Changes in Employment Structure and Rises in Wage Inequality in Japan

Changes in Employment Structure and Rises in Wage Inequality in Japan Hiroyuki Uni Graduate School of Economics, Kyoto University (E-mail: uni@econ.kyoto-u.ac.jp) 1 Introduction From about 1980 onwards, there was a tremendous growth in the ageing population and the labour force in Japan. The increase in the ageing population raises the wage costs of enterprises in two ways. The first is the seniority-based wage system; in fact, under this wage system, the ageing of the labour force naturally leads to a rise in the total wage costs. The second way in which the ageing population raises wage costs is by increasing the social security burden of employers. When the ratio of social security recipients in the overall population rises due to population ageing, the amount of social security contribution rises in the case of the pay-as-you-go system. The social security burden of employers increases if the shares of the employees, employers and the government in the total burden are constant. From the 1990s, many enterprises adopted two countermeasures non-regularization of employment and reforms of the wage system in order to restrain wage costs. The structural change of employment and wages might relate to the rising income inequality, which is a significant social issue in contemporary Japan. In this paper, we approach the problem of income inequality from the viewpoint of the structural change of employment and the wage system. The composition of this paper is as follows. Section 2 examines the influence of the ageing population on wage costs. The reactions of enterprises, such as the non-regularization of employment and reforms of the wage system, are analysed in Section 3. Based on these analyses, the causes of the rising income inequality from the end of the 1990s are clarified in Section 4 1. The view that the main cause of the rising income inequality is population ageing is predominant in Japan. The higher the age, the larger is the income inequality in the age group. Therefore, according to this view, income inequality in the entire economy naturally increases due to population ageing. In this paper, however, we demonstrate that income inequality in each age group has risen since the end of the 1990s. The rising income inequality is not a natural consequence of the population ageing; rather, it is greatly influenced by the reactions of enterprises, particularly reforms of the wage system. The conclusion is described in Section 5. 2 Influences of the population ageing on the wage costs of enterprises 2.1 Rapid ageing in Japan The overall population of Japan reached 128 million in 2005, registering the first decline in the post-war 1 In the analysis in Section 4, we used anonymized micro data of the National Survey of Family Income and Expenditure in 1999 and 2004, and the Employment Status Survey in 1997 and 2002, conducted by the Ministry of Internal Affairs and Communications. These micro data were provided by the Research Centre for Information and Statistics of Social Science, Institute of Economic Research, Hitotsubashi University. Please refer to Uni (2008) for the details of the analysis in Section 4. 1

period. From about 1980 onwards, the number of elderly people aged 65 years or above increased rapidly, and it is estimated that this rapid increase will continue until about 2020. As indicated in Figure 1, the share of elderly people aged 65 years or above in the total population the so-called the percentage of the elderly exceeded 7% and 14% in 1970 and 1994, respectively. It is estimated that this percentage will reach 26% in 2015. Such rapid population ageing is a very rare occurrence in the world. The time interval required for the percentage change from 7% to 14% the so-called doubling time was 24 years in Japan, 115 years in France, 85 years in Sweden, 47 years in the U.K. and 40 years in Germany. In Korea, the present percentage of the elderly population is still low, although it is estimated that the speed of ageing in the future will be higher than that of Japan. Figure 1. Percentage of Population Aged 65 Years and above 30 25 20 15 10 5 JAPAN KOREA FRANCE GERMANY UNITED STATES 0 1955 1965 1975 1985 1995 2005 2015(p) Source: UN, World Population Prospects: The 2006 Revision. (Predicted value of 2015: Estimate Medium Variant) The causes of the rapid ageing in Japan are as follows: (1) an increase in life expectancy at birth due to the decline in the death rate and (2) a decrease in the number of children due to the decline in the birth rate 2. The death rate in Japan (mortality per one thousand people) was reduced from 14.6 in 1947 to 7.0 in 1963 due to the improvement of the life environment, the amelioration of eating habits and nutrition, and the development of medical technology, etc. Later, the death rate remained at this low level. Consequently, the life expectancy has drastically increased from 50.06 years for males and 53.96 years for females in 1947 to 78.64 years and 85.59 years for males and females respectively in 2004. As indicated in Figure 2, although the total fertility rate in Japan had been greater than 2.00 until 1974, it fell below 1.50 in 1993; the lowest fertility rate 1.26 was recorded in 2005. Since there are few births outside marriage in Japan, the decline in the birth rate in recent years is chiefly due to the advancement of the age of first marriage (growing popularity of late marriages), an increase in the number of unmarried 2 Cabinet Office, Annual Report on the Aging Society 2007. 2

people and the decline in the fertility rate among married couples. On the other hand, the total fertility rate in advanced countries such as the United States has been comparatively high. Moreover, the total fertility rate is improving in France and Sweden. In recent years, a similar trend has been observed in Germany and Italy, where the total fertility rate was below that in Japan. Figure 2. Total Fertility Rates 3 2.5 2 1.5 1 1970 1975 1980 1985 1990 1995 2000 2005 Korea Japan U.S. France Germany Italy Sweden Source: UN, Demographic Yearbook, except for Japan (Ministry of Health, Labour and Welfare, Vital Statistics) and Korea (KOSIS). 2.2 Increase in wage costs due to labour force ageing Naturally, such rapid population ageing changes the employees distribution by age, as shown in Figure 3. The share of elderly people aged 50 years or above in the total employment increased from 20% in 1975 to 36% in 2005. Another underlying factor is the increase in the retirement age by enterprises. Figure 3. Distribution of Employees by Age (Non-agriculture) 16% 14% 12% 10% 8% 6% 4% 1975 1985 1995 2005 2% 0% 15~19 歳 20~24 25~29 30~34 35~39 40~44 45~49 50~54 55~59 60~64 65 歳 以 上 Source: Ministry of Internal Affairs and Communications, Labour Force Survey. 3

