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Home > Opinions Last Updated: 12:14 11/10/2008
November 10, 2008

Economic Disparities Caused by Japanese System

Yutaka Harada (Chief Economist, Daiwa Institute of Research)

Economic disparities are being hotly debated in Japan these days, and will surely become one of the key issues in the coming general election. The prevailing view on economic disparities seems to be that their fundamental cause must be the "Koizumi reform," which emphasized competition in the market.

However, from the historical viewpoint, it is fair to say that there have always been considerable disparities throughout the Japanese history. For example, traditionally part-time working women were paid very low wages, and housewives' part-time work at home was incredibly underpaid. Despite extremely low wages for women, there was not a "disparity issue" recognized as such those days, so long as their husbands were earning reasonable salaries. As the marriage rate has been declining and the number of single working women has been increasing, especially since the 1990s, the reality of low wages for part-time work has become clearly visible. Furthermore, during the "lost decade," economic disparities began appearing among members of the same family, as younger generations could not find jobs, while their parents were working for large companies. Thus, economic disparities have become a serious social issue in Japan.

Contrary to the prevailing view in Japan, there is not much relationship between the "Koizumi reform" and the phenomenon of widening disparities. It might appear that under the Koizumi administration the labor share in corporate income has consistently been declining, and wage gaps between large and small businesses and also between regular and non-regular employees have been widening. However, Japanese companies could have hired part-time workers all along even before the new system of non-regular employment was introduced. Although wage disparities may have become apparent as a result of wider options for companies due to the Koizumi reform, that should not be considered the essence of the disparity problem. Rather it must be pointed out that thanks to economic recovery under the Koizumi administration, the employment condition for younger generations improved and, therefore, many young people were able to become regular workers.

Also by the Koizumi reform, many of the subsidy programs in favor of local regions were curtailed or eliminated altogether. This might appear to have caused regional disparities between large metropolitan areas and local regions, but that should not be considered the essence of the disparity problem either.

In a sense, it is true, as is often pointed out, that the trend of economic globalization tends to make domestic disparities worse. However, in the case of Japan, where mostly younger generations are affected negatively by such a trend, it seems more likely that the main cause is not severe competition in the global market, but rather the traditional system of life-time employment and seniority wages that have still been surviving in Japan. "Employment responsibilities" for private corporations in Japan are interpreted as responsibilities to keep currently employed workers, not as responsibilities to offer new employment opportunities. This kind of Japanese system tends to place younger generations in a relatively disadvantaged position with regard to job opportunities.

Japanese politicians also tend to disregard younger generations, and mostly listen to the voices of older people. These days both the Liberal Democratic Party and the Democratic Party of Japan seem to become what might even be called "seniors' parties," possibly advocating problematic policy measures solely in favor of older people, who are much greater in number than younger generations. In particular, it might be likely in the near future that public pension benefits are to be raised by increasing the consumption tax rate. However, older people's share in total consumption is about 28 percent now, and will be increasing beyond 50 percent, as the number of older people increases in the future. Then, tax increases would be meaningless, if pension benefits are raised along with the consumption tax rate without limit. The problem is that there are very few politicians who are willing to address this difficult issue in Japan.

In order for senior people to feel secure in their lives, their children must be educated properly and trained to be good citizens and diligent workers to support themselves and their seniors. For that purpose, policy priorities should be placed on education and employment for younger generations. However, the current system seems to become such that older generations are to be supported by taxing other, mostly younger, generations. A majority of the older people may subscribe to "conservatism," which should originally mean the ideal of educating next generations to inherit traditional legacies and properties of the past and current generations. It is regrettable to find very few conservative politicians whose agendas and actions reflect such an ideal. We should pay attention to this important point in the upcoming general election in Japan.

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