## Structural Barriers to Wage Income Growth in Japan ## Source details **Canonical URL:** [Structural Barriers to Wage Income Growth in Japan](https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023031.pdf) ## Other formats - [Markdown version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023031.pdf.md) - [Structured JSON version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023031.pdf.json) --- ### Introduction - Average wage income has not risen since 1995, making Japan the worst performing country among the G7. - Stagnant income growth has limited Japan’s growth potential and depressed inflation for the last two decades. - By 2019, unemployment had dropped to below 2.5 percent while the female labor force participation rate rose to 54 percent. - For every job seeker, more than two new job openings were available. - Three mathematical determinants of average wage income: composition of workers (e.g., part-time vs. full-time), hours worked in each group, and hourly wages in each group. - Key structural drivers identified: - Rise of part-time workers driven by higher labor force participation among female and senior workers. - Declining hours among part-time workers linked to distortions in the tax and social security system. - College “discount” in wage growth driven by life-long employment practices reducing mobility and reskilling incentives. - Policy priorities highlighted: - Comprehensive labor market reform to break down dualism and promote merit-based pay. - Remove disincentives to employment embedded in benefit policies, including redesigning health care and pension coverage thresholds. - Encourage worker training and reskilling, especially for non-regular workers. - Advance work-style reforms and family care services to help women remain in regular jobs after childbirth. ### Resolving the “Wage Puzzle” Findings - Share of part-time workers increased from 30 percent in 2010 to 38 percent in 2020. - Monthly working hours by part-time workers dropped by about 10 percent from 2010 to 2019. - Hourly wages have risen across employment types; real wage growth among part-time workers averaged 1.8 percent from 2015-2019. - Heterogeneity by demographic and education groups (Basic Survey on Wage Structure data): - Female workers experienced faster wage growth than male workers across regular and non-regular workers and education levels; overall female wage growth exceeds growth in each female segment due to improving female education attainment. - Less educated workers experienced faster wage growth: among regular workers, college-educated workers had the least wage increase while those with technical and junior college degrees had the most; among non-regular workers, the least educated group experienced the highest wage growth. ### The Rise of Part-Time Workers and Their Reduced Hours Findings - Japan added 2.5 million women to the labor force since 2013; half of these were part-time workers. - Increase in female participation fueled by labor shortages and the expansion of childcare capacity since 2013. - Employment among senior citizens increased due to rising life expectancy and pension eligibility age; many firms rehire senior workers as non-regular workers, leading to significant pay cuts for rehired seniors. - Hours and hourly wages have a strong negative correlation since 1995. - Declining hours point to distortions in tax and social security systems rather than pure income effects. Specific thresholds and distortions (as described) - Spousal deduction: exempts up to JPY 380 000 from the main earner’s taxable income if the second earner’s income is below a nominal threshold (JPY1.03 million before 2018 and JPY1.5 million after 2018); the effective discount on the second earner’s marginal contribution equals the main earner’s marginal tax rate, about 20-33 percent. - Pension contribution exemption: second earners are eligible for the national pension without paying the premium if their income is below JPY 1.3 million; this became more binding after 2018 when the spousal deduction threshold rose to JPY1.5 million. - Health Insurance and Employee’s Pension Insurance coverage expansion: before 2016 firms paid contributions for those working more than 30 hours a week; since October 2016 coverage expanded to those working more than 20 hours a week and earning more than 1.06 million per year. Initial enforcement targeted large firms (more than 500 employees) and extended to firms with more than 100 employees in 2022, with plans for firms hiring more than 50 employees in 2024. The policy induced many large firms to limit part-time workers’ hours to 20 to avoid paying social security contributions. ### The Absence of a Wage-Price Spiral Findings - Monthly earnings statistics are misleading due to structural changes in composition and hours. - Analysis separating monthly earnings and hourly wages for full-time and part-time workers finds neither monthly earnings nor hourly wages respond to measures of inflation expectations. - Wages do respond to core inflation, with a larger coefficient for hourly wages than for monthly earnings. - Monthly earnings of part-time workers do not respond to core inflation because of distortions from the tax and social security system. - Hourly income is affected by labor market tightness, but not by potential growth. Structural constraints - Regular workers’ wages largely set by annual shunto negotiations led by unions concentrated in large firms; unions prioritize employment maintenance over higher wages. - Low mobility among regular workers reduces outside options and bargaining power. - Part-time second earners face benefit-policy distortions that cap monthly income despite rising hourly wages. ### Policy Implications (Section 1) - Despite strong growth in hourly wages, overall wage income has been stagnant, impeding sustainable attainment of a 2 percent inflation target. - Key policy recommendations to boost overall wage income: - Eliminate disincentives to labor supply in the social security system (example reforms include removing or redesigning thresholds that cap second earners’ income incentives). - Implement comprehensive labor market reforms to reduce dualism and encourage merit-based pay to raise incomes for both regular and non-regular workers. - Redesign health care and pension coverage rules to avoid specific nominal