The majority of Japanese companies adopt a wage system with a strong seniority-based character. A comparison with the wage profile in other advanced countries clarifies this, as indicated in Figure 4. The seniority-based character remained unchanged after the introduction of merit-based wages in the 1970s and performance-related remuneration in the 1990s. As indicated in Figure 5, the wage profile of workers aged 20 49 has been constant in 1985 2005. Moreover, the wage level of workers aged 50 59 continued to increase after the retirement age was raised. Naturally, the total wages cost of enterprises rises under this wage system, as indicated by Figure 5; labour force ageing, as shown in Figure 3. 180 Figure4. Wage Gap by Age Group (Male workers in manufacturing industry in 2002, workers aged under 29 years=100) 160 140 120 JPN GBR DEU ITA SWE 100-29 30-39 40-49 50-59 Sources: Japan: Ministry of Health, Labour and Welfare, Basic Survey on Wage Structure 2002; EU: Structure of Earnings Statistics 2002 Figure 5. Regular Wages (Workers aged 35-39 years=1) (Manufacturing, All education levels, All sizes of enterprise) 1.4 1.2 1.0 0.8 0.6 0.4 1985 1990 1995 2000 2005 0.2 0.0 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 Sources: Japan: Ministry of Health, Labour and Welfare, Basic Survey on Wage Structure. 4

2.3 Increase in wage costs due to the social security burden According to the Social Expenditure Database of the Organisation for Economic Co-operation and Development (OECD), shown in Figure 6, the ratio of social expenditure to GDP in Japan is lower than that of European countries 3. However, due to population ageing, the pace of its increase is rapid in Japan. The amount of change in the ratio from 1990 to 2003 is 6.5% in Japan, 4.8% in Germany, 3.4% in France, 2.8% in the United States and 2.7% in Korea. Figure 6. Social Expenditure (In percentage of GDP) 35 30 25 20 15 10 France Germany Japan Korea U.S. 5 0 1980 1985 1990 1995 2000 2003 Sources: OECD, Social Expenditure Database 2007. Within social security benefits, the number of benefits for the elderly increased rapidly in Japan. Its share in the total social security benefits rose from 43.4% in 1980 to 70.4% in 2003 4. Despite such a major structural change in social security benefits in Japan, there has been no substantial change in the composition of financial resources after the 1970s 5, as shown in Table 1. Although the rate of contribution was raised repeatedly, the shares of employees, employers and the government in the total contribution were sustained for the last three decades, based on the principle of equal contribution to public pension insurance by employees and employers and the principle of one-third burden of the government in the total social security benefits 6. 3 Social expenditure includes social security benefits and other expenses and administrative expenses. Social security benefits are the benefits directly and indirectly supplied to recipients with cash or services. 4 Payment of pension accounts for 72% of the benefits for the elderly, while health care expenses (medical treatment) account for 18%. 5 Only the asset income that was a profit from the investment of social security funds fluctuated according to financial market conditions. 6 With regard to the basic pension, the government decided that its burden rate would increase from one-third to half by 2009. However, there is no consensus with regard to financing this burden, and the final agreement depends on the future political process. 5

Table 1. Percentages of Financial Resources of Social Security in Japan (unit: %) Fiscal year 1951 1960 1970 1980 1990 2000 2002 2003 Employers burden 28.6 41.7 31.2 29.1 31.7 31.4 32.2 26.9 Employees burden 28.1 26.2 28.5 26.5 27.9 29.6 31.1 27.0 Government burden 36.5 24.7 30.0 32.9 24.4 28.0 30.3 27.4 Asset income 1.1 4.9 8.8 9.7 12.6 7.2 1.8 15.0 Others 5.8 2.4 1.6 1.8 3.5 3.8 4.6 3.6 Sources: The National Institute of Population and Social Security Research, the Cost of Social Security in Japan for FY2003. Although they are nominally funded pension systems, Japanese pension systems are substantially managed as the pay-as-you-go system. Therefore, they are greatly influenced by the falling birth rate and the ageing population. The rapid decline in the birth rate and rapid population ageing necessitate an increase in the rate of contribution and a reduction in the amount of benefits 7. Moreover, the rapid increase in medical expenses for the elderly placed pressure on the health insurance systems, and many health insurance systems were running into a deficit. There were conflicts about the long-term care insurance system. In the medical treatment system in Japan, doctors and their association wield considerable power. The doctors association proposed to create an independent single long-term care insurance system for the elderly. Moreover, the employers association demanded an increase in the government burden. However, these views also faced strong opposition. Finally, the Ministry of Health, Labour and Welfare announced eclectic plans for the long-term care insurance system in 2005 8. Thus, the employers association continued to demand reforms of the social security system for lowering the employers contribution. However, these reforms have not been adequately implemented due to resistance from trade unions and the government. Consequently, there was no reduction in the employers contribution towards public social security; moreover, a significant reduction cannot be expected in the future. Therefore, the employers contribution will increase at almost the same pace as the increase in the total social security benefits due to population ageing. On the other hand, besides such legal welfare expenses, Japanese companies, particularly large ones, are bearing a considerable amount of non-legal welfare expenses for their own employees, such as the additional benefits of pension and health insurance, company houses and rest homes. Enterprise welfare or 7 Population ageing remarkably influenced the National Pension System in which the average age of members is high and the average income level is low. This system is facing a crisis due to the budget deficit, the number of insurance premium defaulters and the continued increase in number of people who have not joined the system. In such a situation, although the employers associations and trade unions proposed that basic pension should be financed by taxes, the Ministry of Health, Labour and Welfare favour the present social insurance system. A reason that the Ministry of Health, Labour and Welfare insists on the social insurance system is that the intervention of the Ministry of Finance and the Congress might increase in the case basic pension is financed by taxes. 8 For elderly people aged 75 years or above, an independent single long-term care insurance system will be created. Elderly people aged 65 74 years continue to join the previous system. A new mechanism for the adjustment of financial imbalances between systems will be created. However, the detailed design of the new systems depends on the future political process. 6

