COVID-19 exacerbates social, economic polarization in Korea

Pandemic leaves uneven scars on social brackets

By Anna J. Park

Kim Eun-ah (pseudonym), a 37-year-old executive director at one of the most successful startup companies in Korea, stays in Gangneung, Gangwon Province, on weekdays. Her company allowed her to work online, and she enjoys living in the city located right next to the East Sea.

The so-called "workation," a portmanteau of work and vacation, is becoming a more frequent trend in Korean corporate culture, as it raises employees' productivity as well as well-being. So far, mostly well-paid IT-based company workers have been enjoying this flexible work arrangement that lets them work in the many stunning countryside settings of Korea or even overseas, in foreign lands like Thailand and Guam.

It is one of the changes that COVID-19 has brought to the domestic work scene. In a time of accelerated digital transformation in every sector of industry and society, corporations have adopted various types of flexible work schedules to attract capable employees and to raise productivity.

However, the flexible work culture has only been available to a fraction of the entire workforce in Korea. Many workers in industries like tourism and aviation, which were hit hard by the pandemic, lost jobs or saw their salaries cut, and many small business owners went bankrupt, after being saddled with enormous debts.

While COVID-19 has been a common experience for everyone living in Korea during the past two and a half years, its impact on each person has been vastly different. The pandemic left a deep scar on many, but for others it became the biggest financial boon and introduced innovative work-life changes.

Although it may be hard to generalize such varying experiences, what has been striking so far is that the pandemic accelerated polarization in almost every sector of Korean society, including income structure, industrial output, retail patterns, education and leisure activities. Income inequality and social polarization had been present in Korea even before the pandemic hit the country, yet it obviously deepened economic and social divides.

Widening economic disparity

Numerous statistics expose the exacerbated social and economic divides in the country. According to data by Statistics Korea, the average net assets owned by the top 20 percent asset bracket stood at 1.28 billion won ($890 million) in 2021, which is 125.5 times higher than that of the lowest 20 percent asset bracket group. The gap was 99.8 times back in 2017, but it widened during the pandemic. The substantial gap in asset values has to do with governments' expansionary monetary policies throughout the pandemic to minimize the shock, which resulted in a huge spike in prices of assets such as real estate and stocks.

The income gap has also worsened during the past couple of years.

Research published by Shinhan Bank in April this year showed that the top 20 percent earned 9.48 million won a month as of early 2022, while the lowest 20 percent made 1.81 million won, a 5.23-times difference and a clear deterioration from 4.76 times in 2019. While those in the top 20 percent earned 5.9 percent more per month in 2022 compared to the previous year, those in the bottom 20 percent bracket saw their monthly income fall by 1.1 percent year-on-year.

The widened income gap is attributed partially to a pandemic-led acceleration of corporate digitalization. A handful of IT-focused companies and capital-abundant conglomerates reaped the benefits of digital-based growth, while workers in declining industries and cash-strapped small and medium-sized companies experienced a fall in their income.

According to data compiled by the Korea Enterprises Federation (KEF), the average income of workers at small and medium-sized companies stood at 49.4 percent of that of employees of big conglomerates, meaning that workers at small companies earn less than half of what conglomerate employees earn. Considering that the average income of workers at small and medium-sized companies surpassed 64 percent of what conglomerate company workers earned in 2012, the income disparity has obviously worsened over the past decade.

While the gap between conglomerates and small companies widened, the income disparity has also been aggravated between full-time employees and temporary workers. In addition, self-owned business owners saw their average monthly revenues plummet by 28 percent in 2021 from 2019 levels.

The polarization is evident in areas beyond asset and income figures.

The vacancy rate of commercial office buildings in Seoul's affluent Gangnam area fell to an all-time low of 3.2 percent, while traditionally representative commercial districts, such as downtown Seoul's Myeong-dong, saw the vacancy rate exceed 52 percent as of the second quarter this year. Areas like Hannam-dong, one of the most expensive housing areas in Seoul, were less hit by the pandemic, as the area's stores focus on providing luxury services for high-income citizens.

Notably, industries with high income earners have been thriving more than ever.

Hyundai Department Store's compiled data showed that sales of luxury goods increased 38.2 percent year-on-year as of early this year. The country's golf enthusiasts also rose by 20 percent to 5.6 million people in 2021, up from 4.7 million in 2019. The import volume of whisky, a representative high-end alcohol beverage, rose by 32.4 percent year-on-year in 2021.

