Income Mobility and Its Implication on Government Welfare Expenditure

Abstract

This paper analyzes income mobility betwen two consecutive periods and estimates the potential effects of introducing differentiated poverty treatment on direct government welfare expenditure. This is done by using a constructed pseudo-panel under the pre-existing two conditions: log-normality of household income and the stability of the household income distribution over time. This paper finds that income mobility shrank from the late 1990s onward. As a result, the probability that a poor household escapes from poverty dwindles. This is partly because the labor market becomes slightly more rigid and also partly because the population is rapidly aging: the share of the elderly who are mostly retirees is growing rapidly. A pseudo-panel study shows that total subsidies to support all poor household escapes from poverty dwindles. This is partly because the labor market becomes slightly more rigid and also partly because the population is rapidly aging: the share of the elderly who are mostly retirees is growing rapidly. A pseudo-panal study shows that total subsidies to support all poor households amount to 7.0 trillion won a year. It also shows that the lifelong poverty rate is 3.4%, approximately on third of the short-run poverty rate of 10.9%. A differential treatement on short-run and long-run poverty can save roughly half the fiscal burden of supporting the poor.