Yeo Hyub Yoon, The Macroeconomic Implications of the COVID-19 Economic Crisis: The Case of South Korea (2021)

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Journal article by Yeo Hyub Yoon of the University of Denver, The Macroeconomic Implications of the COVID-19 Economic Crisis: The Case of South Korea, manuscript received 23 January 2021 and final version received 28 February 2021. The abstract states that the paper examines the major impacts of COVID-19 on the Korean economy throughout 2020, finding that sectoral unevenness of growth, employment inequality and corporate liquidity preferences accelerated as a continuation of trends since the 1997 Asian crisis. The author focuses on the unequal distribution of output and employment shocks across businesses, workers and households, and argues that 2020 saw income redistribution favorable to big corporations and banks and away from small businesses, non-standard workers and low-income households. JEL codes are E21, E22, E24, E65, I18 and O53.

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THE MACROECONOMIC IMPLICATIONS
OF THE COVID-19 ECONOMIC CRISIS:
THE CASE OF SOUTH KOREA
Yeo Hyub Yoon
University of Denver (United States of America)
Email: Yeohyub.Yoon@du.edu

Manuscript received 23 January 2021; final version received 28 February 2021.

ABSTRACT
This paper examines the major impacts of COVID-19 on the Korean
economy throughout 2020. Since the start of the pandemic, sec-
toral unevenness of growth, employment inequality, and corporate
liquidity preferences have been accelerated. These patterns reflect a
continuation of trends that have been developed since the 1997 Asian
crisis. As the main approach in examining the economic effects of
the COVID-19 crisis and the government policy implemented to
cope with them, I focus on the unequal distribution of output and
employment shocks across businesses, workers, and households,
through which I derive the macroeconomic implications of the
pandemic crisis for the Korean economy. Throughout 2020, South
Korea has been witnessing income redistribution favorable to big cor-
porations and banks and away from small businesses, non-standard
workers, and low-income households. These widening disparities
have important macroeconomic implications.
Keywords: COVID-19, South Korea, inequality, saving, stagnation,
stimulus package.
jel Classification: E21, E22, E24, E65, I18, O53.

http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
© 2021 Universidad Nacional Autónoma de México, Facultad de
Economía. This is an open access article under the CC BY-NC-ND license IE, 80(316), abril-junio de 2021 5
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
LAS IMPLICACIONES MACROECONÓMICAS DE LA CRISIS ECONÓMICA COVID-19:
EL CASO DE COREA DEL SUR
RESUMEN
En este trabajo se examinan los principales impactos del COVID-19
en la economía de Corea del Sur en 2020. Desde el inicio de la pan-
demia el crecimiento sectorial desigual, la desigualdad del empleo
y las preferencias por la liquidez se han acelerado. Estos patrones
reflejan la continuación de tendencias que se han desarrollado desde
la crisis asiática de 1997. Al revisar los efectos de la crisis COVID-19
y la política correspondiente implementada por el gobierno, nos
enfocamos principalmente en la distribución desigual del producto
y de los choques al empleo entre las empresas, los trabajadores y los
hogares mediante lo cual se derivan las implicaciones macroeco-
nómicas de la pandemia para la economía de Corea. A lo largo de
2020, Corea del Sur ha estado experimentando una redistribución
del ingreso favorable a las grandes corporaciones y a los bancos y
en disfavor de las pequeñas empresas, los trabajadores no estándar
y los hogares de bajos ingresos. Estas disparidades crecientes tienen
implicaciones macroeconómicas importantes.
Palabras clave: COVID-19, Corea del Sur, desigualdad, ahorro,
estancamiento, paquete de estímulo.
Clasificación jel: E21, E22, E24, E65, I18, O53.

1. INTRODUCTION

K
orea is one of the major countries hit by the COVID-19 pandem-
ic in early 2020, with the first case confirmed in January 2020.
Infections rose quickly in February, but the spread of the virus
was controlled successfully with the help of an effective containment
strategy employed by the Korean government from February through
March 2020 (Kim, 2020).
Meanwhile, real gdp has declined by 1.3% in 2020. Whilst Korea’s
economic downfall started from falling consumption and exports in early
2020, recovery of exports and steady growth in investment in machinery
and equipment have considerably offset consumption losses during the
second half of 2020.

6 IE, 80(316), abril-junio de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
However, the economic impacts of the pandemic and partial economic
recovery have been markedly disproportionate across different business
sectors, workers, and households (Stiglitz, 2020; Taylor, 2020). Output
growth rates in high-contact service sectors have been substantially
lower than those in finance, high-tech, and export-oriented industries.
Importantly, the sectors hit hard by the pandemic are the industries
that pay relatively lower wages to their workers. The workers who have
been mostly dismissed during the pandemic are those in non-standard,
temporary labor arrangements. Even among non-standard workers,
female workers with atypical employment types were the hardest-hit
group. These patterns suggest that COVID-19 has struck the weakest
spots of the Korean society, thereby intensifying the economic suffering
of the most vulnerable firms, workers, and families.
This paper examines the main impacts of the pandemic on economic
activity and discusses the policy implications from South Korea’s expe-
rience of the pandemic crisis. I will particularly focus on the unequal
distribution of output, employment, and income shocks across different
business sectors, workers, and households.
The COVID-19 pandemic has exacerbated pre-existing economic
problems in Korea that have been developed since the Asian financial crisis
of 1997-1998. These problems mainly include (1) a decreasing share of
employment both in the manufacturing sector and financial services (the
so-called fire sectors) notwithstanding continued growth in their output
share in gdp; (2) the polarization of workers based on the employment
types and worsening household income inequality; and (3) a surge of cor-
porate saving in combination with rising corporate liquidity preferences.
The widening disparities that occurred in the current pandemic have
important macroeconomic implications. First, the disproportionate em-
ployment and income impacts on the workers in relatively poorly paid
industries and in non-standard employment arrangements tend to raise
the household sector’s saving rate. Second, contrasting trends between
output and employment in the manufacturing and fire industries and
larger employment losses than output losses in the hardest-hit sectors
during the pandemic could end up strengthening the business sectors’
saving rate, net lending, and their liquid financial asset investment, thereby
adversely affecting aggregate demand. Third, policy measures thus far
implemented in Korea have mostly supported big businesses and banks

