Abstract
Japan: Selected Issues
Mininum Wages as a Policy Tool1
In order to revamp growth and permanently exit deflation, Japan needs vigorous wage growth. The government has recognized this and announced substantial increases in the minimum wage and we empirically estimate its impact on average wages. Our econometric results suggest that the 3 percent hourly minimum wage increase could cause monthly wages to increase by about 1.5 percent on a year-on-year basis. The minimum wage policy should be complemented by other income policies—e.g. a “soft target” for wage growth and increases in public wages to create cost-push pressures in line with the inflation target.
A. Introduction
While Japan has maintained relatively strong productivity growth through the “lost decades,” real wage growth has lagged behind. Sluggish wage growth reflects cyclical and structural factors, including the rapid emergence of low-paid non-regular workers, whose share gradually rose to almost 40 percent of the labor force. Weak wage-price dynamics despite a very tight labor market weakens consumption and hampers the attainment of the inflation target.
In September 2015, the Abe administration called for a substantial rise in the minimum wage as part of its efforts to stimulate wage growth. In Japan, minimum wages are set at the prefectural level, but they can be substantially influenced by the central government. Hence, the government’s proposal is expected to translate into an increase of 3 percent per year between now and 2023, which would hike the national weighted average of the hourly minimum wage from 798 to 1,000 yen. The 3 percent increase in the minimum wage is an ambitious objective compared to the dynamics during the last two decades (Table 1).
Wage Determinants in Japan (Prefectural Panel), Regression Results Using Instrumental Variables. (hourly), in Logs
Wage Determinants in Japan (Prefectural Panel), Regression Results Using Instrumental Variables. (hourly), in Logs
| Period: 1997–2014 | Dep. Variable: Real wages (total) | Dep. Variable: Real wages (Women) | Dep. Variable: Real wages (Men) |
|---|---|---|---|
| Minimum Wage | 0.48** | 0.42** | 0.66** |
| (1.92) | (2.28) | (2.42) | |
| CPI Inflation | −0.008** | −0.001 | 0.01** |
| (−2.36) | (−0.31) | (02.31) | |
| Prefectural GDP | 0.0003 *** | 0.0004*** | 0.0004*** |
| (4.33) | (6.20) | (5.09) | |
| Share of part-time workers | −0.09 | 0.12** | −0.1 |
| (−0.99) | (1.65) | (−0.85) | |
| Unemployment Rate | −0.009* | 0.002 | 0.01* |
| (−1.75) | (0.52) | (1.69) | |
| Share of employment in manufacturing | 0.002*** | 0.001* | 0.003*** |
| (3.52) | (1.78) | (3.21) | |
| Average female age | −0.03*** | −0.02*** | −-- |
| (−6.22) | (−5.00) | ||
| Average male age | 0.04*** | −-- | 0.03*** |
| (5.28) | (4.27) | ||
| Constant | −2.41 | −1.93 | −6.23** |
| (−1.30) | (−1.36) | (−3.14) | |
| R-Squared | 0.63 | 0.70 | 0.53 |
Wage Determinants in Japan (Prefectural Panel), Regression Results Using Instrumental Variables. (hourly), in Logs
| Period: 1997–2014 | Dep. Variable: Real wages (total) | Dep. Variable: Real wages (Women) | Dep. Variable: Real wages (Men) |
|---|---|---|---|
| Minimum Wage | 0.48** | 0.42** | 0.66** |
| (1.92) | (2.28) | (2.42) | |
| CPI Inflation | −0.008** | −0.001 | 0.01** |
| (−2.36) | (−0.31) | (02.31) | |
| Prefectural GDP | 0.0003 *** | 0.0004*** | 0.0004*** |
| (4.33) | (6.20) | (5.09) | |
| Share of part-time workers | −0.09 | 0.12** | −0.1 |
| (−0.99) | (1.65) | (−0.85) | |
| Unemployment Rate | −0.009* | 0.002 | 0.01* |
| (−1.75) | (0.52) | (1.69) | |
| Share of employment in manufacturing | 0.002*** | 0.001* | 0.003*** |
| (3.52) | (1.78) | (3.21) | |
| Average female age | −0.03*** | −0.02*** | −-- |
| (−6.22) | (−5.00) | ||
| Average male age | 0.04*** | −-- | 0.03*** |
| (5.28) | (4.27) | ||
| Constant | −2.41 | −1.93 | −6.23** |
| (−1.30) | (−1.36) | (−3.14) | |
| R-Squared | 0.63 | 0.70 | 0.53 |
Evolution of the Minimum Wage in Japan
Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A003
Source: Ministry of Health, Labour and Welfare (MHLW).Evolution of the Minimum Wage in Japan
Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A003
Source: Ministry of Health, Labour and Welfare (MHLW).Evolution of the Minimum Wage in Japan
Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A003
Source: Ministry of Health, Labour and Welfare (MHLW).
