[Collapsing Self-Employed] Middle Class Suffers More Damage Than Upper and Lower Classes

Hana Financial Research Institute 'Changes in the Self-Employed Market Due to COVID-19 and Digital Transformation'
Strengthening Winner-Takes-All by Top Firms and Delivery App Usage by Lower-Tier Firms
Weakened Competitiveness of the 'Moderately Okay' Middle-Tier Self-Employed

On the 22nd, a business owner is updating the menu with increased prices at a restaurant in downtown Seoul, where self-employed individuals are struggling due to soaring inflation. Photo by Mun Honam munonam@

"Sales have been 'plummeting' recently, and if we close for four days during the Chuseok holiday, it feels like sales will hit rock bottom." Park Eun-su (42), who runs a chain noodle restaurant in Yeongdeungpo-gu, Seoul, sighed deeply as if the ground were sinking beneath her. Four years ago, Park quit her job and gathered all her savings to open the store. She inherited the recipe from her parents who ran a noodle restaurant in the provinces, and the location was good, so until before COVID-19, she had quite a few regular customers.

After deducting rent, ingredient costs, and utilities, Park's monthly income at that time was usually around 3 million KRW. It was a decent score for a first-time business owner. Although she had to stand in a cramped kitchen for 12 hours a day, she endured it with the hope that things would improve. However, COVID-19 shattered that hope. "Noodles are a lunch menu for office workers, so delivery demand is incomparable to chicken or jokbal (pig's trotters), and as remote work periods extended, my monthly income sometimes fell below 1 million KRW," she said. "Even now, my income is still below what it was before COVID-19."

Median-tier Self-employed Business Income Decreased by 2.7% Since COVID-19

While the business income of self-employed individuals contracted during the pandemic, it was found that middle-income self-employed people like Park suffered more significant losses. Income changes at the upper and lower extremes were relatively less pronounced. The winner-takes-all effect among top-tier businesses and the expansion of sales opportunities for lower-tier businesses through delivery applications weakened the competitiveness of middle-tier self-employed individuals.

On the 5th, Hana Financial Management Research Institute's report titled "Changes in the Self-employed Market Due to COVID-19 and Digital Transformation" analyzed the Household Trend Survey by Statistics Korea to assess the situation of self-employed households. When dividing the monthly business income of self-employed individuals into quintiles, the median tier (top 40-60%) third quintile business income was 2.82 million KRW in 2021, a 2.7% decrease compared to 2.9 million KRW in 2019. In 2020, when COVID-19 spread, it dropped by 4.3% from the previous year to 2.77 million KRW, and although it slightly rebounded the following year, recovery was limited.

On the other hand, the monthly business income of small-scale self-employed individuals in the first quintile (bottom 20%) increased by 9%, from 680,000 KRW in 2019 to 750,000 KRW in 2021. The fifth quintile (top 20%) also saw a slight increase of 0.6%, from 6.39 million KRW to 6.43 million KRW.

The worries of self-employed people are deepening, and on the 3rd, a restaurant in Myeongdong, Seoul, is quiet. Photo by Mun Ho-nam munonam@

Support Focused on Lower Tier, Loan Interest Rates Rising... Risks for the Middle Tier

Why has the backbone of the self-employed market broken? The report analyzed that famous restaurants or large stores in the upper tier maintained a 'superstar effect' as people flocked to them regardless of timing. Researcher Kim Moon-tae explained, "With online platforms expanding the competition range from walking distance to motorcycle delivery range, the meaning of being 'number one in the neighborhood' has disappeared, and demand concentrated on some top-tier businesses."

Regarding lower-tier small-scale self-employed individuals, Kim said, "They benefited from delivery apps more than before COVID-19, increasing sales even at stores that were previously hard to access." He added, "The income of middle-tier self-employed people decreased, causing some to fall into the lower tier, and some originally lower-tier self-employed individuals closed their businesses and dropped out of the statistics, creating an illusion that lower-tier income increased."

Pressed from above and squeezed from below, the position of the 'moderately okay' middle-tier self-employed is likely to narrow further. Support policies for the self-employed have focused on the lower tier, as seen in the New Start Fund, and the interest on loans increased during the COVID-19 period is rising with the current interest rate hike, while loan maturity extension support policies will end at the end of this month.

Professor Ha Jun-kyung of Hanyang University's Department of Economics pointed out, "The digital technology utilization rate of small business owners is still low, so the government should provide digital transformation consulting support to help middle-income self-employed individuals in the blind spots increase their sales." He also emphasized, "Their financial insolvency risks should be closely monitored."