Yoon • The macroeconomic implications of the COVID-19 economic crisis 7
at the expense of the most vulnerable firms and people, therefore failing
to curb the exacerbation of employment, income, and social inequalities.
Observing what has happened during the pandemic throughout
2020, worsening trends of income and wealth disparities across firms
and households are less likely to be reversed to their pre-pandemic
statuses. Therefore, I argue that the resulting sectoral uneven growth,
income inequality, corporate liquidity preference could inhibit short-
term recovery in the remaining period of the pandemic and exacerbate
the pre-existing stagnation tendencies in Korea thereafter.
The implications of all of these patterns are evident. Supporting the
weakest sectors and people so that the disparities of income and wealth
do not get worse becomes especially vital for full recovery. Without
well-designed government support programs and structural reforms that
aim to reverse worsening trends of the income and wealth disparities
across industries, employment, and households, the Korean economy
could plunge into a much severe and prolonged recession after the
pandemic. In this sense, our economic policy must not only be massive
and well-targeted to protect the bottom-tier firms and families, but also
provide more equitable social-economic visions for sustainable growth
of the Korean and global economy.
The paper is divided into seven sections. Section 2 outlines South
Korea’s aggregate demand, output, and employment growth in 2020. In
particular, I will provide defining features of the output and employment
structure in Korea. Sections 3 and 4 examine how the COVID-19 crisis
has exacerbated the pre-existing dual economic structure in Korea across
employment and families. Sections 5, 6, and 7 discuss the macroeconomic
implications of the COVID-19 crisis by examining its disproportionate
impacts on consumption, investment, and saving behavior of the pri-
vate sectors in Korea. Section 8 outlines the main policy responses by
the Korean government. The final section summarizes the economic
implications of the pandemic.

2. THE IMPACTS ON THE ECONOMIC ACTIVITY OF THE COVID-19 CRISIS

In this section, I will outline the major changes in the components of
aggregate demand and the structure of employment and output of the
Korean economy in 2020.

8 IE, 80(316), abril-junio de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
2.1. Aggregate demand

In 2020, Korea’s real gdp has declined by 1.3%. To better understand
key factors driving aggregate demand to change, I provide the relative
importance of each component of gdp during the COVID-19 period.
Table 1 shows the levels of gdp and its major components for each quarter
in 2020 relative to their corresponding figures for the fourth quarter of
2019. It presents the direction and magnitude of changes in aggregate
expenditures since the beginning of the COVID-19 crisis. As presented
in the table, real gdp in the first quarter of 2020 stood at 98.7% of its
pre-crisis level, continued to decline to 95.6% in the second quarter, and
then it has partly recovered its pre-crisis level since the third quarter of
2020. Over a year, the Korean economy was eventually able to find its
position at a 1.3 percentage point decline in real gdp.
In Korea, the decline of economic activity mainly came from falling
consumption and exports. First, although a complete lockdown has not
been implemented, a drop in household consumption, especially during
the first quarter of 2020, was a major contributor to the output reduction

Table 1. Real gdp, 2019Q4-2020Q4
gdp indices (2019Q4 = 100)

2019Q4 2020Q1 2020Q2 2020Q3 2020Q4

Real gdp 100 98.7 95.6 97.6 98.7
Consumption 100 93.5 94.9 94.9 93.4
Private investment 100 100.8 102.2 102.0 103.5
Machinery and equipment 100 100.1 105.3 109.7 105.6
Intellectual products 100 100.7 102.6 102.6 104.4
Government expenditures 100 100.8 99.6 98.3 99.7
Exports 100 98.6 82.8 96.0 101.0
Notes: Seasonally adjusted real gdp data at chained 2015-year price is retrieved from Statistics
Korea. Real gdp and its components in 2020Q1-Q4 are normalized by their corresponding
figures for 2019Q4.
Source: Bank of Korea, National Accounts and author’s calculations.

Yoon • The macroeconomic implications of the COVID-19 economic crisis 9
in 2020. Since 2020Q2, private consumption has stopped plummeting
partly due to emergency income transfers to households along with
successful containment of the virus spread, but fell again during the last
quarter due to a resurge of COVID-19 infection cases. Second, falling
exports during the first half of 2020 were another important driver to
the gdp decrease. Exports fell to 82.8% of the pre-crisis level in 2020Q2
but bounced back to its pre-crisis level thereafter.
In contrast, relatively stable capital investment has counterbalanced
the gdp decrease. As shown in Table 1, there has been a steady increase
in investment in machinery and equipment and intellectual property
products throughout 2020, thereby supporting aggregate economic
activity even during the peak of consumption and export shocks. Due
to a decent share of private investment in South Korea’s gdp —that is,
about a quarter of gdp as of 2020— stable growth in private capital
investment coupled with improved exports in the second half of 2020
has supported a relatively prompt recovery of Korean gdp.

