"Income Drops and Excluded from Aid" Middle Class Closes Wallets Due to COVID-19

KDI Analysis... Last Year Spending Decreased by 6.8%, Largest Consumption Drop Among the Top 20% Income Quintile
Wealthy Top 20% Reduced by 0.8%, Poor Bottom 20% Increased by 2.8%

[Sejong=Asia Economy Reporter Kim Hyun-jung] It has been revealed that the group that reduced consumption the most during the COVID-19 phase last year was not the poor or the wealthy, but the middle class. Although income earned from the market, such as earned income and business income, significantly decreased, they responded by closing their wallets as they were excluded from various government support programs. Considering this situation, there are calls to select government support recipients by taking into account both the income levels of economic agents and the scale of income shocks.

According to the report "COVID-19 Economic Crisis and Household Consumption," authored by Nam Chang-woo, a research fellow at the Korea Development Institute (KDI), and Jo Deok-sang, Chief Forecaster, on the 17th, consumption expenditure of the third quintile households, corresponding to the 40-60% income bracket last year, decreased by 6.8%, significantly exceeding the overall household expenditure decline rate of 2.8%. The consumption expenditure decline rate for the fourth quintile households, in the 20-40% income bracket, was 4.2%, followed by the second quintile households, in the 20-40% lower income bracket, at 3.3%.

Consumption among the wealthy, who are in the top 20% income bracket, decreased by only 0.8%, while consumption among the poor, in the bottom 20% income bracket, actually increased by 2.8%. Looking solely at household expenditure size, the wealthy were not significantly affected, whereas the third quintile, representing the middle income bracket, and the fourth quintile, classified as middle class, led the consumption decline last year.

The government's "disaster relief funds" are pointed out as the reason for the differentiated expenditure change rates by income quintile. For the first quintile, the bottom 20% income group, market income?which includes earned income, business income, and property income?decreased by 6.1% last year, but disposable income, which accounts for public transfers such as government disaster relief funds and non-consumption expenditures like taxes, increased by 7.5%. Although they were hit hardest by COVID-19, receiving universal and selective government support funds increased their average income, enabling spending capacity. The second quintile also saw a 1.9% decrease in market income but a 4.6% increase in disposable income.

In contrast, the third quintile experienced a 2.7% decrease in market income, with disposable income increasing by only 2.0%. The fourth quintile also saw a 1.2% decrease in market income, with disposable income increasing by just 2.2%. Both the third and fourth quintiles fell short of the overall household average disposable income growth rate of 3.3%. Notably, the third quintile had the lowest disposable income growth rate among the five income quintiles.

Research fellow Nam Chang-woo explained, "The third and fourth quintiles, representing the middle-income groups, were most exposed to the real shocks and uncertainties caused by COVID-19. The middle class responded by significantly reducing consumption expenditure and increasing savings to prepare for the worst-case scenario."

He also diagnosed the need to select government support recipients by considering both the income levels of economic agents and the scale of income shocks. Nam said, "Since the consumption shock due to the spread of COVID-19 was significant among the middle-income groups, it is necessary to select government support recipients by considering both the income levels of economic agents and the scale of income shocks. Given that effective quarantine is a key factor in the recovery of household consumption, to secure the acceptability and sustainability of quarantine policies, it is necessary to provide support to groups that bear a significant social cost due to quarantine measures."

This content was produced with the assistance of AI translation services.