Policy Update 091

Overview of the new EBPM program in RIETI’s Fifth Medium-Term Plan Policy Evaluation Program: Evidence-Based Policy Making

Faculty Fellow, RIETI

Dr. Daiji Kawaguchi received his Ph.D. from the Department of Economics, Michigan State University. His previous roles include Assistant Professor at the Institute of Social and Economic Research, Osaka University; Assistant Professor at the Graduate School of Humanities and Social Sciences, University of Tsukuba; and Professor at the Graduate School of Economics, Hitotsubashi University. Since April 2016, he has been a Professor at the Graduate School of Economics/Graduate School of Public Policy, The University of Tokyo.

Interviewed by Masataka Saburi, Director of International Coordination and PR Strategy, RIETI

With the goal of accelerating Evidence-Based Policy Making (EBPM), the Research Institute of Economy, Trade and Industry (RIETI) launched the "Policy Assessment Program" in FY 2020 to simultaneously promote two research subjects: the configuration of EBPM and the assessment of individual policies. In this interview, we asked the Program's new director, Dr. Daiji Kawaguchi (Graduate School of Economics/Graduate School of Public Policy, University of Tokyo), to provide an overview of the Program, explain how we should structure policy assessment, and describe the future goals of the Program.

Could you please tell us how you first became interested in EBPM and policy assessment, possibly in the context of your previous research?

During my University education, labor economics was my major. It is a subject area in which a significant amount of data has been available for a relatively long time, and the research in this field is predominantly focused on empirical analysis. From its early days, the approach of labor economics has been to identify "causality" rather than "correlation."

In the case of minimum wage and employment, the government may decide to not raise the minimum wage because the economy is not thriving. However, when the economy improves, the government may consider it safe to raise the minimum wage. Thus, a strong economy definitely plays an important role in raising the minimum wage.

What would happen to employment if we raised the minimum wage by 10% when the economic conditions were stagnant? Labor economics has been studying this causal relationship since the early 1990s using an approach called "natural experiments." I found it intriguing to be able to discover causal relationships by simulating an experiment when one cannot conduct an actual experiment. This was what drew me to EBPM.

Successful policy formulation is impossible without the knowledge of causal relationships. In order to decide whether or not to raise the minimum wage under the current pandemic, we should, while supposing that all other conditions will remain constant, deduce the extent of change in employment if we raise—or decide not to raise—the minimum wage.

I believe that the type of knowledge and expertise in economics that would best contribute to policy formulation is the knowledge of the causal relationships that are relevant to the policy at hand.. Such investigation has been carried out for a long time in positive economics as a social science, outside the realm of policy assessment, but I became specifically interested in estimating causalities using non-experimental data.

Could you give us an overview of the new "Policy Assessment Project" launched under RIETI's Fifth Mid-Term Plan?

Considering this project, we are planning to examine a central theme of labor policy: the impact of the minimum wage on employment.

The minimum wage is adjusted every year and it is also a major subject of debate from a policy perspective. While Abenomics raised stock prices, it failed to increase wages. Thus, the current administration's policy focuses on boosting overall wages by raising minimum wages.

There is an argument that raising the minimum wage would eliminate businesses that can only pay low wages, increasing the overall productivity in Japan. However, there is also a concern that raising the minimum wage might reduce employment itself or cause small- and medium-sized businesses to go out of business. As such, how employment might change when the minimum wage is raised is a critical question in policymaking. The policy assessment of this question will be one of the major pillars of RIETI's new project. Our plan is to uncover it using government statistics and other resources.

Another pillar of our research is the impact of major negative economic shocks on employment adjustment. One of the previous projects at RIETI analyzed employment adjustment in the aftermath of the 2008-2009 financial crisis. One of the factors behind the huge shocks triggered by this financial crisis was the yen's appreciation as a result of purchases of yen under the assumption that it was safe. We examined how employment adjustments were implemented by exporters who had experienced enormous negative shocks. Our results indicated that their employment adjustments barely affected their full-time employees, affecting only their part-time employees. The study was an empirical analysis and used only data from the Basic Survey of Japanese Business Structure and Activities from the Ministry of Economy, Trade and Industry. The new project will use economic statistics with a sampling frame of the Economic Census from the Ministry of Internal Affairs and Communications. By combining the Basic Survey of Japanese Business Structure and Activities with data from the Basic Survey on Wage Structure of the Ministry of Health, Labour and Welfare, our investigation will elucidate how the companies that were hit by the strong-yen shock adjusted their wages.