2.2. Output and employment

Following the 1.3% drop in gdp in 2020, the employment rate or the em-
ployed as a fraction of the working-age population has declined by 2.3%
in 2020 (Statistics Korea, 2020a). However, importantly, the economic
impacts of the pandemic and a partial recovery have been remarkably
disproportionate across businesses, workers, and households. Figure
1 demonstrates large variations in employment losses across different
sectors during the COVID-19 crisis. It clearly shows contrasting trends
of employment losses between high-contact services (such as accom-
modation and food, retail, culture, educational activities), high-skilled
& information and communication (itc) related- services (professional
and information-communication services), and the manufacturing sector.
Not only the magnitude of job losses was stronger for high-contact
services compared to other sectors, but also sectoral employment trends
since mid-2020 look markedly divergent. Whereas high-skilled & itc
related- service sectors have recovered the pre-crisis levels of employment
in late 2020, job destruction has continued to increase in the high-con-
tact sectors. It is also noted that the manufacturing sector has slashed
employment roughly by 3% during the pandemic.

10 IE, 80(316), abril-junio de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
Figure 1. Sectoral employment in 2020, December 2019 = 100,
December 2019 to December 2020

100

Employment index

(Dec-2019 = 100)
95

90
Dec-2019 Mar-2020 Jun-2020 Sep-2020 Dec-2020

itc & professional-Technical service Manufacturing
Accommodation, food, retail, culture, education

Notes: itc & Professional-Technical Service includes itc and professional, scientific, and
technical service. The category of accommodation, food, retail, culture, and education con-
sists of accommodation, food, retail, wholesale, education, culture, and recreation services.
Source: Ministry of Employment and Labor (2020a), Labor Force Survey at Establishments,
December 2019-December 2020, available at <http://laborstat.moel.go.kr>.

Table 2 presents detailed information on the sectoral changes in
employment and production in the Korean economy, ordered by em-
ployment changes during the COVID-19 pandemic from 2019Q4 to
2020Q4. Starting from accommodation and food services on the top
row through the bottom row —health and social work— the size of
employment losses during the pandemic decreases.
The following are the major findings from my examination of the
figures in Table 2.
The changes in output and employment within the service sector
have been visibly divergent. High-contact services —such as education,
culture, entertainment, retail and wholesale, and accommodation and
food industries— have undergone both output and employment losses,
while information and communication-related- services and the health/
social work industries have been protected during the pandemic.
On the other hand, in the financial (finance, insurance, and real estate,
or so-called fire) and manufacturing sectors, output and employment

Yoon • The macroeconomic implications of the COVID-19 economic crisis 11
Table 2. Sectoral structure of employment, output and wages, 2019Q4-2020Q4
Employment Output
Employment
change growth
share
2019Q4- 2019Q4-
2019Q4
2020Q4 2020Q4
(%)
(Thousands) (%)
Accommodation and food services –313 –18.11 8.6
Retail & wholesale –197 –3.34 13.3
Manufacturing –110 0.11 16.5
Education –99 –2.35 6.9
Culture and recreation –97 –18.25 2.0
Real estate –66 0.63 2.1
Finance and insurance –20 8.85 2.9
Information and communication –2 0.26 3.1
Professional, scientific and technical
12 –1.56 4.3
service
Construction 22 –2.81 7.5
Transportation and storage 29 –18.33 5.5
Health and social work 44 –0.34 8.2
Source: Statistics Korea (2020b), National Business Survey; Ministry of Employment and
Labor (2020a), Labor Force Survey at Establishments; Bank of Korea, National Accounts,
gdp and gni by Economic Activities; and author’s calculations. See Appendix for more
details on the data sources.

have changed in an opposite direction. Output has continued to grow
but there were employment cuts throughout 2020. In particular, the fire
sector has achieved rapid output growth during the pandemic, which is
contrasted with employment losses (see column 1 in Table 2).
It is important to know that the contrasting trends between em-
ployment and production in Korea have begun back in the early 2000s.
According to the National Business Survey (Statistics Korea, 2020b),
the manufacturing and fire sectors have consistently reduced their
employment shares despite a substantial gain in their output shares

12 IE, 80(316), abril-junio de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
over the last fifteen years. In detail, from
2004 through 2019, whilst the output
Wage rate
Output share
per day
share of the manufacturing sector has
2019Q4 risen by 2.2 percentage points, its em-
Dec. 2019
(%) ployment share has declined by 0.8 per-
(KOR Won)
centage point. During the same period,
2.4 105,340 the finance and insurance sector has
7.8 196,134 increased its output share by 1.4 percent-
age points, but the employment share
29.1 258,798
has declined by 0.9 percentage point
5.1 235,610 (ibid.; and author’s calculations).
2.4 163,574 The contrast between the output
growing sectors and high-contact ser-
8.0 164,315
vices conveys two important macroe-
6.1 417,854 conomic implications. First, since rela-
4.8 265,544 tively lower-wage jobs are concentrated
in high-contact services, a greater em-
9.3 289,519 ployment impact on high-contact ser-
vices could lead to further deterioration
5.3 197,912 of income for lower-tier workers and
3.7 194,404 households, therefore adversely affecting
aggregate demand. Since low-income
5.1 159,536 households have a lower saving rate than
high-income households, the house-
hold saving rate will rise resulting from the disparate job losses. Second,
output growth combined with employment loss that occurred in the fire
and manufacturing sectors could translate to a rise in corporate sav-
ing and financial investment, which, in turn, generates depressing effects
on aggregate demand. I will provide more details on these macroeco-
nomic phenomena in the later sections of the paper.