thresholds that distort labor supply. - Encourage worker training and reskilling, especially for non-regular workers, to improve mobility and productivity. - Continue progress on work-style reforms and family care services to enable women to sustain regular employment after childbirth. ### Income-threshold distortions and social insurance coverage (Section 2) Findings - Income threshold for the spousal deduction was raised from 1.03 to 1.5 million yen in 2018. - The income threshold for a dependent spouse (of an insured employee) who can be exempted from Health Insurance and Pension Insurance contribution remains at 1.3 million yen. - Expansion of Health Insurance and Employee’s Pension Insurance to part-time workers since 2016 is a welcome step in mitigating the distortions in the social security system. - Partial coverage has the side effect of limiting labor supply within 20 hours per week for some workers. Implications and recommendations - Eliminating those distortions would significantly raise women’s labor supply and earnings and boost government revenues. - A new design that avoids thresholds in hours or nominal income should be adopted to eliminate distortions to labor supply. - Near-term: harmonize income thresholds to reduce distortions. - Medium-term: review and streamline tax incentives regularly to ensure compatibility, especially in the current environment of surging inflation. - Long-term: adopt a social insurance design without hours- or nominal-income thresholds to reduce incentives that limit labor supply. ### Work-style reforms, teleworking, and female labor force outcomes (Section 2) Findings - Since 2013, progress on work-style reforms and childcare services helped boost female labor force participation. - Most female workers re-enter the labor force as part-time workers taking on jobs that under-utilize their skills. - Teleworking was especially helpful for working mothers to retain their jobs while taking care of young children during the pandemic. Policy and institutional recommendations - Further progress on work-style reforms, including through teleworking, is needed to improve career prospects and income of female workers. - Work-style reforms can provide more flexible work arrangements and allow men to share more housework, addressing the disproportionate amount of housework shouldered by women. - Address rigidities in the labor market that channel women into part-time employment that under-utilizes skills. ### Breaking down labor market dualism and improving flexibility (Section 2) Findings - Japan’s traditional model—simultaneous recruitment of new graduates, lifetime employment, seniority-based wage and promotion system, mandatory retirement and company-based training—needs to be modernized to adapt to the rapidly ageing society. - A more flexible labor market with merit-based promotions could boost productivity and raise labor income. Reform option suggested - Introduce a Single Open-Ended Contract for all newly hired workers, complemented by a shift towards a model that combines labor market flexibility and security. *Source: sipea2023031 - Sections 1–2* ### Section 1 ### Structural Barriers to Wage Income Growth in Japan ### A. Introduction - Average wage income has not risen since 1995, making Japan the worst performing country among the G7. - Stagnant income growth has limited Japan’s growth potential and depressed inflation for the last two decades. - By 2019, unemployment had dropped to below 2.5 percent while the female labor force participation rate rose to 54 percent. - For every job seeker, more than two new job openings were available. - Three mathematical factors determine average wage income: composition of workers (e.g., part-time vs. full-time), hours worked in each group, and hourly wages in each group. - Key structural drivers identified: - Rise of part-time workers driven by higher labor force participation among female and senior workers. - Declining hours among part-time workers linked to distortions in the tax and social security system. - College “discount” in wage growth driven by life-long employment practices reducing mobility and reskilling incentives. - Policy priorities highlighted: - Comprehensive labor market reform to break down dualism and promote merit-based pay. - Remove disincentives to employment embedded in benefit policies, including redesigning health care and pension coverage thresholds. - Encourage worker training and reskilling, especially for non-regular workers. - Advance work-style reforms and family care services to help women remain in regular jobs after childbirth. ### B. Resolving the “Wage Puzzle” - Average monthly earnings statistics are misleading due to structural changes: - Share of part-time workers increased from 30 percent in 2010 to 38 percent in 2020. - Monthly working hours by part-time workers dropped by about 10 percent from 2010 to 2019. - Hourly wages have risen across employment types: - Real wage growth among part-time workers averaged 1.8 percent from 2015-2019. - Heterogeneity by demographic and education groups (Basic Survey on Wage Structure data): - Female workers experienced faster wage growth than male workers across regular and non-regular workers and education levels; overall female wage growth exceeds growth in each female segment due to improving female education attainment. - Less educated workers experienced faster wage growth: among regular workers, college-educated workers had the least wage increase while those with technical and junior college degrees had the most; among non-regular workers, the least educated group experienced the highest wage growth. ### C. The Rise of Part-Time Workers and Their Reduced Hours - Labor force composition changes: - Japan added 2.5 million women to the labor force since 2013; half of these were part-time workers. - Increase in female participation fueled by labor shortages and the expansion of childcare capacity since 2013. - Employment among senior citizens increased due to rising life expectancy and pension eligibility age; many firms rehire senior workers as non-regular workers, leading to significant pay cuts for rehired seniors. - Declining hours among part-time workers: - Hours and hourly wages have a strong negative correlation since 1995. - Declining hours point to distortions in tax and social security systems rather than pure