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September 30, 2003

Policies Needed to Avoid Immobilization of Income Levels

Yoshio HIGUCHI (Professor, Keio University)

Equality of opportunity is the basis for building a competitive society that induces people's motivation. Follow-up research in recent years has shown that equality of opportunity has diminished and income levels of people have become less mobilized among income brackets. The government needs to prioritize its policy to enhance social systems in areas such as entrepreneurship support, employment structure alignment, and workers' capability development, to allow for a society that offers a second chance at success.

Causes to Curb Competitive Society

To many Japanese, the expression "income disparity" has been regarded as something more than simply an income gap in terms of numbers. It has been thought of as "unfair disparity of ratings" of people. But recently it has become clear that this "egalitarianism" has affected Japanese society to deprive its people of eagerness to work and create a country where individuals' efforts are not properly rewarded.

For example, "Strategy to Revitalize the Japanese Economy," published by The Economic Strategy Council in 1999, has declared: "It is necessary to restructure Japan's social system where equality of result is excessively pursued, to where individuals would be able to exercise fully their creativity and spirit of challenge, which would form the basis for 'healthy, creative, and competitive society'" It has been suggested by private companies that the wage structure needs to be changed from the seniority system to where those with better performance records would be rewarded, which, as a consequence, would create a system with large wage diversity.

However, it is necessary for equality of opportunity to be guaranteed to stimulate people's willingness to challenge. Dissatisfaction would increase and a sense of resignation would spread in a society where disparity is caused according to origin or luck. Is Japanese society really moving to fortify equal opportunity and to avoid formation of inflexible income brackets?

Two sets of data are necessary to analyze a country's income distribution trends: one is static income disparity that shows how income is distributed among people at a certain point in time, and the other is dynamic income movement that shows the extent of individuals' income fluctuation in terms of movement among brackets. Data tracing individuals' long term economic situations is necessary to analyze such phenomena. As the basis for the following discussion I shall be using the results of a study conducted at the Policy Research Institute of the Ministry of Finance, based on the "Japanese Panel Survey of Consumers" executed by The Institute for Research on Household Economics since 1993.

Difficulty for Low Income Class People to Move up to Higher Class

The survey traces 1,500 women and their spouses--who were between the ages of 24 and 34 in 1993, and 500 women and their spouses who were between 24 and 27 in 1997--on their personal attributions, status of employment, and economic situation every year. Gross income of men with spouses is chosen for the following discussion.

An indicator called the Gini coefficient is often used in economics to measure inequality of income distribution. It is so formulated that inequality is considered to be greater when this number is larger. The figures for men with spouses were 0.226 for 1993-95 and 0.229 for 1996-98, which increased to 0.239 for 1999-2001.

This could be a result of a natural trend that income disparity increases as age increases. To neutralize this effect, estimates were made to reflect those of 30-34 age groups only, but the result was the same: income disparity had in fact broadened since the late 1990s. Income differences based on academic background, size of corporate employer, and type of job all showed widening income disparity during the 1997-2001 period.

The data was split into five groups, or brackets, for further analysis, according to income levels. It was first studied whether those belonging to the lowest income group had moved to a higher one the following year, and the result showed 36.5% of people rose in class in the 1993-94 period but that the number decreased to 28.4% in the 2000-2001 period.

On the other hand, the share of those in the lowest group who remained there the following year was 69.8% for the 1993-94 period, which increased to 83.2% in 2000-2001, indicating immobilization of income disparity.

Increasing income disparity while immobilized in a bracket has affected peoples' sentiment accordingly. Analysis of life satisfaction by housewives according to income level of households shows that the degree of satisfaction remained stable during the period of research for higher income brackets while significant deterioration is observed for lower income brackets, especially since 1997. Evaluation of their own living standards during the period shows a similar trend, with the gap increasing among income brackets. Loss of work incentives, which has recently become a general concern, is more serious in the low -income group.

It is of course possible for people to change jobs if the current one is unsatisfactory. In fact, those in the lowest income bracket changed jobs four times more often then those in the highest income bracket. But have these people increased their income? The study shows only 20% of those in the lowest income bracket were able to rise to a higher one, while 80% remained in the same lowest bracket after switching jobs. In fact, after changing jobs 50% of the people who belonged to the second lowest bracket tumbled to the lowest income group, while 90% of those in the highest bracket remained in the same group.

In the past Japanese companies would employ a large number of new graduates to be trained in-house to enhance competitiveness. From the individual's point of view, this meant the person would be able to acquire skills by simply following the instructions of the company, and income was guaranteed. But now the number of permanent staff has been slashed and income level is insecure even in large corporations, which in turn increased individual's own responsibility to maintain job skills. For part-time or non-regular workers, the fact that they are unable to receive assistance from their employers makes it even more difficult for them to emerge from the lowest income group.

If, however, the government were to enhance social benefits in compensation for the diminished ability of private corporations to guarantee income, it would induce dependence on government and wipe out the sense of independence of the people. Increased opportunities to challenge are needed to bring about people's motivation.

Skill Development Programs Must be Reviewed

In addition to reinforcing assistance to entrepreneurs, the present social system must be revised, where only those who passed severe screening at the start line are allowed to exercise their skills. The current system would limit the number of people to be employed, and would tend to be decided on such matters as sex, age, or academic background. Systems to allow for switching from non-regular to permanent staff, and trial employment programs should be further adopted.

Skill development programs by the government used to be performed by setting up public skill training centers or designating certain courses provided by private institutions so as to provide what is thought to be necessary by the government. But to provide skills reflecting the real needs of society, a system must be devised for workers themselves to seek advice from experts and choose training programs, which should result in a system where training centers must compete in order to gather trainees.

For example, the government may establish scholarships for reeducation of adults or allow tax credits for human resource investments, and regional governments could foster and utilize consultants familiar with local affairs who, in conjunction with job introduction agencies, could assist individuals to challenge a second chance.

As it has become difficult for only husbands to work and obtain stable income, a social system is needed to support wives to work also. It would be necessary to abolish deductions for spouse provisions in income tax rules, and special treatment of full-time housewives in social security procedures must be halted so as not to discourage women seeking jobs. True equality in employment and treatment is obviously a must.

It is not clear whether the disparity and immobilization of income levels are caused by a prolonged economic slump where the phenomenon could still be considered cyclic, or if it is a reflection of irreversible structural change of industry and technology where jobs have been polarized to those that require high professional skills and those that do not. Whichever the case, progression of the aging population would tend to immobilize income levels and deprive society of dynamism.

To avoid falling into such a pitfall, expansion of scope and enhancement of equality in opportunity must be vigorously pursued. Merits of a free and competitive market can only be realized through providing every citizen with equal opportunity to challenge, and offering assistance to re-challenge.

(The original Japanese article appeared in the August 21, 2003 issue of Nihon Keizai Shimbun. Do not quote without the author's permission.)

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