3. DISPROPORTIONATE JOB LOSS

The economic development in the aftermath of the 1997 Asian Financial
Crisis has been associated with a dramatic increase in non-standard em-
ployment. According to Statistics Korea (2020c), nonstandard-irregular
workers account for 36.1% of the total wage-salary workers in South

Yoon • The macroeconomic implications of the COVID-19 economic crisis 13
Korea as of August 2020, which amounts to 7.5 million workers. The
duality of the Korean labor market indicates disparities in employment
stability, working conditions, wages, and social insurance coverage
between standard-regular workers and nonstandard-irregular workers.
Given the prevailing dual labor markets in Korea, one can expect that
the COVID-19 crisis may have disproportionately affected nonstand-
ard-irregular workers. According to Hwang (2020), a larger proportion of
non-standard workers have lost their jobs and undergone larger payment
cuts than their counterparts during the pandemic.
In this context, this section examines how the COVID-19 crisis has
unevenly affected workers in different employment types in Korea. As
shown in Figure 2, from August 2019 to August 2020, 2.49% of total
wage and salary workers have lost jobs but non-standard workers were
hit exclusively. According to the data (Statistics Korea, 2020c), 7.46%
of irregular workers have been dismissed, while standard-regular jobs
have gained jobs by 0.07% during the same period.

Figure 2. Job loss by employment type, year-on-year percentage change,
August 2019-August 2020
2
Standard-regular
0.07
0

Percentage points −2
−2.49

(Aug-2019 to Aug-2020
Total wage &
−4 salary workers

−6

−8 −7.46
Nonstandard-irregular

Notes: Nonstandard-irregular jobs are the forms of employment that do not offer workers
the prospect of a long-lasting employment relationship. The nonstandard-irregular jobs
mainly include open-ended temporary contracts, atypical-temporary agency workers,
and daily or hourly workers.
Source: Statistics Korea (2020c), Economically Active Population Survey, Supplement
Survey Results, available at <www.kosis.go.kr>; and author’s calculations.

14 IE, 80(316), abril-junio de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
Even among the nonstandard-irregular workers, there have been
uneven employment impacts on specific groups. As depicted in Figure
3, “open-ended contract workers” —who have no defined termination
date of employment but could be dismissed involuntarily— and “atyp-
ically employed workers” —indicating temporary agency workers and
disguised self-employed workers— have markedly experienced larger
job losses, while jobs for hourly and daily workers have increased during
the pandemic. In particular, female in atypical employment (temporary
agency and disguised self-employed workers) is the group of the work-
ers who has been hit the hardest by COVID-19. Over a year, 13% of
jobs for the atypical type of female workers had disappeared (Statistics
Korea, 2020c).
In sum, whereas regular employment type workers have been pro-
tected, workers in nonstandard employment types have been exclusively
hit by the pandemic. Among the nonstandard workers, open-ended
temporary workers and atypical workers were hit heavily. Particularly,

Figure 3. Nonstandard-irregular employment, year-on-year percentage
change, August 2019-August 2020

10.0
Hourly
6.3%

Percentage changes
5.0

0.0

Aug-2019 to Aug-2020
−5.0 −3.7%
Open-ended
temporary
−8.4%
−10.0
Atypical

Notes: Nonstandard-irregular jobs can be categorized into three sub-types of employ-
ment: (1) open-ended temporary workers whose contract period is not fixed but can be
dismissed against workers’ own will, (2) atypically employed workers —mainly includ-
ing disguised self-employed and agency workers—, and (3) hourly or daily workers.
Source: Statistics Korea (2020c), Supplement Survey Results by Employment Type,
August 2020, available at <www.kosis.go.kr>; and author’s calculations.

Yoon • The macroeconomic implications of the COVID-19 economic crisis 15
female workers have been damaged the hardest even among the atypical
workers. Combined with severe employment losses in high-contact service
industries, this unequal feature of job destruction during the pandemic
provides important implications for designing policy responses.

4. DISPARATE INCOME EFFECTS

Following the uneven distribution of employment losses across busi-
nesses and workers, COVID-19 has generated disproportionate income
impacts on Korean households. This section examines empirical patterns
of household income disparity in Korea during the pandemic. Figure 4
depicts how mean incomes of different household income quintiles have
changed in 2020. Mean income in the figure grows from the left to right
along the horizontal axis, so 1st quintile is the bottom income household
group, and 5th quintile is the top income group. The percentage change
in each quintile’s mean income in 2020 is the growth rate of the quintile’s
mean income from the same quarter of 2019.

Figure 4. Percentage changes in incomes for household income quintiles, 2020

5.0

Percentage change in mean
0.0
2020Q1

−5.0

household income
2020Q3
−10.0
2020Q4
−15.0
2020Q2

−20.0
1 quintile 2 quintile 3 quintile 4 quintile 5 quintile
Income quintiles

Notes: Mean incomes grow from the left to right on the horizontal axis. Household income
includes wage and salary income and business income. Percentage change in quintile incomes
in 2020 is the growth rate of each quintile’s mean income from the same quarter in 2019.
Source: Statistics Korea (2020d), Household Income and Expenditure Survey, available at
<www.kosis.kr>; and author’s calculations.

16 IE, 80(316), abril-junio de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
As shown in Figure 4, the bottom quintile households started to en-
counter income losses from 2020Q1, and then all income quintiles have
experienced substantial income losses in 2020Q2. However, the size of
initial income losses was markedly different between the bottom and
higher-income households. Mean income losses in 2020Q2 range from
17.6 percentage for the bottom quintile households to 2.7 percentage
points for the top quintile households.
Furthermore, the evolution of household incomes throughout 2020
demonstrates that the upper three quintiles have almost recovered their
pre-crisis income levels from 2020Q3, but recovery looks stagnant for
the bottom quintile. Specifically, mean incomes of the bottom quintile
in 2020Q3-Q4 were below 90% of their 2019 income levels.
Overall, the higher household income is, the smaller initial income
losses occurred, and the faster income recovery followed. Considering
the unequal distribution of production and employment losses during the
pandemic, extensive employment losses that occurred to high-contact
services and nonstandard-irregular workers could have resulted in larger
income losses and stagnant income recovery for lower-income families.
These domino effects may have widened the disparity of household
incomes, which, in turn, hurts aggregate demand.

