## 1. Unemployment Rate and Poverty Rate of the Working-Age Population, 2018

## Source details

**Canonical URL:** [1. Unemployment Rate and Poverty Rate of the Working-Age Population, 2018](https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023033.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023033.pdf.md)
- [Structured JSON version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023033.pdf.json)

---

### A. Introduction — key observations
- The high poverty rate of the working-age population is a long-standing social and economic issue in Japan.
- The working-age population refers to those people between 18 and 65 years old.
- Japan’s unemployment rate remains relatively low compared to other OECD countries, while the poverty rate of the working-age population has risen since the 1980s and has been one of the higher ones among OECD countries, despite some deduction in recent years.
- The poverty rate is defined as the share of the people whose income falls below half of the median household income.
- Japan’s poverty rate is derived from the Comprehensive Survey of Living Conditions conducted once every three years by the Ministry of Health, Labour, and Welfare (MHLW) of Japan.

### B. Non-regular employment and incomes
- The number of non-regular workers (fixed-term contract workers, part-time workers, and dispatched workers) has increased in recent decades, accounting for about 40 percent of total employment (IPSS, 2019).
- Non-regular workers face unstable employment, low wages, and poor development opportunities.
- The average annual income of non-regular workers falls below 2 million JPY and is less than half of that of regular workers.
- The working poor in Japan is domestically understood to be those whose annual income is less than 2 million JPY.

### C. Public assistance program — structure and limitations
- Legal basis: Public Assistance Act enacted in 1950; founded on four principles including State responsibility and means-testing (recipients must utilize assets and abilities first).
- Program composition: eight types of assistance — livelihood, education, housing, medical, long-term care, maternity, occupational, and funeral assistance; livelihood assistance is the major component and provided as cash transfers.
- Means-testing: Assistance amount = minimum living expenses (region/family dependent) minus household income.
- Asset rules: Assets such as land, houses, and farms must be sold unless retained produces higher value when utilized than when sold.
- Work requirement: If able to work and adequate jobs exist locally, the person must use that ability before receiving assistance; nevertheless, receipt is possible if household income including working income does not reach minimum living expenses.
- Recipient statistics (as of July 2016):
  - About 1.6 million households received public assistance.
  - Elderly households: over 50 percent of recipients.
  - Households with a disabled or sick individual: about 26 percent of recipients.
  - Single-mother households: about 6 percent of recipients.
  - Duration of receipt: about 10 percent of recipients have been on the program for less than a year; about 30 percent have been on the program for more than ten years.
- Program implications:
  - More than half of recipients are elderly; a large share have disabilities or sickness — suggesting the program may not provide adequate income support for the working poor.
  - The calculation method creates inherent work disincentives: assistance declines with earned income because assistance = minimum living expenses − household income; a worker with annual income below the minimum living expenses may be induced not to work.

### D. Rationale for considering an Earned Income Tax Credit (EITC)
- Identified policy challenges suggesting EITC consideration:
  1. Low unemployment rate but high poverty rate of the working-age population.
  2. Widespread non-regular employment.
  3. Limited income support for the working poor from public assistance.
  4. Inherent work disincentives created by the public assistance program.
- International context and trends:
  - EITC programs have grown in popularity in advanced economies; as of 2009, 16 of the 30 OECD countries operated EITC programs (Immervoll and Pearson, 2009).
  - Long-standing EITC examples: US and UK (about four or more decades); Germany included it in early-2000s labor market reforms; Denmark and Sweden implemented EITC in 2004 and 2007 respectively.
  - The US EITC started in 1975 and expanded substantially over time.
- Policy complementarities:
  - EITC can address concerns about work disincentives from means-tested transfers and support working poor incomes.
  - EITC may boost employment and labor supply, helping address Japan’s ageing population challenge:
    - Elderly (aged 65 or over) in 2017: about 27.6% of total population.
    - Projected elderly share in 2065: about 38.4% of total population.
  - EITC aligns with the “New Form of Capitalism” objective to boost employment and a more equitable distribution of benefits.

