Title : Household Debt and Income Inequality in South Korea

Author : Soohyon Kim(Chonnam National University), Seolwoong Hwang(Bank of Korea)

In this study, we analyze the impact of the increasing household debt on income inequality in South Korea. Using data from the Korean Labor and Income Panel Study from 2004 to 2021, our analysis of the patterns of household debt in South Korea reveals that, since 2018, the majority of new debt has been incurred for housing mortgage loans. The number of loans and the balance of household debt are increasing, primarily centered around high-income households. Furthermore, our findings suggest that, rather than adhering to the ‘Rajan Hypothesis’, South Korea is, in fact, sacrificing current consumption to acquire non-financial assets, thereby potentially increasing future income and exacerbating future income inequality. Through a fixed-effects panel regression model, we estimate the effects of acquiring non-financial assets on the increase in new debt by household income quintiles. The results show a significant positive effect on disposable income increase only for the fifth quintile households, while other households are estimated to experience a decrease in income. This implies that the income increase effect from factors such as rental income outweighs the interest expense, mainly observed in high-income households, indicating the potential to deepen overall income inequality when considering the income decrease effect on low-income households. Additionally, dynamic panel regression model analysis results show that the increase in debt balance significantly contributes to a notable increase in household income. Considering the substantial growth rate of household debt for non-financial asset acquisition, particularly in higher-income households from 2004 to 2020, this result also supports the exacerbating effect of increasing household debt on income inequality.