Why Korea's Middle Class Is Collapsing

Global consulting firm McKinsey said in a report on Sunday that half of all middle-class Korean households risk falling into poverty as they are trapped by slow income growth and increased expenditures.

The proportion of middle-class households shrank from 75.4 percent in 1990 to 67.5 percent in 2010, and 55 percent of middle-class families are having a tough time making ends meet as they are burdened by debt, according to McKinsey.

The biggest reason for the decline of the middle class is a drop in the number of high-paying jobs with major business conglomerates, which led to a standstill in income growth. Productivity of major manufacturers increased 9.3 percent on average annually from 1995 to 2010, but their overseas production also rose from 6.7 percent in 2005 to 16.7 percent in 2010, resulting in an average 2 percent fall a year in domestic hiring.

Small- and mid-sized businesses, which account for 88 percent of domestic jobs, and the service sector, which accounts for 70 percent, are suffering from low productivity.

Productivity in SMEs plummeted from 49 percent of the level of major conglomerates in 1990 to 27 percent in 2010, while pay stands at half the amount of the conglomerates. In Germany, SMEs’ productivity stands at 62 percent of the level of big businesses, and salaries at 90 percent. In the service sector, productivity reaches 40 percent of the level of big companies.

But while incomes stagnate, the mortgage repayment burden is mounting, as is education spending for children. As a result, the household savings rate fell from 20 percent in 1994 to just 3 percent in 2012, the lowest in the OECD, while household debt surged.

The consulting firm pointed out that Korea has the world’s highest suicide rate and is seeing a surge in divorces and a low birthrate, all of which also contribute to the decline of the middle class. At this rate, the Korean economy would be "unable to continue growth," it added.

If the Korea is to obtain a new growth engines, it must boost the competitiveness and efficiency of small businesses and the service sector. This solution is nothing new, but no concrete measures have been put into practice so far.

In order for the economy to gain momentum again and to create high-quality jobs, businesses wallowing in low productivity must be left to fail according to the principles of the free market and their workers must shift to new and efficient industries. That is the only way to improve productivity across the board, restore the middle class and enhance the quality of life.

Read this article in Korean