5. HOUSEHOLDS’ CONSUMPTION AND SAVING BEHAVIOR

The unequal characteristics of job losses and income distribution could
have changed households’ consumption and saving behavior. According
to Statistics Korea (2020d), the Korean household sector has reduced
consumption spending as a share of disposable income throughout 2020,
ranging from –7.9 percentage points (2020Q1) to –1.7 percentage points
(2020Q4). Figure 5a presents the percentage point change in the ratio of
consumption to disposable income in each quarter of 2020 compared
to the same quarter of 2019. Low-income households have dramatically
reduced their consumption spending in response to income losses. The
magnitude of the drop in the consumption ratio for the lower 50% in-
come households has been –10.71, –6.59, and –4.68 percentage points
from 2020Q1 through 2020Q3, while the consumption ratio for upper
50% income households has been –7.72, –1.52, and –2.12 percentage
points during the same period.

Yoon • The macroeconomic implications of the COVID-19 economic crisis 17
Figure 5. The ratio of consumption to disposable income, 2020

(a) Changes in the consumption-to-disposable income ratio in 2019-2020
(year-on-year percentage change)
0

Change in the ratio of consumption
Q1 Q2 Q3 Q4
−2

−4

−6

to income (percentage points)
−8

−10

−12
Household sector Low-income High-income

(b) The consumption-to-disposable income ratio for household
income quintiles in 2020

125

Consumption-to-Income ratio
115%
110

(%)
79%
80 72%
67%
65
56%
50
1 quintile 2 quintile 3 quintile 4 quintile 5 quintile
Income quintiles

Notes: (1) Average propensity to consume = consumption/disposable income*100;
(2) Disposable income = current gross income – (tax + pension contribution + social
insurance contribution + interest payment); (3) The low-income group in the upper
panel indicates the bottom 50% income households, and the high-income group is
the upper 50% income households.
Source: Statistics Korea (2020d), Household Income and Expenditure Survey, Quarterly,
available at <www.kosis.go.kr>; and author’s calculations.

18 IE, 80(316), abril-junio de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
The different numbers between the two groups appear to be related
to the disproportionate income impacts on households with different
income levels as examined in Section 4. Considering concentrated job
losses in the high-contact, low-wage service sectors and for non-stand-
ard workers, low-income households would have reduced consumption
as one of the family members has suddenly lost his/her job during the
pandemic.
Meanwhile, the upper 50% income households have also reduced
their consumption. On average, the upper-half households have gained
income by 0.75%, but reduced consumption by 0.6% in 2020 compared to
their income and consumption levels in 2019 (ibid.; and author’s calcu-
lations). For 2020Q2-Q3, there has been an increase in consumption,
but the magnitude of the consumption increase was less than that of
the income increase, resulting in a slight drop in the consumption ratio.
Overall, low-income families, a larger portion of which have been
adversely hit by COVID-19, have slashed consumption in 2020, there-
by contributing to raising the household sector’s saving rate. Because
low-income households have negative or relatively lower saving rates
(see Figure 5b)1, the uneven distribution of job losses unfavorable for
low-income workers could have become the major driver to the rise in
the household saving rate.
Between 2019 and 2020, on average, Korean disposable income has
risen by 4.3%, but consumption has declined by 1.2%, resulting in a higher
household saving rate2. Less consumption or a higher saving rate imply
aggravation of aggregate demand. Worse, since the rise in the house-
hold saving rate has been caused by the uneven impacts of COVID-19
on some of the service sectors where workers are paid poorly, the slumped
period of aggregate demand could be prolonged. Furthermore, since
suppliers in service industries tend to slowly respond to a rise in de-
mand, we are likely to see a more sluggish recovery of demand (Olney
and Pacitti, 2017; Blecker, 2014).

1
As plotted in Figure 5b, the ratios of consumption to household disposable income for
household income quintiles in Korea in 2020 are 115%, 79%, 72%, 67%, and 56%, which
are ordered from the bottom to top income quintile.
2
In the same vein, Lee and Lee (2020) expected a 4% rise in the Korean household saving
rate in 2020.

Yoon • The macroeconomic implications of the COVID-19 economic crisis 19
6. THE RISE IN CORPORATE SAVING AND LIQUIDITY PREFERENCE

The downfall in household consumption could be counterbalanced if
corporations have sufficiently increased capital investment. If higher
profits have been channeled to a larger scale of capital investment, the
negative impacts of the pandemic on the aggregate consumption ratio
can be diminished or offset. As presented earlier, the Korean corporate
sector’s capital investment has been sustained in 2020. However, if the
pace of corporate investment is exceeded by that of the corporate sector’s
profits, we can expect a rise in corporate net lending, which, in turn,
further depresses aggregate demand.
From 2019Q4 to 2020Q4, 2.3% of jobs have been destroyed and real
gdp has declined by 1.3%. Since the magnitude of employment losses
was larger than that of output losses, disproportionate degrowth in out-
put and employment could end up strengthening the corporate sector’s
saving and net lending. However, due to limited data on the sectoral
flow of funds for 2020, reliable calculations for the corporate sector’s
net lending should be postponed.
In this section, as a background, I will outline important empirical
patterns in South Korea since 1990, and then discuss the expected mac-
roeconomic implications of the COVID-19 downturn. Figure 6 depicts
the evolution of the Korean nonfinancial corporations’ (nfcs) profits,
capital investment, and net lending relative to national disposable income
between 1990 and 2019.
Over the last three decades, the Korean nfcs have seen a significant
increase in gross profits along with downscaled capital investment.
Specifically, Korean nfcs’ profit share grew from 16.59% to 22.5% of
national disposable income between 2000 and 2010 and then remained
at this higher plateau. But nfc capital investment has decreased in the
aftermath of the 1997 Asian crisis and fluctuated between 19% to 22%
since then. Together, a consistent rise in the profit share and downscaled
capital investment combined have made upward pressure on Korean nfcs’
net lending. As shown in Figure 6, the ratio of net lending to national
disposable income rose from –11.8% to –0.15% in the period 1990-2019.
Consistent with the findings of de Souza and Epstein (2014) for the
U.S. and European countries, the increasing pattern of net lending by
Korean nonfinancial firms could be associated with their increased in-

