"Past Dismissal Experience Shrinks Household Consumption"

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A study has found that past experiences of being fired at work suppress household consumption.

According to the Bank of Korea's report 'BOK Economic Research 2024-5, Analysis of the Long-term Effects of Unemployment Experience on Household Consumption' released on the 30th, household consumption in South Korea has significantly slowed down since the 1997 foreign exchange crisis and has not recovered its previous growth trend.

The analysis showed that past unemployment experience had a statistically significant negative impact on household consumption. The report emphasized that the shock following the 1997 foreign exchange crisis negatively affected South Korea's household consumption in the long term through unemployment experience.

This scarred consumption mainly occurs through the asset accumulation channel, which increases savings rather than reducing future income. Scarred consumption refers to the phenomenon where household consumption continues to be affected by past shocks. When consumers reduce spending due to past unemployment experience and save instead, they accumulate more wealth in the future.

The reduction in household consumption due to unemployment experience was mainly observed in households with low total income and total assets, while households in the top asset bracket did not reduce consumption even when unemployment experience increased. The report explained that the reason why wealthier households did not reduce consumption despite unemployment experience is due to the assets they had accumulated and relatively low borrowing constraints.

Choi Young-jun, a research fellow at the Microeconomic Institutions Research Division of the Bank of Korea Economic Research Institute, who authored the report, said, "Scarred consumption mainly occurs through the asset accumulation channel that increases savings rather than reducing future income," and added, "The research results suggest that past shocks can become scars and have a long-term impact on household consumption."

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