Selected Issues

Abstract

Selected Issues

Inequality in Japan: Generational, Gender, and Regional Considerations1

Income inequality has been increasing in Japan, as in other advanced economies. Studies identify demographic forces and increases in non-regular work and female labor force participation as contributors to this trend. Fiscal redistribution via taxes and transfers—mainly to older generations—has helped maintain a relatively stable level of disposable income inequality. Older generations exhibit higher income inequality but also higher wealth than younger generations. Gender inequality is significant, but there has been a decline in the gender wage differential over time. Poorer and older prefectures show higher income inequality, though income inequality across prefectures has decreased over time. Highlighted intergenerational, gender-based, and regional considerations are essential for a well-balanced comprehensive macroeconomic policy package to help tackle inequality in Japan.

A. Introduction

1. As in other advanced economies, income inequality has been increasing in Japan (Figure 1). Following extremely high income concentration in Japan pre-World War Two (WWII), concentration declined abruptly during WWII and remained very low for the rest of the twentieth century (Moriguchi and Saez, 2008).2 Over the last few decades, technological progress and globalization have been identified as drivers of income inequality increases in advanced countries (IMF, 2017). For example, technological change has contributed to the skill premium, with a more educated population having a comparative advantage on new technology adoption. In the case of Japan, aging and demographic factors, plus the rise of non-regular work, have been identified as contributors to this trend (Cabinet Office, 2006; Jones, 2007). Shirahase (2013) also emphasizes the rise in female labor force participation vis-à-vis significant gender inequality in Japan’s labor market.

Figure 1.
Figure 1.

Income Inequality Trends in G7 Countries since 1983

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A003

2. While Japan’s market income inequality has been increasing rapidly, disposable income inequality has been more stable due to fiscal redistribution via taxes and transfers.3 Even though Japan’s market income inequality has been increasing, it is still lower than that of other advanced countries. However, Japan’s market income inequality was 27 percent higher than its disposable income inequality in 2003, but this had increased to 33 percent by 2012 (OECD data in Figure 2, left panel). This trend highlights the growing redistributive role of taxes and transfers over time, which appears to be increasing faster in Japan than in all other G7 countries. Most recent data are available for 2014 (NSFIE data in Figure 2, right panel) and show a further uptick in market income inequality while disposable income inequality remains stable.

Figure 2.
Figure 2.

Japan Income Inequality Trends, OECD versus NSFIE Data

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A003

3. The remainder of the chapter covers generational, gender, and regional aspects of inequality in Japan. Section E summarizes the key findings and includes a policy discussion. The appendix highlights important differences and limitations from available national surveys that cover inequality.

B. Inequality and Generations

4, Income inequality is higher for older generations, and it is expected to further increase as the share of the elderly continues to rise. Data for different cohorts show that income inequality is higher among the elderly than among the working-age population, even though fiscal redistribution significantly reduces the difference (i.e. note the 50 percent reduction from the Gini market income to the Gini disposable income for the elderly, in Figure 3). A similar pattern is observed among cohorts “30 years old and under,” “30–49 years old,” and “50–64 years old,” with higher income inequality for older cohorts.

Figure 3.
Figure 3.

Japan: Income Inequality by Generation

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A003

5. Evidence points to some convergence between disposable income poverty rates of old and young generations. Japan’s poverty rate is above the OECD average. Starting in the 1980s, older generations (above 50 years old) show flat or declining disposable income poverty rates, while younger generations experienced poverty increases up to 2012 (OECD data, top panels Figure 4). Specifically for children, there is evidence that those in a single-mother household are more likely to suffer poverty (and chronic poverty) than children in other types of households, based on Japanese Longitudinal Survey of Newborns up to 2013 (Kureishi and Wakabayashi, 2017). However, Japanese CSLC and NSFIE data (bottom panels Figure 4) provide evidence that there has been a reversal in this trend for 2014 and 2015, showing a reduction in disposable income poverty rates for younger generations.

Figure 4.
Figure 4.

Disposable Income Poverty by Generation

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A003

6. Older generations, who benefit most from fiscal redistribution (via taxes and transfers), are significantly wealthier than younger generations. Wealth poverty is significantly lower for older generations (Figure 5, left panel). Moreover, the wealth ratio of older versus younger cohorts is relatively high in Japan when compared with Germany and Italy, though lower than in the U.S. (Figure 5, right panel).4 Therefore, the evidence points to significant wealth inequality across generations—with wealthier older cohorts and less wealthy younger cohorts.5 The highlighted relative wealth of older generations in Japan calls into question the costly fiscal redistribution mechanism in place that reduces elderly income inequality mainly via pensions (see Figure 3).

Figure 5.
Figure 5.