industry welfare plays a significant role in Japan 9. 3 Reactions of enterprises 3.1 Non-regularization of employment In order to control an increase in wage costs, Japanese companies promoted the non-regularization of employment and reforms of their wage systems. These reactions intensified after the financial crisis in 1997. The Hokkaido Takushoku Bank and Yamaichi Securities failed in 1997. The Long-Term Credit Bank of Japan and Nippon Credit Bank were temporarily nationalized, and in 1998, Nissan Motor began restructuring itself under the control of Renault S.A. After 1998, the total number of employees decreased due to this crisis. The unemployment rate increased from 3.4% in 1997 to 4.7% in 1999 and 5.0% in 2001. Moreover, the substitution of full-time workers with part-time workers, dispatched workers and contracted workers increased. The share of part-time workers in the total labour force rose from 16.3% in 1998 to 19.5% in 1999 and 23.7% in 2004 10. Moreover, the trend of substituting regular workers with dispatched workers and contracted workers became widespread, particularly in the machinery industry. For instance, the number of regular workers in the electric machinery manufacturing industry decreased by about 430,000 persons (the rate of decrease: 26%) from 1996 to 2004, while that of dispatched workers and contracted workers increased by about 130,000 persons (the number of part-time workers decreased by about 30,000 persons) 11. Deregulation contributes to such non-regularization of employment. When the Worker Dispatch Law was enacted in 1986, dispatched work was limited to 13 jobs that required expertise and skill. The revision of the law in 1999 permitted the employment of dispatched workers for every job, except construction, security guard, harbour loading and unloading, medical treatment and manufacturing. In addition, from 2004, dispatched work was permitted in the manufacturing work. Moreover, the period of contract for dispatched workers was extended drastically. Table 2 shows the amount of increase in employees for every five years. Although both male and female employees increased until 1997, the number of male employees decreased in 1997 2002. In breakdowns of the increases in female employees, a considerable portion comprises non-regular workers. Actual non-regularization with a decrease in regular workers and a simultaneous increase in non-regular workers began in the middle of the 1990s for women, and at the end of the 1990s for men. 9 According to the Japan Business Federation s Survey on Welfare Expenses (2005), the ratio of legal welfare expenses in the total wage costs was 12.9%, while that of non-legal welfare expenses was 4.8%. Some companies such as Canon Inc. withdrew from enterprise welfare. However, such instances are not many and the above-mentioned ratio has been constant since the 1970s. 10 Ministry of Internal Affairs and Communications, Labour Force Survey. 11 Ministry of Internal Affairs and Communications, Establishment and Enterprise Census. 7