### E. EITC in theory — implications for design
- Theoretical extensions indicate an EITC can be part of an optimal income tax schedule (extensions include labor supply on intensive/extensive margins, two-dimensional informational asymmetry, individual failures, and non-welfarist social welfare functions).
- Trade-off highlighted by labor supply theory:
  - EITC tends to increase aggregate employment by inducing non-workers to enter the labor force (extensive margin).
  - Increased labor supply can lower post-EITC wages faced by employers; incidence depends on labor demand elasticity.
  - Greater share of EITC benefits captured by workers increases poverty alleviation but tends to lower employment impact, and vice versa.

### F. EITC experience in OECD countries — forms and targeting
- EITC programs vary by design:
  - Some use tax concessions or social contribution reductions (e.g., Belgium, Finland, Germany, Netherlands).
  - Many provide refundable tax credits (e.g., Canada, France, the US, the UK).
- Targeting mechanisms:
  - Eligibility and benefit amounts can depend on children, minimum hours worked, earned income, or entry into employment.
  - Many programs use phase-ins/phase-outs or condition on working and hours.
  - About half of EITC programs restrict eligibility to working families with children.
  - Income assessment can be individual-based or family/couple-based.
- Examples of program scale:
  - US 2019: 25 million working households received about $63 billion nationwide, with an average benefit of approximately $2,500.
  - UK 2016-17: 2.9 million working families received about £19.3 billion, with an average benefit of around £6,700.

### G. Key policy issues and design considerations
- Articulate the primary objective:
  - Choose between addressing in-work poverty (short run) or promoting employment (long run). Given Japan’s low unemployment and high working-age poverty, addressing in-work poverty could be primary in the short run; boosting labor force participation may take priority as ageing intensifies.
- Address existing policy anomalies before and alongside EITC introduction:
  - Labor taxes: High labor income taxes (e.g., payroll taxes) at low earnings run counter to poverty alleviation and employment objectives. Consider tax reductions targeted at low earners and examine the personal income tax base and rate schedule.
  - Out-of-work benefits: Where eligibility is lax and benefits generous, strengthen links between benefit levels and earnings; reassess public assistance eligibility criteria and benefit levels (eligibility in Japan is currently independent of employment status).
- Design choices (depend on primary objective):
  - Definition of income:
    - For poverty alleviation: link benefits to total household income (including capital income, employment, and self-employment).
    - For employment promotion: individual earnings may be the appropriate base.
  - Linking benefits to family structure:
    - Poverty alleviation is best achieved by linking benefits to family composition (e.g., number of children) and individual earnings.
    - Despite Japan’s individual-based income tax, linking EITC benefits to family circumstances is feasible but must avoid administrative barriers that undermine take-up.
  - Use of working hours or earnings thresholds:
    - Thresholds provide stronger incentives to work more hours and reduce fiscal cost, but increase administrative burden and exclude some low-income workers, reducing poverty alleviation.
    - Thresholds could be targeted to less vulnerable groups (e.g., single adults) with conditional additional benefits tied to job search/training.
  - Frequency and timing of payments:
    - Regular, real-time payments (e.g., monthly or reflected in paychecks) help liquidity-constrained low-income workers and strengthen the perceived link between income and labor supply decisions.
    - In the US, annual payments became predominant; in the UK, tax credits are reflected in withholding so recipients receive benefits contemporaneously with earnings.
  - Treatment of the self-employed:
    - Verifying self-employed income is difficult; refundable tax credits for self-employed invite fraud and administrative challenges.
    - To address in-work poverty, inclusion of the self-employed is important, but must be accompanied by measures ensuring adequate tax compliance.

