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October 3, 2005

Economic Disparity in Japanese Society: Fair and Efficient Labor Market is Essential

Yoshio HIGUCHI (Professor, Keio University)

This is an analysis of the background of the widening income disparity in Japan, and possible measures that can be taken. More opportunities for non-regular workers to seek regular employment status should be created by appropriate deregulation and social security policies, in order to impede the current trend of stratum immobilization caused by the lack of these opportunities.

Widening of income gap apparent in late 1990s

There is much talk recently about the widening of the income gap, but determining the optimal degree of income disparity for a society is not a simple task. If disparity gets too wide it will cause a sense of unfairness that may lead to social disorder. But if income disparity is too small, it will facilitate misapplied equality that disrupts individuals' motivation to work.

The government's Strategic Economic Council stated in its final report of 1999 that Japanese society is one in which the equality of results is overly emphasized, and one's efforts are not sufficiently compensated. It also said that the Japanese economic system must be reformed to create "a society with healthy and creative competition" in which the ingenuity and the competitive spirit of individuals are encouraged and rewarded.

The maximum rate of individual income tax was gradually reduced from 70% in 1986 to 37% in 1999 in order to motivate taxpayers to earn more. Personnel systems in corporations were always concerned that overemphasis on fairness would have a negative effect on productivity. Many companies, in an effort to stimulate motivation of their employees, have been reforming their salary systems in recent years to introduce a pay-per-performance scheme replacing the conventional seniority-based system.

However, worker incentive is not something that can be enhanced by simply broadening the degree of dispersion. As the above government report indicates, equal opportunity and impartial evaluation are essential in making such a mechanism work. If this basic premise is neglected, the widening gap would not enhance motivation among people. Rather, it would induce a sense of resignation and stagnation towards the resulting hierarchized society. What, then, is actually happening now in Japan's labor market?

Although researchers are still somewhat divided over the initial effects of this shift until the early 1990s from a seniority-oriented to a performance-conscious mechanism, there is general consensus that the income gap has been widening since the late 1990s. Analysis of various governmental statistics shows a similar trend in which Gini's coefficient, an index that increases with the broadening of the income gap, has been rising.

As Gini's coefficient shows only static income disparity at a certain point of time, it is necessary also to review the yearly transition of individual household income figures. Does it show lesser inter-stratum movement - the poor getting poorer and the rich getting richer - or has this transition created new opportunities for individuals to rise within the economic hierarchy?

The Japanese Panel Survey of Consumers', which is conducted by the Institute for Research on Household Economics, has been following up on a number of specific individuals every year since 1993. The survey studies the employment and financial status of 1500 females (and their respective spouses, if applicable) who were age 24 to 34 in 1993. New samples have also been added since. The results show that since around 1998, when the banking crisis occurred and corporations began massive lay-offs, there has been a trend of decreasing inter-stratum movement - meaning that fewer and fewer individuals (households) are being able to move up to a higher income bracket.

Fifty percent of households with annual income in the lowest quintile in 1996 had risen to a higher status in the following year of 1997. However, in 1998 the ratio of this upward movement decreased to 33%, and in 2000 to 30%. This trend of immobilization can be seen in the highest bracket also: the ratio of households that stay in the top group has increased by nearly 10% since 1998. The same tendency is observed for the income figure of married males as well, with the percentage of those who stay in the lowest bracket increasing from 69% in 1997 to 75% in 2001.

This trend is caused by the widening of the gap in individual income both within and among companies, and also between regular and temporary employees. Thus the nature of income disparity between regular and temporary employees needs further examination.

Low marriage rate in non-regular workers

According to the Ministry of Internal Affairs and Communications' Labour Force Survey, the number of individuals who were employed as regular staff (excluding those in agriculture and forestry) fell from 37.62 million in February 1995 to 33.93 million in February 2004. During the same period, those who were employed as non-regular staff increased from 9.88 million to 15.47 million. The ratio of non-regular staff increased notably among the young, age 24 or younger (excluding students), from 10% to 27% for males and 16% to 39% for females during the nine years. There are other countries where the proportion of part-time workers is increasing as well, but the pace of increase in Japan is exceptionally high.

