Wealth Inequality in South Korea in a Comparative Perspective: Housing Wealth, Household Structure, and Institutional Contraints
South Korea started economic development with relatively lower wealth inequality due to the land reform since the Korean War, 1950-53. However, with the rapid economic development from the 1960s, urbanization and redevelopment have made real assets a driver of growing wealth inequality. The Korean government has maintained a homeowner-centered policy and utilized the housing sector as a lever for economic growth. Additionally, the Gini coefficient of wealth has soared from 0.55 in the late 1980s to 0.67 in the 2000s. The developmentalism combined with Korean household characteristics seems to have contributed to it. Parents’ asset, too, played a role in the acquisition of their children’s housing assets(cf, Shin and Lee, 2014). Liberalization of loans to household assets, increasing housing price, and the growing debt of the poor have also contributed to the wealth inequality after the economic crisis of 1997.
Despite growing inequalities in housing and assets in Korea, previous research has shown two interesting findings. Firstly, from the perspective of international comparison, the wealth inequality in Korea ranks low among the OECD countries, while the inequality in earnings in Korea ranks high and the income inequality ranks middle. For example, the level of wealth inequality in Korea is lower than that in the U.S. and Sweden, and similar to that in Spain and Italy. Secondly, the distribution of incomes and assets are highly correlated in Korea, when compared to other nations. This is true even after controlling for age, education, and household type and after ruling out the confounding effects of extreme values and the high skewness of wealth distribution, applying a copula function (cf, Cheon et. al, 2014).
This paper seeks to explain why Korean wealth inequality is not as severe as that of other OECD countries, despite the widespread strong desire for homeownership in Korea as a complement to difficulties caused by weak income protection and job instability. We begin by identifying the key socioeconomic factors affecting wealth inequality, and focus on two explanatory factors. First, demographic characteristics such as household structure and age-wealth distributions are noteworthy in understanding wealth inequality. The second point is the equalizing effect of housing assets.
Our methodology is to quantify wealth inequality both in Korea and in selected OECD countries; analyze the contribution of other types of assets and debts to total wealth inequality, measured in this study using Gini coefficient decomposition techniques, counterfactual methods, and a quantile regression analysis.
The relatively low level of wealth inequality in Korea can be partly explained by the family structure and the age distribution of population. The wealth distribution by age in Korea is similar to that of Southern European countries. We hypothesize that a household structure with a large percentage of individuals aged 25-29 living with their parents on one side, and a higher proportion of single household in Korea on the other side, tend to lower the level of wealth inequality.
Another noticeable factor that curbed the deepening of wealth inequality are institutional constraints: the late and still limited development of financialization of the housing market; strong public regulations of housing debts (e.g. DTI, LTV limits) from the mid-2000s; and the persistence of a specifically Korean rental system based on deposit money called ‘Jeonse.’.
Despite this relatively low level of wealth inequality in Korea, however, the equalizing effect of housing assets is not evident unlike in many EU member countries. On the contrary, housing assets tend to magnify wealth inequality in Korea. This contrasts to the study of the EU member states(cf, Bezrukovs, 2013), which showed that housing assets have wealth-equalizing effects, and even relatively smaller shares of wealth invested in private businesses and share can contribute to wealth inequality. The contribution and marginal effects of housing assets to total wealth inequality are higher in Korea than in other countries. Unlike the results of existing studies on the role of housing assets in wealth inequality for the EU countries, housing wealth in Korea is not the main equalizing asset due to the fact that its share of the total net wealth tends to be large(The percent of housing assets is more than 80%, one of the highest in OECD countries).