income effects. - Specific policy thresholds and distortions cited: - Spousal deduction: exempts up to JPY 380 000 from the main earner’s taxable income if the second earner’s income is below a nominal threshold (JPY1.03 million before 2018 and JPY1.5 million after 2018); the effective discount on the second earner’s marginal contribution equals the main earner’s marginal tax rate, about 20-33 percent. - Pension contribution exemption: second earners are eligible for the national pension without paying the premium if their income is below JPY 1.3 million; this became more binding after 2018 when the spousal deduction threshold rose to JPY1.5 million. - Health Insurance and Employee’s Pension Insurance coverage expansion: before 2016 firms paid contributions for those working more than 30 hours a week; since October 2016 coverage expanded to those working more than 20 hours a week and earning more than 1.06 million per year. Initial enforcement targeted large firms (more than 500 employees) and extended to firms with more than 100 employees in 2022, with plans for firms hiring more than 50 employees in 2024. The policy induced many large firms to limit part-time workers’ hours to 20 to avoid paying social security contributions. ### D. The Absence of a Wage-Price Spiral - Wages in Japan have not responded to inflation expectations historically: - Analysis (separating monthly earnings and hourly wages for full-time and part-time workers) finds neither monthly earnings nor hourly wages respond to measures of inflation expectations. - Wages do respond to core inflation, with a larger coefficient for hourly wages than for monthly earnings. - Monthly earnings of part-time workers do not respond to core inflation due to distortions from the tax and social security system. - Hourly income is affected by labor market tightness, but not by potential growth. - Structural labor market issues limiting wage responsiveness: - Regular workers’ wages largely set by annual shunto negotiations led by unions concentrated in large firms; unions prioritize employment maintenance over higher wages. - Low mobility among regular workers reduces outside options and bargaining power. - Part-time second earners face benefit-policy distortions that cap monthly income despite rising hourly wages. ### E. Policy Implications - Despite strong growth in hourly wages, overall wage income has been stagnant, impeding sustainable attainment of a 2 percent inflation target. - Key policy recommendations to boost overall wage income: - Eliminate disincentives to labor supply in the social security system (example reforms include removing or redesigning thresholds that cap second earners’ income incentives). - Implement comprehensive labor market reforms to reduce dualism and encourage merit-based pay to raise incomes for both regular and non-regular workers. - Redesign health care and pension coverage rules to avoid specific nominal thresholds that distort labor supply. - Encourage worker training and reskilling, especially for non-regular workers, to improve mobility and productivity. - Continue progress on work-style reforms and family care services to enable women to sustain regular employment after childbirth. *Source: IMF Selected Issues Paper (SIP/2023/031), “Structural Barriers to Wage Income Growth in Japan,” Section 1.* ### Section 2 ### Section 2 ### Income-threshold distortions and social insurance coverage - Income threshold for the spousal deduction was raised from 1.03 to 1.5 million yen in 2018. - The income threshold for a dependent spouse (of an insured employee) who can be exempted from Health Insurance and Pension Insurance contribution remains at 1.3 million yen. - Expansion of Health Insurance and Employee’s Pension Insurance to part-time workers since 2016 is a welcome step in mitigating the distortions in the social security system. - Partial coverage has the side effect of limiting labor supply within 20 hours per week for some workers. Findings and implications: - Eliminating those distortions would significantly raise women’s labor supply and earnings and boost government revenues (as shown in Kitao and Mikoshiba (2022)). - A new design that avoids thresholds in hours or nominal income should be adopted to eliminate distortions to labor supply. Policy recommendations: - In the near term, harmonize income thresholds to reduce distortions. - Over the medium term, review and streamline tax incentives regularly to ensure compatibility, especially in the current environment of surging inflation. - Adopt a social insurance design without hours- or nominal-income thresholds to reduce incentives that limit labor supply. ### Work-style reforms, teleworking, and female labor force outcomes - Since 2013, significant progress has been made on work-style reforms and childcare services, which helped boost female labor force participation. - Most female workers re-enter the labor force as part-time workers taking on jobs that under-utilize their skills. - Teleworking was found especially helpful for working mothers to retain their jobs while taking care of young children during the pandemic. Policy and institutional recommendations: - Further progress on work-style reforms, including through teleworking, is needed to improve career prospects and income of female workers. - Work-style reforms can help by providing more flexible work arrangements and allowing men to share more housework, addressing the disproportionate amount of housework shouldered by women. - Address rigidities in the labor market that channel women into part-time employment that under-utilizes skills. ### Breaking down labor market dualism and improving flexibility - Japan’s traditional model—simultaneous recruitment of new graduates, lifetime employment, seniority-based wage and promotion system, mandatory retirement and company-based training—needs to be modernized to adapt to the rapidly ageing society. - A more flexible labor market with merit-based promotions could boost productivity and raise labor income. Reform options suggested: - Introduce a Single Open-Ended Contract for all newly hired workers, complemented by a shift towards a model that combines labor market flexibility and security (as suggested in Aoyagi and Ganelli (2013)). *Source: sipea2023031 - Section 2* --- _Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023031.pdf_