Wealth by Generation

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A003

C. Inequality and Gender

7. Women’s economic participation in Japanese labor markets has increased, though much of the increase represents non-regular and part-time work, which has contributed to higher inequality. Female labor force participation (FLFP) shows a significant uptick in recent years, with more women joining and remaining engaged in the labor force (Figure 6). However, many of the jobs that women have are non-regular or part-time jobs that receive lower wages, training and career opportunities, which increases inequality (Miake, 2017; Shirahase, 2013). Along similar lines, Yokoyama and Kodama (2018) find that the decrease in earnings of middle-class female workers (between 1989 and 2013) is mainly due to the increase in part-time workers.

Figure 6.
Figure 6.

Japan: Labor Market Participation by Gender

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A003

8. Women are underrepresented in Japanese managerial and policy-making positions.6 There has been some improvement in female representation in managerial roles within public and private sectors, but outcomes are still below the government’s 2020 targets (Figure 7). Similarly, the share of female board members in listed companies has increased (from 1.6 percent in 2012 to 3.7 percent in 2017), but it remains well below the 10 percent target set for 2020. Regarding female representation among policy makers, Japan ranks low with only 10 percent of lower chamber representatives being women—the lowest share among the G7 countries and 70 percent below the OECD average (Figure 7).

Figure 7.
Figure 7.

Japan: Women Underrepresentation in Senior Positions

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A003

9. Inequality by gender is significant in Japan but there has been a decline in the gender (hourly) wage differential over time. Japan’s gender wage gap (of 25 percent) is 75 percent higher than the OECD average. Japan’s male-female hourly wage ratio was 134 percent in 2015 and varies by prefecture, with many of the western prefectures showing the lowest hourly wage differentials (Figure 8).7 Improvements in the status of women within Japan’s labor market is evidenced by the 8 percent decrease in the gender hourly wage differential between 2005 and 2015. Similarly, Lise et al (2014) find a decrease in (hourly) wage inequality for women between 1991 and 2008; but, due to a sharp increase in “hours inequality” for women, they document an increase in earnings inequality for women.

uA03fig01

Gender Wage Gap

(In percent of male median wage, data as of 2016)

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A003

Source: OECD, Gender Wage Gap.*Data as of 2017.The gender wage gap is unadjusted and is defined as the difference between median earnings of men and women relative to median earnings of men. Data refer to full-time employees and to self-employed.
Figure 8.
Figure 8.

Japan: Gender-Based Wage Inequality

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A003

D. Regional Inequality

10. Poorer and older Japanese prefectures show higher income inequality, although income inequality across prefectures has decreased over time (NSFIE data). Disposable income inequality by prefecture, available for 2014, is higher for poorer and older prefectures—with correlations of 0.5 and 0.2, respectively (NSFIE data in Figure 9). Between 2009 and 2014, inequality decreased across prefectures as measured by the 90/10 (or 80/20) percentiles ratio of prefectures’ average income— driven by a relative decrease of average incomes in the prefectures with higher average income.

Figure 9.
Figure 9.

Japan: Regional Disposable Income Inequality

Citation: IMF Staff Country Reports 2018, 334; 10.5089/9781484386804.002.A003

E. Findings and Policy Discussion

11. Greater equality and healthy social mobility are key for inclusive growth. For high-income countries, higher income inequality skews opportunity and reduces intergenerational mobility (Corak, 2013; Chetty et al, 2016). Excessive inequality and lack of opportunity may increase polarization, weaken social cohesion, and lead to lower economic growth. To promote inclusive growth in developed economies, the key is to advance policies that can both boost innovation-based growth and enhance social mobility and equality.

12. Income inequality has been increasing rapidly in Japan, driven by demographic forces and increases in non-regular work and female labor force participation. Several factors are associated with higher inequality in Japan:

  • Older generations show higher income inequality—and benefit the most from fiscal redistribution via pensions—but they are also wealthier than younger generations.

  • Inequality by gender is still significant in Japan, but there has been a decline in the gender (hourly) wage differential over time.

  • Poorer and older prefectures show higher income inequality, though income inequality across prefectures has decreased over time (per NSFIE data).

13. However, Japan’s disposable income inequality is stable, thanks to an increasing role of fiscal redistribution (taxes and transfers) over time. While market income inequality has been rising rapidly since the early 1980s, growing fiscal redistribution to older generations via taxes and transfers (chiefly pensions) has helped disposable income inequality remain broadly stable over the period.

14. Fiscal and structural reforms are key levers to obtain the desired balance between growth, fiscal consolidation, and redistribution objectives (Ostry et al, 2014, 2018). Aoyagi et al (2015) links monetary policy under Abenomics with rising prefectural income inequality, possibly driven by unequal income gains from higher inflation, and emphasizes that further structural reforms are necessary to foster growth and increase equality. Moreover, it is important that reform design carefully accounts for distributional considerations by focusing on policies that foster equality and social mobility, while also accomplishing growth and fiscal objectives.

15. Intergenerational, gender-based, and regional considerations are essential for a well-balanced comprehensive and inclusive macroeconomic policy package. Independently of the chosen balance among sometimes competing policy objectives (i.e. growth and fiscal consolidation), a comprehensive policy package that takes all trade-offs and synergies into account is key, incorporating critical intergenerational, regional and gender-based considerations.