Wages and Productivity Growth
Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A003
Source: Haver Analytics.Wages and Productivity Growth
Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A003
Source: Haver Analytics.Wages and Productivity Growth
Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A003
Source: Haver Analytics.While the absolute level of the minimum wage in Japan is comparable to that of other developed countries, its level relative to the average wage of full-time workers is low. Existing estimates of people at (or around the) minimum wage vary widely but could be around 10 percent of all workers, while covering a considerably higher share of part-time workers.
Higher minimum wages most directly impact workers at the lower end of the wage distributions. Given Japan’s high share of non-regular workers, this suggests that a significant number of employees’ wages could be affected. Eyeballing the data also suggests that there is correlation between the minimum and average wage growth, although causality needs to be established by a more rigorous empirical analysis, which we present in next section.
Minimum relative to average wages of full-time workers
(2014)
Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A003
Sources: Online OECD Employment databaseMinimum relative to average wages of full-time workers
(2014)
Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A003
Sources: Online OECD Employment databaseMinimum relative to average wages of full-time workers
(2014)
Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A003
Sources: Online OECD Employment database
Monthly Wage Distribution for Full-time Workers
(Monthly wage in thousand yen; % of total number of workers)
Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A003
Sources: Ministry of Health Labor and Welfare; and IMF staff calculations.Monthly Wage Distribution for Full-time Workers
(Monthly wage in thousand yen; % of total number of workers)
Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A003
Sources: Ministry of Health Labor and Welfare; and IMF staff calculations.Monthly Wage Distribution for Full-time Workers
(Monthly wage in thousand yen; % of total number of workers)
Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A003
Sources: Ministry of Health Labor and Welfare; and IMF staff calculations.B. Empirical Strategy and Results
In our empirical analysis, we exploit the variability of the minimum wage over time and across prefectures. Our panel data comprises yearly data for the 47 prefectures of Japan, from 1997 until 2014. The dependent variable is the hourly real average wage and explanatory variables include: the minimum wage, the unemployment rate, the consumer price index (CPI) level, real GDP, the share of part-time work applicants (as a proxy for labor market duality), the share of unemployment in manufacturing, and the average age of workers (male, female).
Since standard tests confirmed the existence of endogeneity between minimum wages and average wages, we employed a two-stage least squares regression using as instruments for the minimum wage the ratio of male and female applicants to social welfare in each prefecture to the total amount of applicants to social welfare in Japan. Given an overall coefficient close to 0.5 (see Table 1), our results suggest that the planned annual increase of 3 percent in the minimum wage could raise average wages by 1.5 percent on a year-on-year basis.
C. Policy Implications
The 1.5 percent annual increase in average wages resulting from the minimum wage policy would be a significant boost to wage growth, but it would still fall short of what is needed to engender the kind of wage-price dynamics that Japan needs to reach escape velocity form deflation. Given the BoJ inflation target of 2 percent, and assuming productivity growth of 1 percent, wage growth of 3 percent would seem desirable for Japan. The policy implication of our analysis is therefore that, while the minimum wage increase policy announced by the authorities is helpful in stimulating wage growth, it should be complemented by other income policies—e.g. a “soft target” for wage growth and increases in public wages.
Prepared by Chie Aoyagi, Giovanni Ganelli, and Nour Tawk (all OAP).