Table 2. Amount of Increase in Employees (unit: 1000 persons) Male Female Total Regular Non-regular Total Regular Non-regular 1982 87 1699 1357 342 1999 539 1460 1987 92 2892 2448 444 3531 1929 1602 1992 97 1084 585 499 1338 225 1563 1997 2002 929 ( 1688) (759) 664 ( 741) (1405) Source: Ministry of Internal Affairs and Communications, Employment Status Survey. Taking into account the revision of the classification of the forms of employment in 2002, with regard to the data in parentheses, Regular not only includes Regular staff but also Contract workers and Employees on a short-term contract (shokutaku), while Non-regular includes Part-timers, Albeiters, Dispatched workers and Others. The rate of increase in non-regular workers in Japan is faster than that in other advanced countries. The share of part-time workers in the total labour force in Japan increased by 9.4% point in 1985 2003. This increase was the second largest among advanced countries the first being that in the Netherlands, where the share of part-time workers increased by 15.1% point 12. The increase in non-regular workers in the Netherlands was mainly due to the following reasons. The work-sharing policy for decreasing unemployment was implemented on the basis of a mutual political agreement between labour and the management in 1983. Thus, full-time work was substituted with part-time work, regardless of gender. The speed of the non-regularization of employment in Japan is the fastest among all advanced countries, except for the Netherlands, which is a special case. The second characteristic of Japan is that both wage inequality between male full-time workers and female full-time workers and wage inequality between female full-time workers and female part-time workers are larger than those in other advanced nations. Among 13 advanced countries, the wage inequality between male full-time workers and female full-time workers in Japan is the second largest after Korea 13. The law on gender equal treatment was enacted in European countries at the beginning of the 1980s. Consequently, the wage inequality between the sexes decreased in these countries. Although the Equal Employment Opportunity Law was enacted in Japan in 1985, its regulation was inadequate as it failed to prohibit indirect discrimination. Moreover, under the special Japanese personnel and wage system known as the ability-based grade system, gender discrimination persists strongly in the grading system. Therefore, the reduction in wage inequality is very slow in Japan. When the female full-time hourly wage is assumed to be 100, the value of the female part-time wage is 62.5 in the United States (1996), 65.7 in Japan (2003), 74.5 in the U.K. (2000), 87.5 in Germany (1995) and 92.3 in Sweden (1995) 14. In many European countries, the law for equal treatment between part-time 12 Source: OECD, Employment and Labour Market Statistics. 13 OECD, Society at a Glance 2002. When the male full-time wage is assumed to be 100, the value of the female full-time wage is 59.3 in Korea, 65.4 in Japan, 74.8 in the U.S., 76.0 in the U.K., 79.3 in Germany and 90.5 in France. 14 Japan: Ministry of Health, Labour and Welfare, Basic Survey on Wage Structure 2003; the U.S., Germany and Sweden: OECD, Employment Outlook 1999; the U.K.: New Earning Survey 2000. 8

work and full-time work was enacted in the 1980s 15. This contributes to reducing the wage inequality. However, the law for part-time work in Japan that was enacted in 1993 merely obliged managers to make efforts to consider the balance of conditions of full-time work and part-time work. Under such weak regulation without compulsion, the wage inequality between full-time workers and part-time workers did not reduce at all; instead, it rose gradually. Although trade unions continue to demand the legislation of the principle of equal treatment, it was only realised partially 16. Given such significant wage inequality between regular workers and non-regular workers, the average wage rate among the total workers decreases along with the non-regularization of employment. As the hourly wage of full-time workers is about 2500 and that of part-time workers is about 1000, the substitution of the former with the latter brought about a decrease in wage costs. As indicated in Table 3, in 1998 2004, the annual rates of decrease in full-time and part-time hourly wages was only 0.2% and 0.5% respectively. However, the hourly wage costs decreased by 1.0% annually because of the non-regularization of employment. In short, about half of the decrease in wage costs is due to the non-regularization of employment. Since it is difficult to reduce the remuneration of existing employees, enterprises decrease wage costs by using non-regular workers. Moreover, half of the non-regular workers do not join the pension and health insurance systems 17. Therefore, the non-regularization of employment reduces the social security burden of enterprises. This also leads to the reduction of wage costs. Table 3. Hourly Wages, Number of Workers and Monthly Working Hours by Form of Employment Hourly Wages (yen) Number of workers (million persons) Monthly Working Hours Average Hourly Wages Full-time Part-time Full-time Part-time Full-time Part-time Total 1993 2309 936 44.53 7.49 171.5 97.9 2188 1998 2502 992 44.95 8.73 167.5 95.8 2351 2004 2431 981 40.84 12.71 169.8 95.4 2215 Annual Rate of Change in 1998 2004 0.5% 0.2% 1.6% 6.5% 0.2% 0.1% 1.0% Sources: Ministry of Health, Labour and Welfare, Monthly Labour Survey and Ministry of Internal Affairs and Communications, Labour Force Survey. Only enterprises with five or more employees are considered. 15 In the U.S., neither low wages nor low working conditions of part-time work are considered to be discrimination, although a law that prohibited employment discrimination by race, sex, religion, nationality, age, pregnancy and physical disability was gradually developed. 16 In the amendment to the law implemented in April 2008, equal treatment between full-time work and part-time work was legislated for the first time. However, it only covers part-time workers whose job is the same as that of regular workers. The coverage of equal treatment is only about 5% of the total part-time workers. 17 Ministry of Health, Labour and Welfare, Survey on the Diversification of the Form of Employment, 2003. 9

