Issues Facing the Japanese Economy in 2012 (January 2012)

Trade Liberalization and Income Inequality

Faculty Fellow, RIETI

"Of the 1%, by the 1%, for the 1%"--Joseph Stiglitz

"We are the 99%"

There has been increased attention on income inequality. Behind this trend is the widening disparity of income in developed countries. Professor Joseph Stiglitz of Columbia University in the United States pointed out in the article titled "Of the 1%, by the 1%, for the 1%," quoted at the beginning of this column, that the upper one percent of Americans are now taking in nearly a quarter of the nation's income (Stiglitz, 2011). This article set off demonstrations all over the United States demanding rectification of income inequality, which has since spread to the major large cities around the world. "We are the 99%" is the slogan that these demonstrations are carrying.

Trade liberalization has been regarded as one of the factors that has caused the widening disparity of incomes. Why trade liberalization?

The Stolper-Samuelson Theorem

Among the theorems in international trade theory is the Stolper-Samuelson theorem. Let us assume that a product is produced using two factors--workers with high skills (skilled labor) and low skills (unskilled labor). Suppose that, in order to produce the product, more of the skilled labor is needed. If the price of this product goes up in developed countries through trade liberalization, the wages of skilled labor will increase while those of unskilled labor decrease. This is what the Stolper-Samuelson theorem states. The reason for the widening disparity between the wages of skilled and unskilled labor can be explained with this theorem.

The Situation in Japan

In 2011, Japan accelerated its move toward trade liberalization. An event symbolizing this is Prime Minister Yoshihiko Noda's proclamation last November that he would "enter into consultations toward participating in the Trans-Pacific Strategic Economic Partnership (TPP) negotiations with the countries concerned." On the other hand, it has been pointed out that income inequality has been worsening in recent years. For example, Ohtake (2008, p.100) states, "On the question of whether income inequality is worsening in Japan, the answer is statistically evident. In every statistic, the trend toward widening disparity can be discerned since the middle of the 1990s." The present situation brings to mind the following disquieting question:

If Japan further liberalizes trade, will income disparity widen even more?

Factors increasing income inequality

As explained above, trade liberalization by developed countries leads to increasing income inequality, according to the Stolper-Samuelson theorem. Be that as it may, is trade liberalization the only factor to begin with that is causing income inequality? Ohtake (2010, pp.140-142) points to five factors causing the expansion of the poor in Japan, namely, recession, technological change, trade liberalization (globalization), aging population, and increase in divorce. This means that trade liberalization is not the only factor to cause income inequality. Multiple factors including technological innovation and an aging population may also be causes.

If there are multiple factors that are increasing inequality, the issue to be addressed becomes "To what degree is trade liberalization contributing to the widening of income disparity?" If the contribution of trade liberalization is more serious than the other factors, then, even if trade liberalization benefits the nation as a whole, there may be opinions advocating halting its rapid deployment. On the other hand, if there are other factors that exert more serious influences, then it would be more important to address these factors.

Scientific evidence

Sakurai (2001) focused on technological change and trade within the five aforementioned factors and showed that the effect of technological change was more significant than that of trade. Sasaki and Sakura (2004), on the other hand, concluded that the effect of trade is as significant as that of technological change. The study also showed, however, that the contribution ratio of the two factors taken together to income inequality amounted to less than 20%. This means that most of the widening disparity is caused by factors other than trade or technological change. What, then, is the main cause of the widening income disparity?

Ohtake (2001) points out the interesting fact that the widening of income disparity before 2000 was mainly caused by the aging of the population. Generally speaking, the income differential among people at the same age tends to widen with age. Therefore, the aging of the population means an increase in the ratio of people with wider income differentials. As a result, even if the income differential at each age does not change, the income differential of the population as a whole will widen with the aging of the population.1

Future prospects and tasks

It is conceivable that in the future there may also be heightened interest in trade liberalization and its impact on income inequality in Japan. Indeed, the possibility that trade liberalization will cause income disparity to widen cannot be denied. But we need to understand that there are various factors other than trade liberalization behind the widening income disparity. We also need to recognize that there is evidence that most of the widening income disparity is caused by factors other than trade liberalization.

On the other hand, researchers need to pay more attention to the latest developments in the economy. More specifically, there is a need to conduct and accumulate studies based on the most current data. It will also be important not only to analyze the effects of trade but also to include those of other globalization factors, including offshoring, in the analysis. To achieve this, it will be the task of the researchers to continue accumulating empirical studies.

Needless to say, in order for empirical studies to pile up, hard and steady work to enhance statistical data is required. Improving the accuracy of statistical data and continued research are unflashy activities that do not draw attention but nevertheless are important policy tasks supporting detailed analysis. To make the discussion on income inequality more constructive, it is desired that 2012 will see further enhancement of statistical data, accumulation of empirical analysis, and policy formation based on statistical evidence.

January 12, 2012
  1. However, Ohtake (2010, chapters 6 and 7) points out that, after 2000, the poor has been expanding and that, among the younger generations, income differentials have been widening. I am not aware of any empirical research on trade and income covering the period from 2000 onward. Thus, there is a possibility that the effect of trade on income disparity may have changed in recent years.
  • Ohtake, Fumio, Inequality in Japan [Nihon no Fubyōdō], Nihon Keizai Shimbunsha (in Japanese), 2001.
  • Ohtake, Fumio, Disparity and Hope [Kakusa to Kibō], Chikuma Shobo (in Japanese), 2008.
  • Ohtake, Fumio, Competition and Fairness: The real benefits of market economy [Kyōsō to Kōheikan], Chuko Shinsho (in Japanese), 2010.
  • Sasaki, Hitoshi and Sakura, Kenichi, "Changes in the Demand for Skilled Labor within Japan's Manufacturing Sector: Effects of Skill-Biased Technological Change and Globalization," Bank of Japan Working Paper Series, No. 05-E-12, 2004.
  • Sakurai, Kojiro, "Biased Technological Change and Japanese Manufacturing Employment," Journal of the Japanese and International Economies, 15:298-322, 2001.
  • Stiglitz, Joseph E., "Of the 1%, by the 1%, for the 1%," Vanity Fair, May 2011.

January 12, 2012