20 IE, 80(316), abril-junio de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
Figure 6. Korean nonfinancial corporate profits, capital investment, and
net lending relative to national disposable income, 1990-2019
30 10

Net lending to disposable income (ratio)
5

Percent of gross disposable income (%)
20
0

15
−5
10

−10
5

−15
0
1990 1995 2000 2005 2010 2015
−5 −20
nfc profit share(lhs) nfc investment ratio(lhs) nfc net lending(rhs)

Notes: nfc profit share is nfc’s gross operating surplus relative to national disposable income.
nfc investment ratio is nfc’s capital investment relative to national disposable income. nfc
net lending denotes nfc’s gross saving net of gross capital investment relative to national
disposable income.
Source: Bank of Korea, National Accounts by Institutional Sectors; and Gross Savings and Gross
Investments, Annual, 1990-2019, available at <www.kosis.go.kr>; and author’s calculations.

volvement in liquid financial transactions. The liberalized, deregulated
financial markets in the aftermath of the 1997 Asian crisis have encour-
aged Korean firms to increase liquid financial investment by diverting
internal resources into the financial markets. Figure 7 depicts changes in
Korean nfcs’ liquid financial assets as a ratio of capital investment. The
empirical pattern in the figure confirms that Korean nfcs have increased
the liquid financial asset investment ratio in the period 2009Q2-2020Q3.
Considering the rising trend of corporate net lending and a mas-
sive explosion of the Korean and global financial markets during the
COVID-19 recession, it is expected that the rise in profits and net lending
may have translated to increased engagement in financial transactions
by Korean nonfinancial firms.
As examined earlier in Section 2, although output has increased, firms
in the manufacturing sector, on average, have reduced employment by

Yoon • The macroeconomic implications of the COVID-19 economic crisis 21
Figure 7. Korean nonfinancial corporate liquid financial asset investment ratio,
2009Q2-2020Q3
0.4

The ratio of nfc liquid asset
0.35
0.3
0.25
0.2

investment to fixed capital investment
0.15
0.1
0.05
0
2009. 2010. 2010. 2011. 2012. 2013. 2013. 2014. 2015. 2016. 2016. 2017. 2018. 2019. 2019. 2020.
2/4 1/4 4/4 3/4 2/4 1/4 4/4 3/4 2/4 1/4 4/4 3/4 2/4 1/4 4/4 3/4

Notes: The liquid financial asset investment ratio is computed as the ratio of nfcs’ liquid
financial asset investment to fixed-asset investment. nfc liquid asset investment is the change
in liquid financial assets held by nfcs. Liquid financial assets include cash and deposit,
marketable securities, securities issued in foreign countries, foreign direct investment, and
net miscellaneous liquid assets.
Source: Bank of Korea, the Flow of Funds, Financial Assets and Liabilities Outstanding;
National Accounts, Gross Capital Formation, available at <www.kosis.go.kr>; and author’s
calculations.

2.5% during the pandemic, which amounts to 110 thousand jobs. In
this context, most of Korean nfcs’ net saving flows could come from the
output-growing sectors that implemented employment cuts during the
pandemic. Considering the divergent patterns between employment
and output growth in Korea, Korean nfcs’ net lending to the financial
markets may have continued to follow its long-term rising trend.

7. AGGREGATE DEMAND GENERATION

Supporting aggregate demand is essential for sustaining economic growth.
To consider how the current crisis could have affected Korea’s aggregate
economic activity, it would be worthwhile to explore the changing nature
of the demand structure of South Korea since 1990.
Figure 8 shows the evolution of the sectoral composition of saving and
net lending in Korea over the last three decades from 1990 through 2019.

22 IE, 80(316), abril-junio de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
Figure 8. Sectoral composition of saving and net lending, 1990-2019

(a) Sectoral saving relative (b) Sectoral net lending relative
to national saving to national income

70 15 Nonfinancial corporate
Nonfinancial corporates

Sectoral saving as a percentage of national saving (%)
Sectoral net lending as a percentage of national
Households Household
60 Government 10 Government

50
5

40
0

disposable income (%)
30
−5
20

−10
10

0 −15
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015

Notes: Gross saving of each sector (nonfinancial corporates, household, and government) is
divided by gross national saving. Sectoral net lending is each sector’s saving net of investment.
Each sector’s net lending is normalized by gross national disposable income.
Source: Bank of Korea, National Accounts-Gross Savings and Gross Investments, available
at <www.kosis.go.kr>; and author’s calculations.