  • In connection with structural policies: (i) labor market reforms should provide a relative productivity boost to disadvantaged workers (i.e. non-regular and female), including via training and education; and (ii) policies that enhance product market competition and firm dynamism should also increase social mobility.

  • In connection with fiscal policy: (i) public expenditure policy should carefully consider the distributional impact across age groups, gender and regions; and (ii) tax policy has a role to play in adjusting the burden across generations and gender.

  • For example, the Japanese authorities have advanced pension reform to decrease pension spending per capita over time (Kashiwase et al, 2012). The reform is expected to address intergenerational inequality by redistributing the fiscal burden from younger to older generations. However, the reform will reduce fiscal redistribution that benefits the low-income elderly population. Fiscal policy may consider strengthening mitigating measures, by targeting potential redistribution to the most affected disadvantaged groups among the elderly.

  • Fiscal policy also has a role to play in increasing opportunities for women in the labor force via the elimination of disincentives to full-time and regular work from the tax and social security system. Moreover, there is room to improve availability of childcare and nursing facilities (see IMF, 2017a).

References

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  • Chen, T., J. Hallaert, A. Pitt, H. Qu, M. Queyranne, A. Rhee, A. Shabunina, J. Vandenbussche, I. Yackovlev, 2018, “Inequality and Poverty Across Generations in the European Union,” IMF SDN/18/01.

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Appendix I. Multiple National Surveys

National surveys use different sampling methods and income definitions, delivering considerably different income inequality estimates. For example, Japan’s NSFIE excludes some households and some income items, while Japan’s CSLC includes students’ households and more of the elderly. OECD (2012) reports that, due to the differences between surveys, NSFIE’s measures of income inequality are lower than those reported by national studies based on CSLC. OECD measures of income inequality are estimated with CSLC data and are in between those from CSLC and NSFIE. Similarly, poverty rates as measured by the OECD are similar to those from national estimates based on CSLC, while both OECD and CSLC report higher poverty rates than NSFIE.

Table 1.

Databases and National Surveys

article image
Source: IMF staff compilation.
1

Prepared by Mariana Colacelli and Anh Le (both APD).

2

Moriguchi and Saez (2008) identify WWII as a defining event for income concentration in Japan. Large-scale government intervention, inflation and war destruction brought a decline in income concentration at the top of the distribution due to the collapse of capital income. Occupational reforms after the war (i.e. transferring assets from higher to lower end of the distribution) prevented re-concentration, while lifetime employment and collective bargaining have reduced wage income concentration since the 1960s.

3

Market income inequality corresponds to income before including taxes and transfers, while disposable income inequality corresponds to income post taxes and transfers. As outlined by IMF (2017), fiscal policy via taxes and income-related transfers affect disposable income inequality – with pensions accounting for the largest share in Japan. In addition, fiscal policy via healthcare and education spending (i.e. in-kind transfers) affect market income inequality over time via changes to the human capital distribution. Lastly, healthcare and education policy affect adjusted disposable income inequality (by in-kind transfers), but there are insufficient data to study adjusted disposable income inequality.

4

Due to the lack of consistent cross-country data, we constructed “old-to-young net wealth ratio” by using the ratio of net wealth for household heads ages 65–69 vs. 25–29 for Japan, 65–74 vs. 25–34 for Germany, over 64 vs. under 34 for Italy, and 65–74 vs. under 35 for the U.S. For Japan, net wealth is defined as total assets including financial assets (current amount of savings – current amount of liabilities) and houses, residential land, and major durable goods (National Survey of Family Income and Expenditure). For Germany, net wealth is calculated as the difference between gross wealth (consisting of non-financial assets and financial assets) and debt (Panel on Household Finances). For Italy, net wealth comprises of the total amount of all real assets (property, businesses, and valuables), financial assets (deposits, government securities, shares, etc.) net of any financial liabilities (mortgages and other debts) (Survey on Italian Household Income and Wealth). For the U.S., net wealth is the difference between total assets (including total financial assets and non-financial assets) and total debt (Survey of Consumer Finances).

5

Relatedly, Chen et.al. (2018) document increasing intergenerational inequality in the European Union since the Global Financial Crisis, with a growing poverty risk for the young and declining risk for the elderly.

6

Kato and Kodama (2017) provide a literature review on the effects of management practices on women in the workplace. Their findings include that individual incentives linking pay to objective performance may enhance gender diversity, while those with subjective performance may decrease it.

7

Abe (2013) finds that FLFP is higher in Japan’s northern coastal region, mainly from regular full-time work by married women with children. Identified drivers are supply-side factors (e.g., childcare availability, three-generation households, husband’s income), demand factor (i.e. industry structure), and cultural norms regarding women’s work.

Japan: Selected Issues
Author: International Monetary Fund. Asia and Pacific Dept