3.2 Reforms of the wage system Until the 1960s, the seniority-based system was the dominant wage system in Japan; under this system, the wage level and promotions were mainly based on the age of employees. From the 1970s, merit-based wage systems were introduced based on the initiatives of the Japan Federation of Employers Association that intended to strengthen the skill upgrading function and the incentive function of the wage system. The merit-based wage system and competency assessment comprise the special Japanese personnel and wage system known as the ability-based grade system. Managers assess workers competency, which is referred to as ability. Based on this assessment, workers are ranked on the basis of an ability grade that is linked with remunerations. However, merit-based wage system involves a problem developing a method of quantifying ability objectively. In the 1990s, many enterprises introduced performance-related remuneration in which the link between remuneration and individual results is strengthened by the objective management system, self-assessment system and interview system. The most prominent performance-related remuneration is the annual salary system. In 1996, about 10% of Japanese enterprises had introduced the annual salary system for executive jobs, and this figure increased to 40% in 2002 18. Moreover, it has been confirmed that wage inequality rises when the performance-related remuneration is introduced 19. The wage bargaining system is also changing. The spring labour offensive system plays an important role as an inter-firm wage standardization mechanism in Japan, where intra-firm wage bargaining by enterprise unions is popular. In this system, the date for each wage bargaining session is set as follows. Comparatively successful enterprises first conduct their bargaining sessions; they then become pattern setters that develop the social standard of the wage increase. Other enterprises schedule their bargaining sessions a few days after those of the comparatively successful enterprises in order to follow the wage increase of the pattern setters as much as possible. In recent years, however, the pattern setter trade unions are often unable to achieve their wage demand. Moreover, in many cases, trade unions cannot coordinate their wage demand in each industry. With respect to the management perspective, managers attach less importance to the social standard of wages in wage determination 20. Such weakening of the spring labour offensive is a cause of the increase in the inter-firm wage inequality. 4 Rising wage inequality and its causes The income inequality problem in Japan has been actively discussed from various perspectives for several years. Although it includes, for instance, regional inequality and the redistribution problem, the 18 Japan Productivity Center for Socio-Economic Development, Survey on Changes in the Japanese Personnel System. The introduction rate of the annual salary system for general employees is below 10%. 19 According to the Questionnaire Survey on Business Behavior conducted by the Cabinet Office in 2004, the intra-firm wage inequality is higher, and the rate of its increase is faster in the case of enterprises in which the share of performance-related remuneration is 50% of or more than that in other enterprises. 20 According to the Survey on Wage Increase conducted by the Ministry of Health, Labour and Welfare, in wage determination, 25% of Japanese enterprises attached importance to the social standard of wages in 1980 97. This ratio declined to 11% in 1998 2006. On the other hand, the ratio of enterprises who attach importance to business performance increased from 62% to 75%. 10

most basic and inclusive problem is whether the inequality of annual income in overall households increased and its cause. Even if a rise in inequality is proven, the countermeasure varies according to the causes. Further, the decision about whether the government should correct the rising income inequality also depends on the causes. In this section, we examine the causes of the rising income inequality in Japan while focusing on wage inequality. We concluded that the main cause of the rising income inequality in Japan is not population ageing or the non-regularization of employment but the disequalization in regular workers wages from the end of the 1990s. 4.1 Population ageing view First of all, we will summarize the past arguments. Tachibanaki (1998) drew attention to the continuous increase in the Gini coefficients of income, which are an index of income inequality. However, Ohtake s explanation (2003) became the predominant view for the cause of the rising income inequality in Japan. Ohtake analysed the micro data of the National Survey of Family Income and Expenditure 21 until 1999, and concluded that the main cause of the rising income inequality in Japan is population ageing. He insisted that such disequalization did not exist. The procedure of his analysis is as follows. First, he divided about 50 thousand household samples according to the age groups of the household heads. Next, he calculated the values of the Gini coefficient and log variance of the annual receipts in each group, which shows the degree of income inequality. The main results are as follows. (1) According to the Gini coefficients obtained in any year, the higher the age of the group, the higher is the income inequality. (2) If observed as a time series, the values of the Gini coefficients in any age group have scarcely changed. (3) Population ageing is the main cause of the rising Gini coefficients of the total households; due to this, the proportion of the aged population with high income inequality continued to rise in the 1980s 90s. Therefore, the widening disparity is superficial. This is Ohtake s population ageing view. To prove this view quantitatively, Ohtake (2005) calculated the log variance of equivalence income, that is, the income adjusted by the number of household members. He decomposed the change into three factors: demographic effects (or effects of population ageing), cohort effects (or within-age effects) and between-age effects 22. According to Ohtake s calculation based on the micro data of the National Survey of Family Income and Expenditure in 1984, 89, 94 and 99, the last two effects are small. Most of the actual change in the income inequality from 1984 to 1999 can be explained by the effects of population ageing (Ohtake, 2005, p.27), as shown in Figure 7. The inequality in each age group is very stable, and this is the basis of Ohtake s insistence that true disequalization has not occurred in Japan. Moreover, some empirical studies (Harashima and Teshima (2002), etc.) affirmed that there was no increase in wage inequality in the 1980s 90s. These studies enhanced the persuasive power of Ohtake s population ageing view. 21 This survey is implemented by the Ministry of Internal Affairs and Communications every five years. The samples are around 50 thousand households. 22 Ohtake and Saito (1998) analysed the causes of the rising consumption inequality in 1979 89 by using this method. The details of this method are described in the Appendix. 11

