The momentum of women’s empowerment is building, as indicated by the enactment of the Act on the Promotion of Female Participation and Career Advancement in the Workplace (women’s empowerment act) and the introduction of numerical targets for women in managerial positions and the obligation for disclosure of wages by gender. All the same, the progress in narrowing gender inequality has remained slow. While women’s labor force participation rate in Japan is higher than the average among the OECD member countries, the critical problem is that their average income is below 60% of the average income for men.
Many women working full-time quit their regular jobs or shift to contingent work upon marriage or childbirth and experience a steep income decline. Although the gender gap in income is insignificant until the age of the mid-20s, it grows after the age of around 30 and remains for the rest of the working career.
While there are many potential factors, Mikoshiba Minamo of the University of Tokyo’s Graduate School of Public Policy and I conducted an analysis as to how women’s labor force participation and income are affected by various barriers that are entrenched in the tax and social security systems such as the “1.03-million-yen barrier” and “1.3-million-yen barrier.”
First, using the Japan Panel Survey of Consumers (JPSC), we examined how a cohort of women born in the 1960s, who are now in or around their 50s, have chosen to work and earn income since their mid-20s. Among those women, the labor force participation rate declined steeply toward their early 30s, before recovering gradually (see (a) in the figure below). Until their mid-20s, most working women worked full time as regular workers, but the proportion of regular workers continued to fall monotonically until their mid-30s and remained at a similar level thereafter. At the same time, the proportion of contingent workers continued to increase with age (see (b) in the figure below).
Upon marriage or childbirth, most women quit regular work and engage in contingent jobs when they return to the labor market. Contingent workers earn less than regular workers, and their income remains flat until the end of their career. Accumulation of job experience does not lead to higher income, and as a result, the gender income gap persists.
History of the Three Institutional Barriers
The institutional barriers that have led women to choose the above-mentioned career path have a long history. In 1961, the “spousal deduction” was introduced, making married salaried workers eligible for an income tax deduction of 760,000 yen, as long as the wives’ annual earnings were less than 1.03 million yen (the tax deduction amount was lowered to 380,000 yen in 2004). Under the public pension system, in 1985, the “Category-III insured persons” designation was introduced for dependent spouses of workers who are covered by employee pension insurance (“Category II insured persons”). Women, including working wives, are exempt from the payment of social security premium if their own annual earnings are less than 1.3 million yen. If their annual earnings exceed 1.3 million yen, around 30% of the income must be paid as social security premium, with the burden of payment divided equally between the employer and employee.
Meanwhile, if wives whose husbands had been designated as Category-II insured persons survive their husbands, they are eligible to receive 75% of the employment-based part of their husbands’ pension benefits under the “survivor’s pension benefit” system.
Our analysis found that if the above three policy measures (spousal deduction, the Category-III insured person designation, and survivor’s pension benefits) had not existed, the labor force participation rate among the women who were born in the 1960s would have been 13 percentage points higher and the average annual earnings would have been 28% higher. If spousal deduction is removed, the hurdle for labor force participation will be lowered, while the abolition of social security premium exemption is expected to increase incentives for women to improve job skills and earn higher income.
In an era when the division of roles by gender within the family—men earn a living by working outside while women dedicate themselves to unpaid domestic labor—was the norm, those tax and social security measures, which rewarded married women for concentrating on domestic labor—probably worked successfully. Now that a new era has arrived, those measures are holding back women’s labor force participation and wages, which is contrary to their original objective of supporting low-income women. Previously, the norm for working women was to quit the labor market upon marriage or childbirth and return after being released from the child-bearing burden, as indicated by the so-called M-shaped curve, which refers to the trajectory of women’s labor force participation rate by age. The curve is flattening, meaning that the trend is changing. Even so, if women’s incomes do not rise, the income gender gap will continue to widen, resulting in a fall in the average income in the overall labor force as well.
However, removing the “barriers” does not represent a magic bullet for everything. If the spousal deduction and social security premium exemption are abolished, the tax and social security burden on households will increase. Moreover, even though consumption should grow in line with an increase in take-home pay, women will work longer hours and have less time to spend on leisure. As for the impact on the government’s fiscal balance, as tax and social security revenues increase in line with income growth, the fiscal balance will improve, and part of the increased revenue might be returned to taxpayers in some form or other.
The conclusion of the analysis is that the welfare of women (the degree of happiness among women) will be improved as a result of the removal of the “barriers” when various positive and negative effects are taken into consideration in an economic model. This indicates that the barriers are leading to a loss of welfare for women, by distorting the incentives both to work and to improve human capital, thereby working against women.
Some people may argue that given that the number of births has declined while women’s labor force participation has increased, the fertility rate may fall further if women earn more (work longer). First, according to this line of argument, if a married couple’s income level rises as a result of the wife working longer, the cost of education and other spending per child would also increase. Additionally, since the rise in the wife’s income also increases the opportunity cost of the time spent on child-rearing, couples may become more reluctant to have children. In short, the argument goes that if women’s labor force participation rate rises and income grows in an economically affluent society, the fertility rate declines.
Positive Correlation between Fertility Rate and Income
However, the argument may be outdated. According to a recent study by Professor Matthias Doepke of Northwestern University, and his coauthors, such relationships among women’s labor force participation, the fertility rate, and income are an anachronism from the previous century and do not necessarily apply to our modern society. From data of OECD countries since 2000, a positive correlation is identified between the income level and the fertility rate and between women’s labor force participation and the fertility rate. This means that women would not have to sacrifice either work or family life if the right conditions are put in place.
Doepke et al. pointed out that one of the key factors that explains this change is labor market mobility.
Currently, the proportion of people who never married is 25% among men and 16% among women in Japan, indicating that getting married and raising a family is no longer the standard norm. If the present circumstances of working women—where taking time out from or slowing down on the career ladder due to childbirth and child-rearing means accepting the prospect of flat income for the rest of one’s working life and an unstable, contingent job as the only option when returning to the labor market—continues, the fertility rate could continue to fall even as the levels of education and income-earning capability of women rise.
The urgent challenge is to improve labor market mobility by removing the “barriers” and resolving the division between regular and contingent jobs that has been created by the institutions.
* Translated by RIETI.
July 30, 2022 Weekly Toyo Keizai