The national weighted average of prefectural minimum hourly wages set by the national government in Japan recorded the largest increase in history for the fourth consecutive year, reaching 1,055 yen in FY2024. Prime Minister Ishiba Shigeru has announced that he aims to raise the average to 1,500 yen by the end of the 2020s, indicating that the trend will continue in the future. In response to this move, Tokura Masakazu, chairman of the Japan Business Federation known as Keidanren, told a press conference in December 2024 that such a wage hike would be “equivalent to a dangerous drug.”
This article focuses on who bears the costs of raising the minimum wage, introducing empirical studies in Japan and the rest of the world. There are four groups that would be expected to bear the costs: workers, companies, consumers, and suppliers.
If the minimum wage is raised without increasing worker productivity, the costs may be borne (1) by workers through a decrease in employment or working hours, (2) by companies through their exit from the market and decreases in profits, (3) by consumers through price increases, and (4) by suppliers through cuts in input prices, such as rents and prices of intermediate goods and services. All or some of these changes could occur simultaneously.
In general, minimum wage hikes are supported by workers and opposed by employers (companies). According to economic theory, however, employers do not necessarily bear all the costs. The extent to which costs are borne by companies or workers depends on the elasticity of supply and demand in the labor market.
Whether wage hikes can be passed on to product prices or whether intermediate goods prices can be cut in response to the wage hikes depends on the elasticity of relevant market supply and demand. If a wage hike will result in a significant increase in the number of unemployed people, workers should oppose the wage increase. If a wage hike will lead to significant increases in prices of goods and services, consumers should oppose the wage increase.
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It is reasonable to first review studies on (1) the effect on workers. According to neoclassical economic theory, setting a minimum wage above the competitive level in a competitive market reduces employment. A meta-analysis of existing studies in Japan found that increasing the minimum wage reduced employment growth.
However, there are many empirical studies that show that increasing the minimum wage has no negative impact on employment. The model of imperfect competition in the labor market has attracted attention in recent years as an explanation for these findings.
According to this model, a hike in the minimum wage may lead to greater labor supply, having a positive effect on employment in a monopsonistic labor market, where a large influential company has a monopsony power in a local labor market and pays lower wages than in a competitive market.
A U.S. study found that an increase in the minimum wage leads to decreased employment in a competitive labor market and increased employment in a monopsonistic labor market. According to our analysis, employment decreases as the minimum wage increases in Japan. Such decreases are larger in a more competitive labor market.
Even if employment decreases, as long as the wage increase exceeds the decrease in employment, workers' welfare improves. In a 2024 paper, Professor Arindrajit Dube at the University of Massachusetts Amherst and Ben Zipperer at the University College London review the body of empirical evidence on the own-wage elasticity (OWE).
The OWE shows how responsive employment is to a change in wages induced by the minimum wage policy. When the OWE is minus 1, the earnings gain through a minimum wage increase for low-wage workers completely offsets the employment reduction. As the OWE rises above minus 1, the increase in income outweighs the decrease in employment.
The figure shows the distribution of OWE estimates for 72 studies published through academic journals in the past 30 years, covering European and the United States. The OWE varies from minus 2.3 to plus 1.7. The median is minus 0.13. The distribution indicates that minimum wage policies have raised wages for low-wage workers beyond the decrease in employment.
It is appropriate to also review studies on (2) the burden on companies. There is a great deal of concern that minimum wage hikes put management in a difficult situation. In fact, many studies have shown that companies affected by a minimum wage hike exit the market faster than others. A study has found that the market exit rate increases for restaurants with low consumer ratings as the minimum wage increases. This is a cleansing effect that leads inefficient companies to exit the market more quickly.
Even if inefficient companies exit the market, the productivity of society as a whole will improve if workers can move to more productive companies. According to a German study, an increase in the minimum wage reallocates low-wage workers from smaller business establishments to larger ones, from lower-wage jobs to higher-wage jobs, and from lower-productivity establishments to higher-productivity ones.
On the other hand, many studies have shown evidence that minimum wage hikes reduce corporate profits. Some studies have been pointed out that rising labor costs lead to cuts in social insurance or training costs.
How about (3) the burden on consumers? Studies in Europe and the United States show that companies in retail, restaurant, and B-to-C services sectors pass most of these labor cost increases on to their goods and services prices.
In the tradable goods or service sector, which are exposed to international competition, however, these costs are difficult to pass on to product prices, meaning that there are greater impacts on employment. Whether or not the minimum wage increase can be passed on to product prices depends on the degree of competition in the downstream goods market. In general, it is easy to pass increasing labor costs on to prices for non-tradable goods and difficult to do so for tradable goods.
Finally, let’s review at (4) the burden on suppliers. In addition to downstream customers, labor cost hikes can be passed on to upstream suppliers. This is important because 30-75% of a company's expenses come from purchasing intermediate goods and services. However, studies on the matter have been limited.
According to a Hungarian study, minimum wage hikes boost companies' spending on raw materials in the short term, while having small medium-term impacts, suggesting that suppliers are not a major target of margin adjustments.
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As the minimum wage is expected to rise in the future, the government, labor, and management sectors have two things to do.
First, the cost of raising the minimum wage should be widely shared between companies, workers, and consumers. To achieve this, each party should have an awareness of paying fair prices for services and labor they receive.
A popular hotel known for its good services and low prices sometimes receives criticism on job search sites for exploiting its employees. A business that fails to properly compensate its workers is not sustainable. It is important for companies to communicate consumers that there are workers behind the prices who support the provision of high-quality services. We are both consumers and workers.
Second and finally, workers should recognize that wages reflect marginal productivity. They should invest in themselves under the recognition that they could lose their jobs if they fail to demonstrate productivity that is commensurate with their wages and should aim to work for companies that prioritize investing in human capital.
>> Original text in Japanese
* Translated by RIETI.
January 24, 2025 Nihon Keizai Shimbun