Figure 8a depicts the long-term trends of sectoral saving as a share of
gross national saving. Korean nfcs and households have shown markedly
opposite trends since the 1997-1998 Asian financial crisis. Savings by
Korean nfcs have rapidly increased importance in national saving from
the late 1990s so that it reaches about 60% of gross national saving in the
2010s, while the household sector lost importance in national saving
after they were hit by the 1997 Asian crisis, remained at a lower plateau
in the 2000s, and then gradually regained its saving share from 12% to
20% in the 2010s.
Following the shift in the sectoral composition of saving toward Korean
nfcs, a similar pattern of structural change has emerged to sectoral net
lending in Korea during the same period from 1990 through 2019. In the
aftermath of the 1997 crisis, many Koreans had lost jobs and incomes,
which hurts the household sector’s net lending position. However, since
the mid-2000s, Korean households have partially recovered their income

Yoon • The macroeconomic implications of the COVID-19 economic crisis 23
relative to its pre-1997 level, therefore we can observe a positive value
of the net lending ratio since 2009. In contrast, as examined earlier, a
rapid increase in profits without a proportionate increase in capital in-
vestment has led Korean nfcs to improve their net lending position so
that the ratio of net lending to national disposable income has reached
a positive value from 2013 through 2018.
Now, throughout the pandemic, higher-tier households and businesses
have increased lending surplus incomes and profits to the financial mar-
kets, while relatively lower-tier households and the high-contact service
sectors are suffering hard. For aggregate demand, these patterns imply
that the widening sectoral/income disparities have become the forces
driving the national saving rate to rise further, which, in turn, generates
downward multiplier effects on aggregate demand.
In sum, the unequal distribution of output, employment, and income
shocks across businesses, workers, and households have been the major
contributor to the soaring pattern of private saving rates, thereby exacer-
bating the already worsened domestic demand structure in South Korea.

8. POLICY RESPONSES AND IMPLICATIONS

As a background for understanding policy responses in Korea, it should be
noted that the Korean government adopted extensive testing and contact
tracing as the main strategy for curbing the spread of the COVID-19
virus rather than implementing stringent social distancing or an extensive
lockdown (Kim, 2020). But it is clear that a relatively moderate degree
of social distancing has also generated a substantial strain on economic
activity (Aum Lee, and Shin, 2020).
As the number of COVID-19 cases exponentially grew in February
2020, consumption fell quickly. Also, given that Korea is an export-oriented
economy, falling foreign demand due to extensive lockdowns in many
major countries resulted in a rapid decrease in exports in the first half of
2020. As emphasized, the disparate distribution of output, employment,
and income shocks over the different sectors of the economy has caused
changes in consumption, saving, and investment decisions. This, in turn,
may have exacerbated aggregate demand of the Korean economy.
To counterbalance the depressing effects caused by the pandemic,
prompt and well-designed policy measures have been required. In this

24 IE, 80(316), abril-junio de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
context, the main role of policy responses is twofold. First, it needs to
protect the businesses, workers, and families who were directly hit hard
by the fall in consumption and exports. Second, it should counteract
the widening disparities between firms and people, thereby curbing the
negative impacts of the increasing disparities on aggregate demand.
In a similar way that many other countries hit by COVID-19 reacted
to the pandemic, the Korean government and policy authorities have
adopted a set of fiscal and monetary policy measures facing the severity of
the pandemic crisis. Broadly, these policy measures can be characterized
as the conventional recession fighting package, which has been adopted
by the U.S. during the last two recessions (Organisation for Economic
Co-operation and Development, oecd, 2020, Annex 1.B). The emergen-
cy stimulus package employed in Korea in early 2020 mainly includes
liquidity provision to the firms in the nationally important industries
and financial institutions, a variety of tax cuts and credits for stimulating
consumption and investment, broad-based cash or grant transfers, and
lowering interest rates by slashing short-term rates and by purchasing
long-term corporate and treasury bonds (ibid.)
Looking at a breakdown of the total spending in the COVID-19
emergency stimulus package employed in Korea from February through
July 2020 (ibid.), liquidity provision to major manufacturers, exporting
firms, and financial institutions (60% or Korean Republic Won, krw, 217
trillion) are the largest components in the stimulus package, followed
by supports for small and medium-sized firms and self-employed busi-
nesses (26% or krw 66.6 trillion), tax incentives and emergency relief
income transfers to households (7% or krw 17.6 trillion), financing
public health (1.2% or krw 3 trillion), and employment stabilization
measures (1% or krw 2.5 trillion).
These expenditure shares demonstrate that policy measures are sig-
nificantly biased away from workers and households and toward busi-
nesses. The financial supports for businesses in the form of direct bailout,
government-guaranteed loans, and a range of other loans and payments
amount to krw 217 trillion or 86% of the total stimulus spending.
The matter is that much of the liquidity provisioning measures have not
been for the people who are the most vulnerable. Even worse, relatively
little money flew to the high-hit sectors and small businesses. Instead,
a larger fraction of spending was to support relatively larger-sized cor-

Yoon • The macroeconomic implications of the COVID-19 economic crisis 25
porations, most of which are the main exporters in Korea. According to
oecd (ibid.) and my calculations, relatively bigger corporations received
39.5% of total emergency stimulus spending, equivalent to krw 99.3
trillion from February to July in 2020. The liquidity assistance should be
equitable across different sectors of the economy, but it ended up mainly
assisting big businesses and financial institutions. In contrast, although it
can prevent liquidity-constrained small self-employed and low-income
households from bankruptcies, no action was taken to relieve the bur-
den of rent, lease, and student loan interest payments throughout 2020.
During the COVID-19 crisis, the main tool for helping Korean house-
holds has been to provide income transfers to people. From April through
May in 2020, the bottom income bracket households, which is about
2.7 million households, received grants in cash, while the remaining
19 million households received vouchers that were redeemable only
at local shops and markets. The amount of the income transfers for
a three-person household was about $814. And its policy goal was to
promote household consumption, thereby helping small businesses and
their workers (ibid.).
On the matter of how effective the income transfer programs were,
the data in Statistics Korea (2020d) demonstrates that there has been
a consumption increase by krw 13.6 trillion out of the total krw 17.6
trillion income transfers over the next 3 months since the start of its
distribution. This indicates that the marginal propensity to consume for
the emergency income transfers in Korea was about 0.77. Coupled with
loosened social distancing measures since May 2020, income transfers
were broadly effective in curbing the pace of falling consumption in
2020Q2.
However, as examined earlier, consumption spending of low-income
households was not improved much relative to that of high-income house-
holds even in 2020Q2 during which the emergency income transfers were
executed. Knowing the underlying reasons for this disparate consumption
pattern in response to income transfers requires a much closer inves-
tigation, but I would point the difference in the payment type between
vouchers for higher-income households and cash for the bottom-tier
households. Given that there were no burden-relieving measures for
fixed costs, such as rents and interest payments, it is expected that the
money from the transfers may have been used for covering those regular

