Asian Political Economy Seminar, November 19, 2020

1. Achievements and Limitations of Income-Led
Growth of the Moon Government in Korea
Asian Political Economy Seminar
November 19, 2020
Kang-Kook Lee
Ritsumeikan University

2. Income-Led Growth of the Moon Government
• A new growth strategy to promote aggregate demand and growth
by increasing wage and household income in Korea
• Based on Post-Keynesian wage-led growth, and considering
specific reality of Korea
• Examining background and policies of income-led growth, and
evaluating growth, distribution and employment effects
• Income-led or wage-led part was successful but growth was not,
and limitations include rising real estate prices, de facto austerity in
2018, and others
• Need for upgrading income-led growth and political support for it

3. Wage-Led Growth and the Korean Economy
• Post-Keynesian wage-led growth argues that the higher wage share
promotes economic growth, demand-side growth theory
• Mainstream economics recognizes that AD affects AS and long-run
growth with hysteresis effects and endogenous technological adoption
(Yellen, 2016; Anzoategui et al., 2019; Cerra and Saxena, 2020)
• Serious inequality is harmful to economic growth, leading to inclusive
growth agenda
• Empirical studies of wage-led growth in Korea report that the Korean
economy is strongly wage-led after the 1997 crisis (Lee, 2017)
• But single-equation approach vs. system equation approach, and
other points for consideration

4. Potential Output Estimation Falling
because of the Crisis and Stagnant AD
Source: Coibion (2018)

5. Background of Income-Led Growth in Korea
• The wage share falling and inequality rising, and growth stagnating along
with the structural changes of the economy, globalization and aging after
the 1997 crisis
• The growth of profit was the highest in the OECD, while real wage,
household income and consumption fell, resulting in stagnant demand and
growth
• A failure of the trickle down effect with deregulation and debt-led growth,
so a concern about a vicious circle of rising inequality and lower growth
• Wage-led growth of the ILO introduced to Democratic party around 2013,
and policy agenda of income-led growth as a growth theory of
progressives
• Not wage-led but Income-led growth, considering the Korean reality with
limited social welfare and the high share of self-employed

6. Source: Bank of Korea

7. Source: Bank of Korea

8. Top income shares rose, and the top 10% income share is
very high in Korea
Source: World Inequality Database

9. Note: wage share = (employee compensation + OSPUE adjusted) / GVA
Source: OECD

10. Source: Statistics Korea

11. Gini Coefficient for Disposable Income in Korea compared
with OECD, Rather High Using New Statistics
Source: OECD, Statistics Korea

12. Also, the relative poverty rate, especially that of the elderly, is
high in Korea.
Source: OECD, Statistics Korea

13. The fertility rate is the lowest, while the suicide rate is
the highest in Korea
Source: OECD

14. Public social expenditure is just half of OECD average,
and the share of self-employed is very high
Source: OECD
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Public Social Expenditure out of GDP in
2018 (%)

15. Main Policy Tools for Income-Led Growth
• Income-led growth attempts to increase wage and household income, and
promote demand and growth
• Based three pillars of policy tools
• 1) Increasing household income
• Raising minimum wage (16.4% in 2018), job stabilization fund (3 trillion
won in 2018 and 2019), reducing card fee and rent, expanding EITC (from
1.2 trillion in 2018 to 3.8 trillion in 2019), etc.
• 2) Enlarging safety net and social welfare
• Expanding employment insurance (from mid- 2018), introducing and
expanding child allowance (0.7 trillion in 2018 to 2.1 trillion in 2019),raising
elderly pension (9.1 trillion in 2018 to 11.5 trillion and 13.2 trillion in 2019
and 2020), welfare budget increased by 12% in 2019
• 3) Reducing living cost: medical cost, childcare and housing cost, etc.

16. Minimum Wage Raise and Income-Led Growth
• The high share of low wage workers in Korea may justify rapid minimum wage
raise growth, 16.4% in 2018, 10.9% in 2019 and 2.9% in 2020, but a hot
controversy
• The growth rate of minimum wage is statistically significantly associated with
the wage share, and maybe easier policy than tax raise and redistribution
• Job stabilization fund introduced, providing 9% of minimum wage for small
firms and self-employed with less than 30 workers, 3 trillion in 2018 and 2019,
and 2.1 trillion in 2020
• A concern about negative effects on rapid minimum wage raise on
employment and conflicts between the weak in economic stagnation with the
high share of small companies and self-employed
• The relative level of minimum wage higher than other countries, and the ratio
of the affected and that of workers receiving less than minimum wage
increasing