### 13. Implementing an EITC — administrative capacity and challenges
- Implementation challenges for Japan:
  - Comprehensive EITC programs require high levels of tax filing among the target population and a strong system of assessment for the personal income tax.
  - If most taxpayers are required to lodge income tax returns or an effective withholding tax system is already in place, then a EITC program should be relatively inexpensive to administer. Otherwise, the cost of introducing an EITC can be substantial.
  - Introducing an EITC in Japan would entail three administrative challenges:
    - First, most employees in Japan do not file annual tax returns. This is because labor income taxes are withheld at source and adjusted annually by their employers, and investment income is withheld at source in many cases.
    - Second, information sharing is insufficient among the ministries, local governments, and public corporations. For example, although Japan’s National Tax Agency collects employees’ income information from employers, its coverage is partial. Local governments gather data of residents’ incomes, but such data are not aggregated by a central agency.
    - Third, delivery of payments: transfers between bank accounts are widely-accepted means of payment, but taxpayers do not register information of their bank accounts with Japan’s National Tax Agency yet.
- Administrative remedies and design recommendations:
  - Make annual tax returns mandatory while providing individuals with pre-filled tax returns.
  - Utilize the My Number taxpayer identification system launched in 2016 to improve information collection, sharing and management.
  - Link the bank account to the My Number of each taxpayer for the purpose of delivering benefits.
- Overcoming information constraints or knowledge barriers:
  - Authorities should undertake informational outreach efforts or use peer networks to ensure eligible individuals are aware of benefits and understand incentives for increasing labor supply (Maag, 2005; Chetty et al., 2013).
  - Simplify the broader tax and benefit system within which an EITC is embedded and ensure potential beneficiaries can easily understand interactions among components (Azmat, 2014).
- Monitoring and evaluation:
  - Allocate adequate resources to monitoring and evaluating how the EITC is impacting employment and wage levels.
  - Conduct careful analysis of employment and wage outcomes for different household and skill types both before and after the policy is introduced.

*Source: International Monetary Fund, “Options to Strengthen the Social Safety Net in Japan,” March 2023.*

### 1. Unemployment Rate and Poverty Rate of the Working-Age Population, 2018 _______ 2

### 1. Unemployment Rate and Poverty Rate of the Working-Age Population, 2018 _______ 2

### A. Introduction — key observations
- The high poverty rate of the working-age population is a long-standing social and economic issue in Japan.
- The working-age population refers to those people between 18 and 65 years old.
- Japan’s unemployment rate remains relatively low compared to other OECD countries, while the poverty rate of the working-age population has risen since the 1980s and has been one of the higher ones among OECD countries, despite some deduction in recent years.
- The poverty rate is defined as the share of the people whose income falls below half of the median household income.
- Japan’s poverty rate is derived from the Comprehensive Survey of Living Conditions conducted once every three years by the Ministry of Health, Labour, and Welfare (MHLW) of Japan.

### B. Non-regular employment and incomes
- The number of non-regular workers (fixed-term contract workers, part-time workers, and dispatched workers) has increased in recent decades, accounting for about 40 percent of total employment (IPSS, 2019).
- Non-regular workers face unstable employment, low wages, and poor development opportunities.
- The average annual income of non-regular workers falls below 2 million JPY and is less than half of that of regular workers.
- The working poor in Japan is domestically understood to be those whose annual income is less than 2 million JPY.

### C. Public assistance program — structure and limitations
- Legal basis: Public Assistance Act enacted in 1950; founded on four principles including State responsibility and means-testing (recipients must utilize assets and abilities first).
- Program composition: eight types of assistance — livelihood, education, housing, medical, long-term care, maternity, occupational, and funeral assistance; livelihood assistance is the major component and provided as cash transfers.
- Means-testing: Assistance amount = minimum living expenses (region/family dependent) minus household income.
- Asset rules: Assets such as land, houses, and farms must be sold unless retained produces higher value when utilized than when sold.
- Work requirement: If able to work and adequate jobs exist locally, the person must use that ability before receiving assistance; nevertheless, receipt is possible if household income including working income does not reach minimum living expenses.
- Recipient statistics (as of July 2016):
  - About 1.6 million households received public assistance.
  - Elderly households: over 50 percent of recipients.
  - Households with a disabled or sick individual: about 26 percent of recipients.
  - Single-mother households: about 6 percent of recipients.
  - Duration of receipt: about 10 percent of recipients have been on the program for less than a year; about 30 percent have been on the program for more than ten years.
- Program implications:
  - More than half of recipients are elderly; a large share have disabilities or sickness — suggesting the program may not provide adequate income support for the working poor.
  - The calculation method creates inherent work disincentives: assistance declines with earned income because assistance = minimum living expenses − household income; a worker with annual income below the minimum living expenses may be induced not to work.

