Savings and demand composition effects of income redistribution : the case of Korea

The objective of this study is to obtain first-order quantitative estimates of the effects of income redistribution on the aggregate levels of household saving and the demands for labor, capital, and imports in the context of the Korean economy, which has been growing rapidly during the past decade. The data are from two household budget surveys; however, the very top and bottom income classes are underrepresented in the budget surveys, and true income inequality may be greater than is reported here. By assuming that household saving is a function of household income only, we have observed that redistribution of income toward more equality reduces saving to a certain extent. Two forces are distinguished in measuring the effects of income redistribution on the demands for labor, capital, and imports: (i) the effect of an increase in aggregate demand and output after redistribution; and (ii) the demand composition effect of income redistribution. The study also found that the potential conflict between equity and efficiency in the field of household saving is much milder than is often predicted, while in the area of demands for labor and capital, equity and efficiency can be complements to each other.