The COVID-19 crisis has once again thrown into sharp relief various inequalities and divisions, including the inequalities between regular and contingent workers and between men and women.
In the rankings of the World Economic Forum's Global Gender Gap Index, Japan was ranked 120th out of the 156 countries evaluated, by far the lowest among developed countries. Japan was given high scores with regard to education and health among the four criteria items, but its low scores regarding economic and political participation were fatal to the country's position in the rankings. Healthy and highly educated human capital is not put to good use in Japan.
When there are impediments to efficient distribution of resources in the market, policy measures may generate positive effects. If we are to consider what gender-specific tax measures, putting aside their feasibility, would have optimal effects in Japan at present, the optimal measures would be to reduce the income tax rate for women and to provide subsidies for their labor force participation. However, the situation in the real world is the exact opposite: many women actually face heavy effective taxes on labor supply that undermine their work incentives and suppress their earnings, with married women in particular hurt by the distortions.
If married women keep their annual earnings below a threshold known as the "1.03-million-yen wall," they are exempted from income tax and their husbands' earnings are eligible for spousal deductions. At many companies, this threshold is also used as the cut-off for the provision of spousal benefits. If their husbands are covered by social insurance at work, married women with annual earnings below 1.3 million yen are designated as "Category 3 insured persons" and are exempted from paying contributions to pension, healthcare insurance, and long-term care insurance programs. If married working women cross this threshold, their households' take-home pay actually decreases significantly.
Married working women are obligated to make social insurance payments as "Category 1 insured persons" even if their annual earnings are below 1.3 million yen if their husbands are not covered by social insurance at work. The same obligation applies to jobless single persons and low-income working single persons. Because of the heavy burden of social security payments, more than 30% of those in their late 20s do not pay the required premium for the the proportion of those who do not pay national pension insurance premiums is higher than 30% among people who are in their late 20s. If those people continue to skip payments, they will become ineligible to receive pension benefits in their old age. In the case of women designated as Category 3 insured persons, who are exempted from making social security payments, if they survive their husbands, they are eligible to receive three-quarters of the salary-linked portion of the husbands' employee pension benefits, in addition to their own basic pension benefits. The average amount of employee pension benefits paid out to women is lower than the amount of bereavement employee pension benefits for women who had lost spouses who had been earning the average income. This is the result of impediments created by the institutional walls that stand in the way of working women.
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The four-year university enrollment rate is higher than 50% among both men and women and there is little difference by gender in terms of employment status and wages right after their entry to the labor market. Marriage and childbearing, however, have a decisive impact on gender inequality (see the left-hand figure). The proportion of regular workers falls steeply among women during their 20s-30s, as many women adjust their employment when confronted with the institutional walls, and the proportion does not bounce back afterward, with most women who return to the labor market employed as contingent workers.
The labor market distortions are not limited to individuals. I, together with Minamo Mikoshiba of the University of Tokyo, studied macroeconomic and fiscal effects of women's labor force participation in the medium- to long-run. According to our analysis, although an increase in women's labor force participation would greatly improve the fiscal balance by promoting economic growth, most of the positive impact would disappear unless the employment status and wages for women remain unchanged.
Contingent workers' wages remain flat over the life-cycle, which implies that they cannot expect to earn higher income and accumulate skills even if they continue working (see the right-hand figure). If many women choose to keep their annual earnings below the 1.03-million-yen or 1.3 million-yen thresholds, tax and social insurance revenues do not increase, either. Furthermore, it has become clear after the Global Financial Crisis and amid the COVID-19 crisis that when an economic cycle shock occurs, companies tend to use pools of contingent workers as a margin for labor adjustments.
Given the trade-off faced by women between the option of getting married and bearing children and the resulting prospect of earning lower income and facing income risks for the rest of their lifetime, it is not surprising that the hurdle for getting married and having a family becomes higher as the opportunity cost increases as they become more educated. Over the past five years, the annual number of births dropped 16%, coming to around 840,000 in 2020. If the number continues to decline at the same pace, the number of new births will be a third of the present level in 30 years. The marriage rate has also continued to fall, with the proportion of adults who remain single over their lifetime standing at 26% among men and at 16% among women (2020 National Census).
As the typical family structure of the high-growth period is no longer standard, the institutional systems that were established in the post-war period based on the traditional family structure and intra-family division of labor generate various harmful effects. It is necessary to promote labor market mobility which adapts to diverse lifestyles and life stages and to develop tax and social security systems that take individuals' economic situations into consideration.