### D. Rationale for considering an Earned Income Tax Credit (EITC)
- Identified policy challenges suggesting EITC consideration:
  1. Low unemployment rate but high poverty rate of the working-age population.
  2. Widespread non-regular employment.
  3. Limited income support for the working poor from public assistance.
  4. Inherent work disincentives created by the public assistance program.
- International context and trends:
  - EITC programs have grown in popularity in advanced economies; as of 2009, 16 of the 30 OECD countries operated EITC programs (Immervoll and Pearson, 2009).
  - Long-standing EITC examples: US and UK (about four or more decades); Germany included it in early-2000s labor market reforms; Denmark and Sweden implemented EITC in 2004 and 2007 respectively.
  - The US EITC started in 1975 and expanded substantially over time.
- Policy complementarities:
  - EITC can address concerns about work disincentives from means-tested transfers and support working poor incomes.
  - EITC may boost employment and labor supply, helping address Japan’s ageing population challenge:
    - Elderly (aged 65 or over) in 2017: about 27.6% of total population.
    - Projected elderly share in 2065: about 38.4% of total population.
  - EITC aligns with the “New Form of Capitalism” objective to boost employment and a more equitable distribution of benefits.

### E. EITC in theory — implications for design
- Theoretical extensions indicate an EITC can be part of an optimal income tax schedule (extensions include labor supply on intensive/extensive margins, two-dimensional informational asymmetry, individual failures, and non-welfarist social welfare functions).
- Trade-off highlighted by labor supply theory:
  - EITC tends to increase aggregate employment by inducing non-workers to enter the labor force (extensive margin).
  - Increased labor supply can lower post-EITC wages faced by employers; incidence depends on labor demand elasticity.
  - Greater share of EITC benefits captured by workers increases poverty alleviation but tends to lower employment impact, and vice versa.

### F. EITC experience in OECD countries — forms and targeting
- EITC programs vary by design:
  - Some use tax concessions or social contribution reductions (e.g., Belgium, Finland, Germany, Netherlands).
  - Many provide refundable tax credits (e.g., Canada, France, the US, the UK).
- Targeting mechanisms:
  - Eligibility and benefit amounts can depend on children, minimum hours worked, earned income, or entry into employment.
  - Many programs use phase-ins/phase-outs or condition on working and hours.
  - About half of EITC programs restrict eligibility to working families with children.
  - Income assessment can be individual-based or family/couple-based.
- Examples of program scale:
  - US 2019: 25 million working households received about $63 billion nationwide, with an average benefit of approximately $2,500.
  - UK 2016-17: 2.9 million working families received about £19.3 billion, with an average benefit of around £6,700.

