Middle class sandwiched between high interest rates, stagnant income

Home > Business > Economy

Middle class sandwiched between high interest rates, stagnant income

Published: 15 Apr. 2025, 18:04 Updated: 15 Apr. 2025, 20:03

Audio report: written by reporters, read by AI

A service counter at a commercial bank in Seoul on Tuesday. [NEWS1]

The middle class is getting sandwiched — hit with the highest interest rates that claim the largest share of their income of all income brackets with the slowest growth in disposable income.

According to Statistics Korea's household income and expenditure survey released Tuesday, households in the third income quintile — the top 40 to 60 percent of earners comprising the middle class — spent 2.8 percent of their income on interest payments in the fourth quarter of last year. This was the highest among all income groups.

The disproportionate burden began in late 2021, when the Bank of Korea started raising the base interest rate. From the fourth quarter of 2021 to the same period in 2023, the share of interest costs rose significantly for both the third quintile, from 2.1 to 2.8 percent, and the fourth, from 2 to 2.7 percent.

The increase was smaller for the fifth quintile, the highest earners, from 1.6 to 2 percent, and the first quintile, the lowest, from 1.9 to 2.3 percent. For the second quintile, the ratio even dropped slightly from 2.1 to 2 percent.

The amount spent on debt repayment, including the principal, accounted for 20.1 percent of the third income quintile’s gross income in 2023. Middle-class households used more than one-fifth of their earnings to repay debt, meaning this group also had the highest debt service ratio.

A person walks by a sign about a bank's loan programs put up on the exterior of a lender in Seoul. [YONHAP]

Middle-income households cut spending

The financial squeeze on the middle class is also reflected in their disposable incomes. While households in the highest and lowest quintiles saw more solid growth, those in the third quintile saw the slowest increase in disposable income.

In the fourth quarter of 2023, third-quintile households reported an average monthly disposable income of 3.52 million won ($2,465), up only 2 percent on year. By contrast, the first quintile saw an increase of 4.6 percent, and the fifth quintile, 4.9 percent.

Higher-income households have the financial cushion to absorb rising interest costs, and lower-income households generally carry less debt. But middle-income earners are exposed directly to the effects of rising rates. An analysis of microdata by Statistics Korea showed that 75.5 percent of households in the third quintile said they had cut back on spending due to debt repayment.

A separate report released last month by the Korea Chamber of Commerce and Industry found that real consumption spending has already recovered for most income brackets. The lowest-income group saw consumption rise even during the pandemic, while the fourth and fifth quintiles bounced back in 2023. Only the second and third quintiles are still spending less than before the pandemic.

Promotional banners for loans hang in front of a bank in Seoul in 2023. [YONHAP]

Income for middle-income earners lag behind top earners

High earners are typically professionals or employees at large conglomerates. The growing wage gap between large and small companies has widened the income divide, leaving middle-class earners — many of whom work at small- and medium-sized enterprises — behind.

Last year, 55 out of Korea’s 100 largest non-financial listed companies paid an average annual salary of more than 100 million won. That’s more than six times the number of companies compared to five years ago, when only nine did so.

“Wages at large companies have steadily increased, but wage growth at smaller firms has been limited,” said Lee Sang-ho, head of the economic research team at the Federation of Korean Industries. “The income gap will likely widen further.”

The middle class is also being squeezed by a slump in domestic consumption, particularly among the self-employed. In 2023, self-employed people made up about 25 percent of households in the third income quintile — the highest share among all five quintiles.

“When interest rates rise, it’s common to sell assets or repay loans using income to reduce total debt,” said Kang Sung-jin, an economics professor at Korea University. “That may be feasible for high-income earners. But for the middle class — especially the self-employed and workers at small and mid-sized firms — that probably wasn’t an option.”

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.

BY JEONG JIN-HO [[email protected]]