Figure 7 Decomposition of the Changes in the Log Variance of the Equivalence Income of Households Comprising Two or More Persons (1984 99) Source: Ohtake (2005) Actual value, Demographic effects, Within-age effects, Between-age effects Tachibanaki basically agreed with Ohtake s population ageing view; for him, the point of controversy was the problem of the aged poor. Tachibanaki (2006) mentioned that an increase in the aged population with high income inequality implied an increase in the aged poor a fact that we could not ignore as being superficial. Although Tachibanaki s argument is effective, it narrows the range of the controversy because he had originally focused on the rising inequality as a problem concerning people in general. However, from the end of 2005, the Ministry of Internal Affairs and Communications started to publish the results of the National Survey of Family Income and Expenditure in 2004, which was not covered in Ohtake s analysis. The result that was published included a new finding that contradicts the population ageing view. However, this finding was not widely known as it was not stated explicitly in the summary of the results. If we carefully compare the results of the survey in 2004 with those in 1999 (the previous survey), we find that the Gini coefficients of most age groups increased. In other words, disequalization has actually occurred in Japan since 1999. The Gini coefficients of annual receipts rose in both All households and Workers households, in all age groups below 60 years. Such a wide-ranging disequalization is a new phenomenon that was not observed in the 1980s 90s. The simple average of the Gini coefficients of annual receipts in workers households aged 25 59 years was 0.217 in 1999 and 0.226 in 2004. The rate of increase is 4%. This rate of increase is particularly higher in the age group below 30 years. This fact has been admitted by the proponents of the population ageing view, including Ohtake, as the inequality problem in young people. However, we should pay attention to the disequalization in the age groups of 30, 40 and 50 years. After all, actual disequalization that is, the disequalization not caused by population ageing occurred just when Ohtake s population ageing view became widely known; moreover, Tachibanaki agreed with his 12

view. Further, the Koizumi administration and Abe administration both of which had a strong neo-liberal character maintained the stance of positively regarding income disequalization as an outcome of free competition. Naturally, this stance was applied to the income disequalization caused by population ageing. Based on Ohtake s population ageing view, the Cabinet Office (2006a) justified the stance of the government that countermeasures against income disequalization were not necessary 23. In addition, the Cabinet Office (2006b) demonstrated that a conclusion similar to that of Ohtake (2003) could be derived from the National Survey of Family Income and Expenditure in 2004, by adding some artificial changes in the statistical procedures 24. According to the Cabinet Office, as shown in Table 4, only the effects of population ageing indicate a positive value in 1999 2004, which implies that population ageing leads to income inequality. Table 4. Decomposition of the Changes in the Mean Logarithm Deviation of the Annual Income of Total Households (1989 2004) 1989 94 1994 99 1999 2004 Change in Mean Logarithm Deviation 0.0125 0.0041 0.0050 Within-age effects 0.0037 0.0074 0.0077 Between-age effects 0.0038 0.0009 0.0067 Effects of population ageing 0.0124 0.0125 0.0095 Source: Cabinet Office (2006b), Appended Notes 3 8. Table 5. Decomposition of the Changes in the Log Variance of the Equivalence Income of Households Comprising Two or More Persons (1999 2004) Annual receipts Consumption expenditure Food expenditure Change in log variance 0.008 0.011 0.016 Within-age effects 0.008 0.010 0.015 Between-age effects 0.009 0.003 0.002 Effects of population ageing 0.009 0.005 0.000 Note: All households in which the household head is aged 25 years or more Source: Uni (2008). However, as indicated in Uni (2008), the population ageing view is not valid for 1999 2004 without the above-mentioned changes in statistical procedures. Table 5 shows the result of the decomposition of changes in the log variance of equivalence income using anonymized micro data of the National Survey of 23 The government party and the Abe administration suffered a crushing defeat in the Upper House election in 2007. The present Fukuda administration made a public commitment to correct income inequality, particularly regional inequality. 24 The following three points are the major changes: (1) calculations based on the total households in which single-member households are included along with households comprising two or more members, (2) calculations using income and not equivalence income, (3) calculations using mean logarithm deviation instead of log variance. 13

Family Income and Expenditure in 1999 and 2004. As demonstrated in this table, the rise in the log variance by within-age effects is 0.008, which is as large as that by the effects of population ageing, namely, 0.009. Therefore, in 1999 2004, the disequalization within each age group significantly affected the rise in income inequality. Moreover, with regard to the total consumption expenditure and food expenditure, the within-age effects are larger than those of population ageing. 4.2 Non-regularization view Eventually, the persuasive power of the population ageing view as an explanation of the rising inequality from the end of the 1990s declined. Instead, the view that the non-regularization of employment was a cause of disequalization has begun to attract attention. In other words, it emphasises the effects of a rapid increase in non-regular workers, particularly in young people such as freeter (free + albeiter). For instance, Ota (2005) analysed the published statistical tables of the Employment Status Survey 25 in 1997 and 2002, and concluded that the main cause of the rising inequality in young people s annual income is an increase in the non-regular workers share in the total employment. Ota decomposed the changes in the log variance of annual income into three factors: effects of the change in distribution by form of employment (effects of non-regularization), within-form effects (effects of wage disequalization within each form of employment) and between-form effects (effects of wage disequalization between forms of employment). Based on the results of his study, as indicated in Table 6, Ota stated the following: In the case of workers aged 20 24, within-form effects and between-form effects are small. The total amount of rise in log variance is 0.75, in which the effects of non-regularization are 0.70. Moreover, of the effects of non-regularization, 0.40 is due to an increase in the share of non-regular workers whose income inequality is higher than regular workers. On the other hand, 0.31 is due to an increase in the share of non-regular workers whose average income is far from the average income of the total workers (Ota, 2005, p.19). This non-regularization view appears to be valid. However, it includes some erroneous findings that are as follows. Moreover, it may be used as grounds that justify the lack of countermeasures by the government as well as Ohtake s population ageing view. Table 6. Decomposition of the Changes in the Log Variance of the Annual Income of Male Employees (1997 2002) 20 24 25 29 30 34 Change in log variance 0.075 0.045 0.044 Within-form effects 0.005 0.002 0.016 Between-form effects 0.001 0.010 0.010 Effects of non-regularization 0.070 0.038 0.019 Source: Ota (2005) 25 This survey is conducted by the Ministry of Internal Affairs and Communications every five years. The samples are household members aged 15 years or above of about 450 thousand households. Ota used data from the published tables of distribution of annual income by form of employment and age group. 14

