The Effects of Change in Functional Income Distribution on Aggregate Demand in Korea

Abstract

Purpose - This study reviewed the demand system of the Korean economy through the impact of changes in Korea’s functional income distribution on consumption, investment, and net exports. Design/Methodology/Approach - Although most domestic research studies have identified wage-led demand systems, some research results of profit-led demand systems have also been presented. In particular, the labor income share has been on the decline since the financial crisis. Considering the situation that has turned upward since 2010, we wanted to examine the impact of changes in income distribution on aggregate demand at this time. Findings - The Korean economy is still considered to be a wage-led demand system, but it has weakened somewhat in terms of intensity. In terms of the components of aggregate demand, the consumption effect was somewhat weakened compared to the preceding study, while the investment effect was significant compared to consumption, and the net export effect was still not found to be statistically significant after the financial crisis. Research Implications - Therefore, as improving income distribution contributes to stabilizing domestic demand, the government needs to make policy efforts to break away from low-growth trends through various distribution policies such as tax cuts and subsidies to households and businesses, including self-employed.