According to the Keio Household Panel Survey, among male part-time workers (known in Japan as freeters, unmarried non-regular employees or non-working school graduates) who were age 25 to 29, only 45% became regular employees after five years. In the 1980s, the conversion from part-time to regular employee was not so much a strait gate, but in the 1990s the number of intermediate recruitment offers decreased significantly. There has also been a tendency of companies to avoid hiring freeters as regular employees, causing freeters to remain so for longer periods of time and increasing the number of freeters in their 30s.

This phenomenon affects issues such as the trend toward later marriages and the declining birthrate. A provisional calculation has been made for unmarried male college graduates at the age of 30, both for those who were freeters and those who were regular employees one year after graduation - when they were age 23 or 24. The results show that before the burst of the bubble economy there were 9% more unmarried males at the age of 30 for those who were freeters, but this gap widened to 23% in the post-bubble period. This could be interpreted to mean that there are more young people who were unable to get married due to their financial status or uncertainty towards their future.

One critical element in the increase of non-regular staff employees is the corporate attitude seeking to cut back on personnel costs and maintain flexibility. There is also the fact that an industrial or technological structure has developed that polarizes jobs that do and do not require advanced or specialized skills. This leads to non-regular employee's earnings being kept low, and also longer working hours for regular employees who are forced to get the same amount of work done with a reduced workforce.

If the Japanese economy gets back on track, companies will presumably increase regular staff recruitment. However, it must be noted that the government's approach and policies were also a major factor in this increase of non-regular employees. The Labour Standards Law was amended, allowing the maximum period of fixed-term employment contracts to be extended from one year to three years. The Worker Dispatching Law has also been amended to allow contracted workers to stay on the same job in the same office for three years instead of one, and also to lift the previous embargo on dispatching workers to jobs in manufacturing. This no doubt has contributed to providing more alternatives for both individuals and corporations, thus leading to more jobs. But because the emphasis has been placed on the deregulation of non-regular employment, certain disparity within the legislative framework may have emerged between regular and non-regular forms of employment.

Balanced efforts in respective areas required for deregulation

In the Organization for Economic Co-operation and Development (OECD) Employment Outlook released last year, quantified figures indicating the intensity of regulations on permanent and temporary employment in different countries were reported. It shows that regulations on permanent employment in Japan are tighter than the average among OECD countries and have changed very little since the 1980s. On the other had, regulations on fixed-term employment and temporary personnel have been gradually eliminated and are now more relaxed than the OECD average. As a result, as of 2003 Japan has the sixth largest gap between regular and non-regular employment regulations intensity among the 28 countries covered in the survey.

Labor deregulation requires careful consideration in order to create a balanced labor market. While certain aspects of equality must be maintained, measures to increase flexibility are necessary on working hours and annual earnings for part-time workers, who also need to be enrolled in social security platforms such as employees' pension. In fact, the current system may be contributing to an increase in the numbers of part time workers because their social security fees need not be borne by employers.

Life is not a board game where participants are granted equal conditions at the start of the game, or where action can be restarted from the beginning. Thus, the government must take necessary measures to provide equal opportunity to support those who are less fortunate. Non-regular employees, whose current efforts do not necessarily lead to future rewards, are being deprived of their opportunities to be competitive.

To assist comeback challenges, a public framework is necessary to provide related information and financial support for development of skills. To increase job opportunities, systems such as temp-to-perm and trial employment, in which the employers can assess the ability of a prospective employee before hiring, may provide an effective solution. The government must make efforts to provide sound footing to individuals seeking to participate, in order to create a vital economy utilizing the advantages of free competition. In this time of depopulation, social and financial hierarchy must not be rigidified. Instead, efforts must be strengthened to create a fair and efficient labor market in which demonstration of eagerness and exertion of abilities are encouraged and rewarded.

(The original Japanese article appeared in the September 13, 2005 issue of Nihon Keizai Shimbun)

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