17. Source: OECD

18. Source: Minimum Wage Committee, Bank of Korea

20. Internationally, the relative level of minimum wage is high, and
the share of workers affected by it and workers receiving less
than that rose rapidly
Source: OECD statistics, Minimum Wage Committee

21. Labor Market and Employment in 2018
• The effect of a mild minimum wage raise on employment is not significant
empirically (Allegretto et al., 2016; Card and Krueger, 2004)
• Mixed results for the effect of the minimum wage raise on employment in
2018, an ongoing debate to consider a trend across industries and
economic cycles (Kim and Lee, 2019 vs. Hwang, 2019)
• The increase in employment in 2018 was down to 97K but up to 300K in
2019, and the labor market is not bad considering the employment rate
though it fell for thirties and forties
• The fall in employment growth in 2018 was associated with rapid aging,
the manufacturing crisis, stagnant construction sector and the difficulty of
the self-employed after a fall of Chinese tourists
• There could have been a negative impact of the rapid minimum wage
raise in economic stagnation, and aggregate wage growth might be
harmful to some vulnerable sectors (macro vs. micro)

22. We need to consider both the population effect in 2018
Source: Statistics Korea

23. The employment rate in general was fine in 2019,
but that for forties fell
Source: Statistics Korea

24. Source: Statistics Korea

25. Economic Growth after Income-Led Growth
• GDP growth falling recently (3.1% in 2017, 2.7% in 2018 and 2% in 2019):
the peak was mid-2017 and the economy stagnating after late 2018
• Growth rate was high in 2017 due to the semiconductor industry boom and
the construction boom in 2015-17, but facilities and construction investment
fell significantly after late 2018
• Possible effects of income-led growth on investment are not clear, but
should be analyzed further
• Exports fell in 2019 with the trade war and uncertainty in the global
economy, leading to a fall in investment and economic stagnation
• Private consumption was relatively better with the highest contribution in
2018, associated with the growth of wage and household income (main
channel of income-led growth)
• The gov’t started to make more efforts to promote corporate investment and
to stimulate the economy, away from income-led growth from 2019

27. Source: Bank of Korea

28. The growth slowdown in 2018 was due to a fall in
investment, but the contribution of private
consumption was relatively large
Source: Bank of Korea

29. Income Distribution after Income-Led Growth
• Inequality fell in 2018 according to the official income distribution data of
SHFLC, with Gini coefficient 0.354 in 2017 to 0.345 in 2018, and the poverty
rate 17.3% in 2017 to 16.7% in 2018
• The quarterly data of HIES reports inequality rose in 2018, but HIES may be
problematic because of the big change in the sample and it is quarterly data
• Even in HIES, income of all workers’ households rose in 2018, while income of
poor and old non-workers’ households income fell significantly outside the
labor market
• Wage inequality and the share of low wage workers fell, and the wage share
and household consumption share rose after 2018, a success of ‘income-led’
or ‘wage-led’ part as it was expected
• The role of income redistribution increased, faced with rapid aging and
economic stagnation, but more efforts for raising taxes on high income groups
and assets, and expanding social welfare are called on

30. • Inequality fell in terms of the Gini
coefficient, the quintile income
ratio, and the poverty rate in 2018
according to SHFLC
• Both in market income and more in
disposable income

31. • HIES reports the increase in
inequality but income of all workers’
households rose in 2018
• Income of poor and non-workers’
households income fell significantly
(average age of bottom 20% non-
workers’ household was 68)

32. Source: Kim (2020), Statistics Korea
Hourly wage Monthly wage
2017 2018 2019 2017 2018 2019
P9010 4.13 3.75 3.59 5.63 5.04 5.39
P5010 1.92 1.67 1.69 2.5 2.33 2.58
P9050 2.15 2.25 2.13 2.25 2.16 2.09
Gini 0.316 0.3098 0.2988 0.3293 0.3289 0.325
Low wage (%) 21.4 15.7 15.8 20.5 17.9 21.6
Wage inequality and low wage workers decreased after 2018

33. Wage growth was higher than productivity growth in
2018 and 2019, so that the wage share rose
Source: Ministry of Employment and Labor, Bank of Korea

34. The increase in the wage share after 2018 could be
associated with the increase in minimum wage, but
profit of the nonfinancial corporate sector fell
Source: Bank of Korea

35. Real Estate Market Boom and Policy
• Real estate prices, especially apartment prices in Seoul, went up after
2018, although construction investment and private credit fell
• Limitations of real estate policy: the government was hesitant about
raising property taxes, gave benefits such as tax cuts to house rental
business holding in 2017, and supply of houses in Seoul was limited
• Recently, a concern that ‘Jeonse’ (lump-sum housing lease) prices are
rising along with tight regulation on the housing lease contract
• National net wealth compared to national income rose after 2017 because
value of land and buildings rose due to the increase in real estate prices
• Piketty’s beta (capital-income ratio) is high internationally, so we should
restrain the increase in asset market prices and rent income, given high
asset concentration and inequality