Firstly, Ota s remark that within-form of employment effects and between-form of employment effects are small is incorrect. Ota overlooked the following revision of the classification of the forms of employment in the Employment Status Survey. The forms of employment in the survey in 2002 are Regular staff, Part-timers, Albeiters, Contract workers and Employees on a short-term contract (shokutaku), Dispatched workers and Others. In the survey in 1997, the fifth form is defined as Employees on a short-term contract (shokutaku). Therefore, contract workers might be included in Regular staff. This can be examined by comparing the number of employees under the fifth form, which was about 90,000 in 1997 and about 580,000 in 2004. These data demonstrate that Ota s Regular group in 1997 included about 500,000 contract workers. This led to the overestimation of income inequality and underestimation of the income average of the Regular group in 1997. If we use the correct data of the Regular group in 1997, income inequality within the Regular group might be higher, while income inequality between the Regular group and Non-regular group might be lower. Secondly, Ota s remark that whether the income inequality among non-regular workers is higher than that among regular workers depends on the definition of non-regular workers. As most of the non-regular workers in Japan are part-time workers, which includes the workers with short annual working hours, the hourly wages of regular and non-regular workers should be compared. If this is impossible because of the unavailability of data, workers with short annual working hours should be excluded while comparing annual income. Ota recognizes this problem and attempts to remove samples of persons with lower income because of voluntary shorter working hours. However, he could not remove them completely because his analysis was not based on the micro data. Consequently, as such low-income workers were included in Ota s Non-regular group, the inequality of annual income within the Non-regular group defined by Ota is higher than it actually is. In fact, as the hourly wages for part-time work in Japan concentrated at about 800, the income inequality among non-regular workers is not necessarily higher than that among regular workers if the comparison is based on hourly wages. In practice, we decomposed the changes in the log variance of the hourly wages of workers with 200 working days or more. Moreover, we took into account the above-mentioned revision of the classification of the forms of employment 26. The result is shown in Table 7. As indicated in Table 7, in the case of more appropriate decomposition using micro data, the effects of non-regularization are small in any age group. Within-form effects are the main cause of the rising inequality in hourly wages. Wage disequalization within each form of employment largely affects the rising inequality in hourly wages. The wage disequalization among regular workers is the most remarkable, although it is not shown in this table. The following conclusions we made are contrary to Ota s above-mentioned conclusions. (1) The inequality in hourly wages among regular workers increased. (2) The income inequality between regular workers and non-regular workers decreased because of the reduction of the wage levels of regular workers. (3) The income inequality among non-regular workers is 26 Although Ota (2005) used the published tables and two groups Regular group and Non-regular group we used the anonymized micro data of the Employment Status Survey in 1997 and 2002, and five groups Regular staff + Contract workers and Employees on a short-term contract (shokutaku), Part-timers, Albeiters, Dispatched workers and Others. 15

not necessarily higher than that among regular workers. Therefore, non-regularization of employment is not necessarily related to the rising income inequality among all workers. In short, the non-regularization view is not valid for all workers. Moreover, the non-regularization view that is discussed without excluding workers with short annual working hours has the following weakness. It is likely to be used for the justification of the lack of countermeasures by the government. The opinion that income inequality increased due to the non-regularization of employment is easily refuted by the one that the annual income of people who voluntarily work for shorter hours is low. This supports the argument that the government is not required to correct such rising income equality. Table 7. Decomposition of the Changes in the Log Variance of the Hourly Wages of Male Employees (1997 2002) 20 24 25 29 30 34 35 39 40 44 45 49 50 54 55 59 Change in log variance 0.026 0.027 0.028 0.032 0.021 0.032 0.040 0.043 Within-form effects 0.022 0.022 0.022 0.028 0.016 0.023 0.029 0.034 Between-form effects 0.002 0.002 0.001 0.001 0.002 0.004 0.005 0.002 Effects of non-regularization 0.006 0.003 0.004 0.005 0.003 0.006 0.007 0.007 Note: Workers with 200 or more working days Source: The author calculated the above figures using the anonymized micro data of the Employment Status Survey in 1997 and 2002. 4.3 Regular wage disequalization view As mentioned in Section 4.1, according to the result of the decomposition of changes in the log variance of the equivalence income by Ohtake s method, within-age effects are as large as the effects of population ageing. In addition, as mentioned in Section 4.2, according to the result of more appropriate decomposition using the micro data of the Employment Status Survey in 1997 and 2002, the effects of non-regularization are small in any age group, and within-form effects are the main factor for the increase in the inequality of hourly wages. Based on these results, we have a novel view on the rising income inequality in Japan that differs from the population ageing view and non-regularization view. In this view, the disequalization in regular workers wages is the main reason for the rising income inequality after the 1990s. We call this view the regular wage disequalization view, and we will examine it below. The annual receipts of households are the total of the following revenues: wages and salaries, income through business and homework, returns from assets, social security benefits, saving deposits cashed, sale of valuable securities, loans and monthly instalments. In the National Survey of Family Income and Expenditure, these receipts and various disbursements of workers households are surveyed for a period of three months. Wages and salaries have the largest share in the total receipts. In general, the total of other receipts changes inversely to wages and salaries. This implies that changes in the total of other receipts compensates for the changes in wages and salaries and partly corrects the inequality in wages and salaries. 16

