevent low-income households from becoming poorer and reduce income inequality.

Furthermore, a possible decrease in tax revenues amid a deepening economic downturn would make it impossible to maintain transfer payments to low-earning households.

The economy will be dragged further into a slump if low-income households are pushed to cut consumption due to a fall in transfer income.

The best and most fundamental way to enable poorer households to earn more is to forge corporate-friendly conditions to encourage companies to increase investment and hire more workers.

The government last week announced a plan to spend 4.7 trillion won on promoting what it described as innovation-driven growth. Regulatory and labor reforms are essential to nurture new industries that should drive innovative growth.

Consideration should be given to applying differentiated minimum wages by industrial sector, region and corporate size.

The minimum wage is set to rise 2.9 percent to 8,590 won next year. Employers will still feel burdened by the relatively moderate increase, which comes on top of double-digit hikes for two consecutive years.

President Moon said last year that the effect of a minimum wage increase “is 90 percent positive.” His remarks sound hollow and insensible, given earnings of households in the lowest 20 percent income bracket have decreased nearly 30 percent over the past two years.

The Moon administration should no longer adhere to the ill-conceived income-led growth policy. It should be reminded that delaying a policy shift would only increase the suffering of the same people it is supposed to help.