Another issue is the inequality between men and women. The "2030" (nimaru sanmaru) policy to increase the percentage of women in managerial positions to 30% by 2020 is being reevaluated as it became impossible to achieve this goal by the 2020 fiscal year. The Japanese government has implemented various policies, such as the Act on Promotion of Women's Participation and Advancement in the Workplace and the "Next Generation Act" (Act on Advancement of Measures to Support Raising Next-Generation Children), to create a society in which it is easier for women to work. Our project will also analyze whether these policies have had initial impacts. One of the core goals of our project is to assess Japan's labor policy from several perspectives.

Could you tell us how policy assessment—including your work as the Director of the Center for Research and Education in Program Evaluation, University of Tokyo—should change in the future?

It is important for policy assessment to quantitatively demonstrate the results of policy implementation. By estimating policy outcomes, such as the degree to which a given policy improved outcomes or the level/number of side effects it produced, we will be able to assess and determine the allocation of scarce resources to achieve the overall goal.

For example, to increase the female employment rate, different policy options are available, such as invoking the Act on Promotion of Women's Participation and Advancement in the Workplace, which impacts how companies manage employment, developing an environment where it is easier for women with children to work by establishing day care centers, enhancing the childcare leave system to make it easier for companies to continue employing women. We also need to remember that different policy options entail different costs. Let's consider if we want to increase female employment by 1%. If we estimate values for the percentages that different policy options will raise the female employment rate, we will be able to estimate how much each policy will cost to raise the female employment rate by 1%. By conducting a number of similar studies, we will be able to deduce which of the 100 policy options provide the best relative cost effectiveness. The significance of working on EBPM as an organization at RIETI or the Center for Research and Education in Program Evaluation, Tokyo University, lies in the fact that it creates a large pool of knowledge that will allow us to consider the entire spectrum of policies and identify the one with the best cost effectiveness. Of course, it goes without saying that the efforts of individual researchers are the most important factor.

It was only around the fall of 2017 when EBPM started to be discussed in Japan. As such, the current level and amount of research are insufficient. However, a number of EBPM studies have been carried out in the United States and European countries, accumulating and developing knowledge.

How is COVID-19 affecting labor and employment?

I believe that the expansion in telework will probably have long-term impacts. On the one hand, this may help individuals achieve a better life-work balance. On the other hand, telework is not an option for individuals who must go to their workplace to provide services to customers in person. It has already been suggested that these individuals will be significantly impacted. A RIETI Discussion Paper (Faculty Fellows Kikuchi & Kitao) argues that COVID-19 is a shock that has triggered inequality. I think that this is an important finding.

Another question is how to assess the outcome of telework. Under the existing, predominant wage system, only a small number of individual workers come under a performance-based system. It is common to pay salary based on the input, such as remaining in the office for a certain number of hours each day, rather than paying salary based on the output. Generally, this system is adopted as output is challenging to measure and as most workers work in teams. If individuals are forced to work from home, I believe that there will be a significant decrease in productivity, unless we carefully examine methods of measuring the output and structuring the compensation system accordingly. The response of society, companies, and corporate managers when jobs, whose output is challenging to measure, are switched to telework, would be a compelling research topic.

One other point I would like to mention is the importance of cities. The belief that the concentration of individuals in cities improves productivity has caused an over-concentration in Tokyo. One of the significant research topics is the change in the importance of cities when telework becomes a viable option in the aftermath of COVID-19. In addition, we should examine how the Japanese government will formulate the national land policy. For example, should the government retain the existing deregulatory policy for the floor-area ratios of buildings, or should it modify the regulation and adopt a policy that encourages individuals to move to non-metropolitan areas of the country? While there was an argument favoring dispersion of the population to non-metropolitan areas of the country, a significant number of economists assert that dispersing the population is undesirable as it diminishes the agglomeration advantage of Tokyo. I am personally very interested in this debate as the balance may shift considerably.

Before we go, could you share your message to RIETI?

RIETI has been acting as a bridge between policymaking and academia. I believe that RIETI's research has penetrated the consciousness of policymakers. There have probably been times when information from RIETI has been utilized to examine policy options. RIETI has considerably strong public relations activities, and I hope that we remain strong in the future as well. As the Program Director, I would like to contribute to this effort.

January 27, 2021