36. • Apartment prices in Seoul rose rapidly after 2017, associated with speculative
demand and relatively limited supply and policy mistakes
• But construction investment and private credit growth were high in 2015-2017
along with deregulation in the former government, and they fell after 2018
Source: Bank of Korea, Kookmin Bank

37. Source: Lee and Yoon (2017), Bank of Korea
• The capital-income ratio (Piketty’s beta) is high internationally, and it rose
in the 2000s, and after 2018, the ratio rose again
• A concern about rising asset prices with high asset inequality

38. De Facto Fiscal Austerity in 2018
• The Korean government aimed at fiscal expansion, with the budget growth 7%
in 2018, and supplementary budget after 2017
• However, de facto fiscal austerity in 2018 because tax revenue was 25.4
trillion won (1.4% of GDP) more than expected: consolidated fiscal surplus
1.7% of GDP, and surplus was 1% of GDP more than the original budget
• In 2018, the SOC budget decreased by 14%, and the supplement budget was
small, different from 2016 and 2017, so the 2018 budget was austerity also in
terms of fiscal impulse index or cyclically adjusted primary balance
• The failure of fiscal policy in 2018 in macroeconomic management and
complementing income-led growth, due to conservative tax revenue estimation
and the lack of strong will for fiscal expansion
• The 2019 budget was more expansionary with 9.5% increase, but the
supplementary budget was not large, and fiscal soundness myth was strong
even if Korea’s fiscal space is very large and fiscal expansion is desirable

39. De facto Austerity As a Result of
Underestimation of Tax Revenue in 2018
Source: Ministry of Economy and Finance, IMF Fiscal Monitor

40. Source: Ministry of Economy and Finance
• The government debt ratio fell in 2018 due to extra tax revenue
• It is expected to rise after 2020 along with fiscal expansion and aging
(44% in 2020 to 59% in 2024)

41. COVID-19 and Recession in 2020
• A successful response to COVID-19 and the growth rate in -1.9% (-5.8% for
advanced countries), and the fiscal deficit and government debt also small
• Four times of supplementary budget of 67 trillion won, 3.5% of GDP, including
consumption coupon, emergency cash, expanding employment safety net,
supporting self-employed, etc.
• Korean New Deal Plan: digital new deal (developing data infra, online
industry), green new deal (green infra, low carbon energy) and safety net
(employment safety net and investment in human) to spend 114 trillion won
create 1.9 million jobs by 2025
• More efforts to strengthen weak workers’ bargaining power and reduce
inequality are necessary, and plans to reduce carbon emission to realize net
zero by 2050 are not clear (Korea is the worst in responding to climate change)
• Fiscal stance is rather expansionary after 2020, with cyclically adjusted
primary balance deficit and the rising debt ratio

42. Health vs. Economy:
a tradeoff in short run but no tradeoff in longer run

43. • Korea is much better than other
advanced countries in terms of
growth and government finance
in 2020
• Gross government debt ratio is
still low, and net deb ratio is even
lower
• Source: IMF, Fiscal Monitor

44. Upgrading Income-Led Growth
• Short-run growth effect of income-led growth could be limited but it should
be understood as an effort to reduce inequality and structurally prevent
demand stagnation in the long run
• Income-led 2.0 is necessary with fiscal expansion, raising taxes and
expanding social welfare, and structural reform of the economy
• Efforts to reduce a gap between large companies and SMC, to reform the
dual labor market by strengthening vulnerable workers’ bargaining power,
and to repress vested right in the public
• New and active industrial policy for innovation including the Green New
Deal, together with promoting competition is necessary
• Conservatives insist deregulation to promote innovative growth, but more
equal and inclusive growth is helpful to innovation and long-run growth
(Lee, 2019)

45. The effective income tax rate for top 10-20% is still too low
Source: Calculated based on income tax data for 2017

46. Concluding Remarks
• The direction of income-led growth in the Moon
government was desirable but some limitations in reality
• Inequality fell and the wage share rose in 2018 and 2019,
so ‘wage-led’ or ‘income-led’ were successful but
economic growth was not yet
• A too rapid minimum wage raise, rising real estate prices,
austerity in 2018, limited efforts for income redistribution
and for the reform of the economic structure
• We need to upgrade income-led growth and introduce
more effective and realistic policy measures for equality-
led growth