The steep decline in the number of births is leading to a rapid drop of the working-age population. It is inevitable that social security expenditure will increase while tax and social security revenues decline. There are many challenges that could become difficult to overcome if not addressed soon, including fiscal problems, widening inequality, and stagnant productivity. The inequality in Japan has not been caused by the concentration of wealth among super-rich entrepreneurs as is the case in the United States: it is mostly attributable to the effects of divisions created by existing institutional walls, other than factors related to the aging of society.
The lifetime employment system, which is the foundation of the employment of regular workers, is crumbling. Can this system continue to support workers of the second baby boomers (children of the baby boomers who were born soon after World War II), who are 50 years old or so, the age at which the seniority wage curve peaks? By 2025, when all of the baby boomers will be over the age of 75, Japanese society is expected to start feeling pains and experiencing the results of the inadequacies inherent in various traditional practices and systems. What can be done before that happens?
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First, we must remove institutional walls that undermine work incentives and hold down the growth of human capital. Even though it may be difficult to quickly reform the system that grants special treatment to Category III insured persons, it is essential to map out a path to phase it out.
It is also necessary to eliminate the discriminatory application of social insurance coverage that has created a wall between regular and contingent workers. Social insurance premiums should be deducted from labor remuneration for all workers at a fixed rate regardless of the size of a firm or the wage level, and the payment of pension benefits commensurate with the lifetime premium contributions should be guaranteed. Considering the severe fiscal situation and from the viewpoint of fairness, it is also necessary to collect a minimum insurance premium from all people who are able to pay. Progressivity of benefits should be determined with due consideration given to the balance between factors such as an increase in the financial burden on low-income earners and the effects on economic inequality in retirement and work motivation.
It is also desirable to reduce various corporate benefits tied to long-term employment, including retirement allowances, and to reflect such benefits in the wages of entire workforces.
Second, it is necessary to develop a safety net that protects people who may lose their job or face earnings cuts as a result of increased labor market mobility. Accessible employment support programs should be developed. It would be desirable to provide intensive vocational training for younger unemployed individuals.
If a safety net does not function well, the ability to respond to macroeconomic crises and structural changes essential to growth will also be impeded. If a firm's bankruptcy results in long-term unemployment and financial hardship for individuals, the government would have to bail them out. A study by Professor Kenichi Ueda of the University of Tokyo and his coauthors showed that many employers that used company support programs introduced in response to the COVID-19 crisis were those whose business performance had already been inferior.
In the recovery phase to come after the COVID-19 crisis, it is desirable to avoid impeding corporate metabolism, which is essential to economic growth, and to shift emphasis to increasing jobs in growth sectors while protecting people who need assistance.
It is also inevitable to revise the practice of using pools of contingent workers as a margin for labor adjustments. It is essential to both relax the restrictions on companies' dismissal of employees and to make it mandatory to pay compensation to dismissed employees in accordance with their wage level and tenure, regardless of whether they were regular or contingent workers, so that the pains of dismissal can be shared. The government should do its utmost to support dismissed workers in finding new jobs.
Finally, in order to realize an employment market that is open to people at all life stages, it should be prohibited to ask questions about certain attributes of job applicants, such as age, gender, and marital status, and to use that information as hiring criteria. It may be necessary to take strong actions, such as making it mandatory for employers to explain the reasons for hiring and promotion if asked to do so.
A declining birthrate is a complicated issue faced by many countries, and there is no simple solution. However, it will be possible to rectify the stagnant wages and steep decline in lifetime earnings associated with marriage and childbearing by improving labor market mobility.
The medium- to long-term macroeconomic outlook is also likely to affect the childbirth trend. If the fiscal burden is shifted to future generations or if the inequality is allowed to expand, living standards will deteriorate in the future, a prospect that could deter people from having children due to concerns for their future well-being. Considering policies that contribute to the welfare of future generations is also useful for resolving our immediate social and economic problems.
Policies and practices that were successful in the past may become impediments to growth and distribution because of the changes in the surrounding environment. It is an urgent task for the government to tear down the walls that stand in the way of economic growth while providing careful explanations to the people in a way that does not create divisions, both across and within generations.
* Translated by RIETI.
January 7, 2022 Nihon Keizai Shimbun