RIETI Report November 2016

Changes in wage inequality and structure of wage determination in Japan

Much research has been done on the rising wage inequality and the related factors that we see not only around the world but also in Japan. There is no consensus as to the cause, and this column decomposes wage inequality in Japan and aims to show the extent to which it increased among men and women in Japan between the 1990s and 2000s, determine the factors that affected these changes, and identify the people that were most affected by the changes. In the November issue of the RIETI Report, we present the column "Changes in wage inequality and structure of wage determination in Japan" originally published on VoxEU by Keio University Professor Yoshio Higuchi, Consulting Fellow Naomi Kodama, and Hitotsubashi University Assistant Professor Izumi Yokoyama.

Higuchi et al. tracked wages during the financial and real estate bubble at the end of 1980s, the Asian currency crisis in 1997, the IT bubble in the early 2000s, and the Global Crisis in 2008. They find that wage rates changed, but wage inequality did not. Since the 2000s, the wage rate of the middle class has been reduced more than that of any other group, although Japan is known for its solid middle class. Their research shows a decrease in the return on general human capital of males and top females and an increase in the return of firm-specific human capital among male workers with a high wage rate. They suggest that Japanese firms undermined employee involvement and problem solving activities at the grassroots level and invested in just a few selected able workers because they no longer have enough reserves to invest in all of their employees.

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Changes in wage inequality and structure of wage determination in Japan

HIGUCHI YoshioProfessor, Faculty of Business and Commerce, Keio University

KODAMA NaomiConsulting Fellow, RIETI

YOKOYAMA IzumiAssistant Professor, Graduate School of Economics and School of International and Public Policy, Hitotsubashi University

There has been a lot of research into changes in wage inequality and the factors that have brought about these changes (Card and DiNardo 2002). In the first decade of the 2000s in the US, wages at the bottom and the top of the wage distribution increased faster than those in the middle. In contrast, in the 1970s and 1980s, wages in the bottom of the wage distribution increased by the smallest amount, and those at the top increased by the largest amount (Cahuc and Zylberberg 2014). Card (2001) and Freeman (1993) demonstrated that de-unionisation contributed to an expansion in the variance of the log of wages by about 20% in the 1980s. Lee (1999) argues that the rise in wage inequality among low earners during the 1980s can be attributed to a decrease in the real value of minimum wage.

Recently, wage polarisation has been observed in many developed countries, including the US (Autor et al. 2003), the UK (Goos and Manning 2007), Germany (Dustmann et al. 2009), and other European countries (Goos et al. 2009, 2014). In addition to SBTC and globalisation, economic sluggishness has an effect on wage inequality (Lise et al. 2014, Yokoyama 2014, Kodama et al. 2015).

According to an analysis by Moriguchi (2010) using a long-term time series of income tax statistics, Japan has been known for its solid middle class and relatively egalitarian society for much of the post-WWII era. But studies have confirmed an increase in income (or household earnings) inequality in Japan (Lise et al. 2014, Tachibanaki 1998, Ohtake 2005, Tachibanaki 2005, Kambayashi et al. 2008, Ohtake 2008, Moriguchi and Saez 2008, Yamada and Kawaguchi 2015). The subjects and data sources vary among the studies, so there is nevertheless controversy about how and when wage inequality has been expanding, and the groups affected.

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