"While concerns about an economic downturn are growing, high-end markets represented by department stores continue to enjoy bullish sentiment, which is moving separately from the entire retail market pattern. The high-income brackets' improved cash flows positively influenced growth in the high-end goods and services markets, showing a deepening consumption divide in the country," Heungkuk Securities researcher Park Jong-ryul pointed out.

Exacerbated inequality shown in K-shaped recovery

As shown in the examples above, the trajectory of each economic participant's financial prosperity over the past two years has diverged further, according to their positions in industries, asset levels, education and even health status, as economic impacts differed for each of these sub-groups. For instance, those in high-growth tech industries and asset owners enjoyed the upper end of a K-shaped economic growth, while those hit worse by the pandemic went the path of the lower end of the K-shaped decline.

This increasing level of inequality on diverse fronts, including income, assets, education and health, is not confined to the Korean economy. It has been a global phenomenon since the pandemic jolted the entire world.

According to the Oxfam report, "Profiting from Pain," published early this year, COVID-19 has resulted in the biggest systemic increase in income inequality ever seen. The report said the pandemic impacted the incomes of the poorest the most. In 2021, the poorest 40 percent saw the steepest decline in their income levels, which went down 6.7 percent on average compared to pre-pandemic projections. This has led to a rise in income inequality, which had been declining since the 2000s as measured by the Gini index.

The World Bank's global inequality report published early this year also showed the increasing inequality in both within-country and between-country indexes. The within-country income inequality was most evident in Latin American and Caribbean countries, as well as Sub-Saharan African countries, where the proportion of the extreme poor bracket is largest among the world's countries.

The report said between-country income inequality has increased as a result of the lagging economic recovery in emerging markets and developing countries, compared to the favorable performances of advanced economies. The report added that a comprehensive package of policies would be needed, in order to steer the global recovery onto a more equitable development path.

Calls for strengthened welfare and R&D expenditures for long-term success

As the World Bank report states that a comprehensive set of policies are required to pursue more equitable economic growth, economic experts in Korea are also urging the government to deploy proper measures to mitigate the impact of income inequality within the country.

Hong Suk-chul, a professor of economics at Seoul National University, told The Korea Times that the government needs a long-term perspective and should focus on supporting the country's marginalized groups, who have experienced worsening inequality, which could hurt the national economy in the medium to long term.

"One of the most noticeable features is that polarization took place not only on economic fronts, but also in various other social indexes. The education gap is such a representative case that affects the country's medium- to long-term growth potential. As schooling hadn't been normalized nearly for two years, it has already widened the educational achievements among income brackets," the professor said.

He explained that as education used to function as a ladder enabling social and economic mobility, the weakening of educational achievement in lower-income households during the past couple of years suggests a deepened level of inequality for the young generation.

"The issues of mental and physical health also impacted the socially marginalized much more adversely, which will in turn aggravate already-widening disparities among groups," Hong said, adding that worsening mental and physical health has put the poorest people in the country into a vicious circle.

As a solution, Hong urged the government to allocate a large enough welfare budget for the marginalized. He said that although policies for income redistribution might not bear results in the short term, they're an absolute necessity as they would cost the economy much more later if they're not put into practice now.

Lee Seung-hun, a research fellow at KB Management Institute, stressed the importance of consistent government investment in research and development in order to reduce inequality in the country.

"Inequality could partially be solved through a society's continued growth. That's why investment into future growth potentials is required, despite concerns over economic slowdowns and tightened monetary policies. While large conglomerates can continue their R&D activities, small and medium-sized companies find it hard to make investments during economic downturns, even if they have capabilities for innovation. State-led R&D initiatives would help reduce the widening gaps between large and small companies," Lee said during a phone interview with The Korea Times.

The researcher also called for the government's active management of social conflicts, which are an inevitable consequence of the aggravated polarization in the country.

Some market watchers emphasized how people really need to understand the current realities and trends of the economy so as not to fall victim to the polarization. Kim Gwang-suk, research head at the Institute for Korean Economy and Industry (IKEI), said only those who understand the current local and global economic situation will be able to step up in their income and asset values.

"As seen in the past couple of years, whether you worked hard or not is no longer a key factor for you becoming rich. It's now all about whether you correctly understand the fast-changing economic landscape and what sort of assets you own," Kim told The Korea Times, stressing that everyone is now required to stay aware of the changing situation.