26 IE, 80(316), abril-junio de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
payments. Overall, regarding policy design, this divergent consumption
pattern demonstrates a need for a more targeted approach to vulnerable
households during the pandemic.
There was also a measure for stabilizing employment, the so-called
“Employment Retention Subsidy.” However, only krw 1.2 trillion was
assigned for running the employment retention subsidy program. Due to
the limited budget, the program was destined to be short-lived, too small
for help, or too restrictive in terms of application requirements (Park,
2020). Even further, the program had a stringent eligibility condition
about the employers who can request. Since it restricted the beneficiaries
of the program to the employers who are already enrolled in the em-
ployment insurance scheme, many hard-hit businesses could not apply
for the assistance (Lee, 2020, p. 2). Because small firms, high-contact
service enterprises, and nonstandard-irregular workers3 have substan-
tially lower coverage rates of social insurance than their counterparts,
the job retention program was doomed to be ineffective in protecting
vulnerable firms and workers. For the same reason, it turns out that rela-
tively affluent businesses have benefited from the job retention program.
Recall that the major impacts of the COVID crisis on economic
activity in Korea were concentrated in the employers and workers in
the high-contact service sectors, nonstandard workers, and relatively
lower-income households. This implies that the government should
have targeted those who are working in these blind spots of the society
and who are the most vulnerable to the health and economic crisis.
However, actual policy measures in Korea were not designed in that
context. Instead, the Korean government chose to devote most of the
available resources to major corporations, exporting firms, and financial
institutions. Probably, this explains why exports and capital investment
have swiftly recovered their pre-crisis levels during the second half of
2020. But it looks evident that wealth redistribution in favor of big cor-
porations and banks has occurred at the cost of vulnerable and needy
firms and people.

3
As of August 2020, only 44.9% of the nonstandard-irregular workers are insured by the
employment insurance scheme, while 87.2% of the standard-regular workers are under
the coverage (Ministry of Employment and Labor, 2020b).

Yoon • The macroeconomic implications of the COVID-19 economic crisis 27
In sum, policy responses must have tackled the disparate impacts
of the viral disease on businesses and people who have limited means
for survival so that the distribution of income and wealth does not get
worse. However, economic policy responses so far implemented in Korea
were mostly ineffective in preventing job losses, protecting high-contact
service businesses, and counteracting the exacerbation of employment,
income, and social inequalities. Without proactive, long-run policy
efforts to reduce income and wealth disparities, the Korean economy
could plunge into a prolonged economic recession.

9. CONCLUSION

This paper examined the major impacts of the COVID-19 pandemic
on economic activity and the effectiveness of policy measures that have
been implemented in South Korea. I particularly focused on the dispa-
rate economic impacts on businesses, workers, and families and then
discussed their macroeconomic and policy implications.
The COVID-19 downturn has deteriorated sectoral uneven growth,
income inequality, and corporate liquidity preferences. The macroeco-
nomic implication lies in the exacerbation of structural deficiency in
domestic demand generation resulting from rising sectoral, income
inequality during the COVID-19 crisis.
In the 1997 Asian crisis, the Korean banks and big corporations were
bailed out, but permitted households to collapse. In the aftermath of
the crisis, through radical neoliberal reforms for the entire aspects
of the society, the Korean economy has recovered and continued to
grow, but this recovery happened at the expense of small businesses
and low-income workers. The consequence of this unequal recovery
process is exemplified by the polarization of the Korean labor markets
in which 36.1% of Korean workers, as of 2020, are discriminated against
compared to their counterparts in terms of employment, wages, social
insurance, and working conditions.
During the current COVID-19 crisis, we are again witnessing an-
other income and wealth redistribution favorable for big corporations
and banks and away from small businesses, non-standard workers, and
low-income households. The impacts of COVID-19 have been extreme-
ly unequal because people who are the most vulnerable in terms of

28 IE, 80(316), abril-junio de 2021 • http://dx.doi.org/10.22201/fe.01851667p.2021.316.78971
both income and health are likely to suffer more from the disease and
unemployment than richer people. This widening disparity also has
important macroeconomic implications. In the paper, I discussed that
the unequal distribution of output, employment, and income shocks
across businesses, workers, and households have contributed to the
rising pattern of private saving rates, thereby exacerbating the already
worsened domestic demand structure in South Korea.
Since early 2020, the Korean government has responded to the COVID-
19 crisis by implementing a wide range of policy measures, which is sim-
ilar to the recession fighting package adopted by the U.S. However, the
policy measures have been extremely biased toward big businesses and
away from small firms and low-income people, thereby contributing to
the widening disparities of income and wealth among workers and firms.
The current state of the Korean economy indicates that policies going
forward must tackle the people and firms who have limited cushion for
survival so that the disparities of income and wealth do not get worse.
Considering the potential knock-on effects on aggregate demand arising
from the widening disparities of income and wealth, protecting the low-
er-tier firms and people would become essential for full macroeconomic
recovery. Without well-designed government support programs for the
vulnerable people, the Korean economy could get into a much deeper
and long-lasting recession. In sum, post-pandemic economic policies
must be massive, long-term, and provide more equitable social-economic
visions for the future of the Korean and global economy. 

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APPENDIX: OTHER DATA SOURCES

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entrType=>.

Yoon • The macroeconomic implications of the COVID-19 economic crisis 31

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