We will first examine this aspect. The published results of the National Survey of Family Income and Expenditure only contain the Gini coefficients of annual receipts. We calculated the Gini coefficients of the wages and salaries of household heads and spouses respectively using the anonymized micro data of the National Survey of Family Income and Expenditure in 1999 and 2004. Table 8 shows the result and Figure 8 indicates the rate of change in the Gini coefficients in 1999 2004. As indicated in these tables and figures, the Gini coefficients increased in most of the age groups of both household heads and spouses. In short, wage inequality rose. The simple average of the Gini coefficients of the wages and salaries of full-time household heads aged 25 59 was 0.176 in 1999 and 0.193 in 2004; the rate of increase was 10%. In the case of full-time spouses, it was 0.261 in 1999 and 0.283 in 2004; the rate of increase was 9%. For part-time spouses, the simple average of the Gini coefficients was 0.262 in 1999 and 0.283 in 2004; the rate of increase was 8%. The rate of increase in the Gini coefficients of wages and salaries is greater than that in those of the annual receipts mentioned in Section 4.1. Therefore, considering the fact that wages and salaries have the largest share in the total receipts, we can conclude that the main reason for the rising inequality of annual receipts is the disequalization in wages and salaries in 1999 2004. According to the data of the Basic Survey on Wage Structure, the wage inequality rose further from 2004 to 2006; the results of the survey conducted in 2006 are currently available. Therefore, in order to clarify the causes of the rising income inequality, it is necessary to pay attention to the disequalization of wages that form the basic revenues in the case of workers households. Wage income is the product of hourly wages and annual working hours. The disequalization of wage income might be caused by the disequalization of hourly wages or that of annual working hours. With regard to wage equality, the disequalization of hourly wages contains a more serious problem. We examine the case that is suited to the rising income inequality from the end of the 1990s in Japan, classifying micro data by age group, sex and form of employment. Table 8. Gini coefficients of annual wage income (workers households) Full-time householder Full-time spouse Part-time spouse 2004 1999 2004 1999 2004 1999 25 29 years old 0.165 0.145 0.248 0.200 0.318 0.268 30 34 0.161 0.145 0.244 0.222 0.308 0.291 35 39 0.178 0.156 0.272 0.248 0.304 0.278 40 44 0.195 0.172 0.283 0.268 0.273 0.244 45 49 0.204 0.187 0.304 0.273 0.255 0.259 50 54 0.216 0.199 0.303 0.301 0.260 0.246 55 59 0.234 0.230 0.325 0.312 0.265 0.250 60 64 0.332 0.320 0.331 0.362 0.283 0.282 65 69 0.322 0.347 0.387 0.332 0.261 0.262 Source: Uni (2008) 17

Figure 8 The Rate of Increase in Gini Coefficients (1999-2004) 25% 20% 15% 10% 5% 0% full-time head full-time spouse part-time spouse -5% 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 -10% Source: Uni (2008) As working hours are not investigated in the National Survey of Family Income and Expenditure, we cannot obtain data on the hourly wages. On the other hand, as weekly working hours and annual working days are investigated in the Employment Status Survey, we can calculate the hourly wages using micro data. On the other hand, as the breakdown of annual wage income is not investigated in the latter survey, other problems arise for instance, retirement pays cannot be separated from the annual wage income. It leads to the overestimation of the hourly wages of workers who retired at the end of March; as a result, they obtain a considerable amount as retirement pay. In order to avoid such overestimation, we only analysed the samples of workers who worked for 200 days or more in the anonymized micro data of the Employment Status Survey in 1997 and 2002. Table 9 shows the Gini coefficients of the annual wage income, working hours and hourly wages of regular male workers 27. Figure 9 shows the rate of increase in the Gini coefficients in 1997 2002. In almost all the age groups, the Gini coefficients of three types of variable rose in 1997 2002. This implies that the inequality in annual wage income, working hours and hourly wages rose in almost all age groups below 59 years. However, there is a considerable difference in the rate of increase. With regard to annual wage income, the inequality in each age group rose at almost the same rate along with the changes in the Gini coefficients of wages and salaries based on the National Survey of Family Income and Expenditure. However, the inequality in annual working hours rose particularly among young and elderly workers. The rate of increase in the inequality in hourly wages is particularly large among young workers. Considering the upward trends of average annual working hours and downward trends of average annual wage income and average hourly wages 28, we explain the reason for this rapid disequalization of young regular workers hourly wages as follows. Workers with low hourly wages tend to increase their annual working hours in order to avoid lowering their annual wage income. However, they cannot avoid lowering 27 Taking into account the revision of the classification of the forms of employment in 2002, regular workers not only includes Regular staff but also Contract workers and Employees on a short-term contract (shokutaku). 28 In the simple average in all age groups of male regular workers, annual working hours increased by 4.8%, annual wage income decreased by 5.0% and hourly wages decreased by 8.4%. 18