### G. Key policy issues and design considerations
- Articulate the primary objective:
  - Choose between addressing in-work poverty (short run) or promoting employment (long run). Given Japan’s low unemployment and high working-age poverty, addressing in-work poverty could be primary in the short run; boosting labor force participation may take priority as ageing intensifies.
- Address existing policy anomalies before and alongside EITC introduction:
  - Labor taxes: High labor income taxes (e.g., payroll taxes) at low earnings run counter to poverty alleviation and employment objectives. Consider tax reductions targeted at low earners and examine the personal income tax base and rate schedule.
  - Out-of-work benefits: Where eligibility is lax and benefits generous, strengthen links between benefit levels and earnings; reassess public assistance eligibility criteria and benefit levels (eligibility in Japan is currently independent of employment status).
- Design choices (depend on primary objective):
  - Definition of income:
    - For poverty alleviation: link benefits to total household income (including capital income, employment, and self-employment).
    - For employment promotion: individual earnings may be the appropriate base.
  - Linking benefits to family structure:
    - Poverty alleviation is best achieved by linking benefits to family composition (e.g., number of children) and individual earnings.
    - Despite Japan’s individual-based income tax, linking EITC benefits to family circumstances is feasible but must avoid administrative barriers that undermine take-up.
  - Use of working hours or earnings thresholds:
    - Thresholds provide stronger incentives to work more hours and reduce fiscal cost, but increase administrative burden and exclude some low-income workers, reducing poverty alleviation.
    - Thresholds could be targeted to less vulnerable groups (e.g., single adults) with conditional additional benefits tied to job search/training.
  - Frequency and timing of payments:
    - Regular, real-time payments (e.g., monthly or reflected in paychecks) help liquidity-constrained low-income workers and strengthen the perceived link between income and labor supply decisions.
    - In the US, annual payments became predominant; in the UK, tax credits are reflected in withholding so recipients receive benefits contemporaneously with earnings.
  - Treatment of the self-employed:
    - Verifying self-employed income is difficult; refundable tax credits for self-employed invite fraud and administrative challenges.
    - To address in-work poverty, inclusion of the self-employed is important, but must be accompanied by measures ensuring adequate tax compliance.

*Source: International Monetary Fund, “Options to Strengthen the Social Safety Net in Japan,” March 2023.*

### 13.      Implementing an EITC. The effectiveness of an EITC in achieving underlying policy

### 13.      Implementing an EITC. The effectiveness of an EITC in achieving underlying policy objectives requires that country authorities have the capacity to implement the program.

### Implementation challenges for Japan
- Comprehensive EITC programs require high levels of tax filing among the target population and a strong system of assessment for the personal income tax.
- If most taxpayers are required to lodge income tax returns or an effective withholding tax system is already in place, then a EITC program should be relatively inexpensive to administer. Otherwise, the cost of introducing an EITC can be substantial.
- Introducing an EITC in Japan would entail three administrative challenges:
  - First, most employees in Japan do not file annual tax returns. This is because labor income taxes are withheld at source and adjusted annually by their employers, and investment income is withheld at source in many cases.
  - Second, information sharing is insufficient among the ministries, local governments, and public corporations. For example, although Japan’s National Tax Agency collects employees’ income information from employers, its coverage is partial. Local governments gather data of residents’ incomes, but such data are not aggregated by a central agency.
  - Third, delivery of payments: transfers between bank accounts are widely-accepted means of payment, but taxpayers do not register information of their bank accounts with Japan’s National Tax Agency yet.

### Administrative remedies and design recommendations
- The three administrative challenges can be overcome by:
  - Making annual tax returns mandatory while providing individuals with pre-filled tax returns.
  - Utilizing the My Number taxpayer identification system launched in 2016 to improve information collection, sharing and management.
  - Linking the bank account to the My Number of each taxpayer for the purpose of delivering benefits.

### Overcoming information constraints or knowledge barriers
- The effectiveness of an EITC also requires that those eligible are aware of these benefits and understand the inherent incentives for increasing their labor supply.
- Country authorities should take measures to overcome information constraints or knowledge barriers through informational outreach efforts or other sources such as peer networks (Maag, 2005; Chetty et al., 2013).
- It is important to simplify the broader tax and benefit system within which an EITC is embedded and ensure that potential beneficiaries can easily understand how various components of the tax and benefit system interact (Azmat, 2014).

### Monitoring and evaluation
- Adequate resources need to be allocated to monitoring and evaluating how the EITC is impacting employment and wage levels to ensure the policy is achieving its objectives and to avoid unintended adverse consequences.
- This requires careful analysis of employment and wage outcomes for different household and skill types both before and after the policy is introduced.

*Source: sipea2023033 - 13. Implementing an EITC. The effectiveness of an EITC in achieving underlying policy objectives.*

---


_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023033.pdf_