Combatting Inequality in Japan: Some Considerations

Important contribution made by Combatting Inequalities

There is an increasing need to gather whatever wisdom available in order to deal with inequality which has become an increasingly serious issue. In response to such a need, Blanchard and Rodrik (2021) has come out, containing the outcome of a conference that took place in October 2019.

The chapters of the book are contributed not only by economists but also by political philosophers and political scientists. Accordingly, the contributions are able to cover a wide range of topics including the current situation with regards inequality; the reasons for addressing inequality; the political obstacles to tackling inequality; the causes of widening inequality; and the policies to combat inequality. For a summary, please see the Introduction by Blanchard and Rodrik.

The discussions provided are all informative and illuminating in thinking about the ways to overcome inequality. Policy makers need to take the proposals seriously and use the insights gained to design and implement credible measures to tackle the issue.

How much does it apply to Japan?

However, when thinking about the application of the discussion and implementing the proposals to individual countries, some considerations as to the special features of the countries are warranted. In the Japanese context, consideration on the following may be necessary.

Did globalization and technological change proceed in the same way in all advanced countries?

First is on the reasons for the widening inequality that is observed since 1980s.

While the importance of the impact of globalization and technological change is emphasized, the general understanding is that, since the extent of globalization and technological change faced by the advanced economies are essentially the same, they are not capable of explaining the differences in the degree of the widening of inequality among the advance economies, particularly between the United States (and the United Kingdom) and other countries (Dustmann Chapter 12; Freund Chapter 13). The focus of the discussion, therefore, shifts to the differences in other aspects and policies including the institutional arrangements in the labor market between the regions.

In the case of Japan, the extent of globalization and technological change facing the economy may be too different to understand them to be essentially the same as others.

For example, the barriers to trade have long been an issue for Japan, and, even after the successive liberalization that has taken place, protection of agricultural products are still relatively high compared to other countries. It is also a fact that the ratio of the stock of inward foreign direct investment to GDP is the lowest in the OECD countries. It implies that, leaving aside whether it is because of institutional barriers against foreign investors or not, domestic firms are relatively sheltered from foreign competitive pressure.

Similarly, technological change may not be so significant in Japan compared to other advanced economies. The decline in the share of influential Japanese academic papers and in the number of Japanese patents suggest that the power of creating new technology may be receding. The low productivity in the private sector, particularly in the non-tradables sector, may also indicate that the application of new technology is slow as well.

These considerations lead us to think that relatively limited degree of the widening of inequality is due, not only to the difference in the institutional arrangements, but also to the different degree of the exposure to foreign competitive pressure and technological change. Discussion along this line has been made in my column in the past. Please see “Widening of Inequality in Japan: Its Implications” and “Equity, Growth, and the Size of the Government : Trilemma facing Japan”

In what way is the labor market subject to imperfect competition?

Second is on the role of institutional arrangement in the labor market.

There seems to be an agreement in the positive role that could be played by the institutional arrangements, minimum wages and labor unions in particular (Freeman Chapter 21; Ellwood Chapter 23). In a competitive labor market, they may lead to a rise in wages but also a fall in employment. However, when the labor market is facing a monopsony or imperfect information, positively sloping labor supply curve faced by the firm(s) would justify the role of these institutional arrangements.

In judging whether the labor market is subject to monopsony or imperfect information needs to take into account the differences in the employment systems in the countries. In the case of Japan, the employment system consists of lifetime employment system, seniority-based wage system, and in-house training system.

Under such a system, there is a stiff competition for new graduates, especially when the number of new graduates is falling (due to the decline in fertility rate since the mid-1970s). However, they are competing in terms of the whole profile of wages and benefits throughout their career until retirement, not by the wage at the time of employment. In such a situation, there may be imperfect information facing the new graduates in choosing which firm to join. Also, once a worker joins a firm, then the worker clearly faces a monopsony because of the difficulty in moving across different employers in a lifetime employment system. Therefore, the labor market in Japan may not be competitive, but has distinct characters so that implications on inequality may not be the same as in other countries.

In addition, the function of labor unions may not be the same as those in other countries. That is because, labor unions in Japan are firm-based so that membership consists of workers in the same firm irrespective of the kind of the jobs that the workers do. Something similar to collective bargaining takes place every spring as a “spring wage round”, with labor unions negotiating with the employers under a common objective. However, no binding commitment is made between the central organizations of employers and the workers so that the impact of the round is not clear in terms of its implications on inequality.

How flexible is the employment system?

Third is on the flexibility of the labor market in absorbing negative shocks.

An example is the impact of the “China Shock” that started in the 1990s. The observation made in the discussion is that, compared to the United States, Germany overcame the negative impact relatively well. One of the reasons for the success in the case of Germany is suggested to be in their apprenticeship training system which made it possible for the employers to reskill and upskill their employees (Dustmann Chapter 12). It is considered to have combined “occupation-specific general skills” with “school-based abstract and academic skills” which made it possible for the workers to move to a different kind of jobs and maintain employment.

In the case of Japan, there is a doubt as to the extent to which employers would be willing to retrain their employees who may be moving to another employer. That is because the firms have tended to depend on non-regular workers (part-time workers and fixed-term workers who are not subject to lifetime employment) when they faced the need to increase employment so that the firms would find it easier to adjust employment by choosing not to renew their contract at times of business difficulty. Firms only provides limited training to these workers because of the difficulty in recouping the cost spent on these workers who have high mobility. For similar reasons, the firms are willing to train their regular workers to accumulate firm-specific skills but not general skills which may make it easier for the workers to switch employment.

What has been pointed above are the consideration that may be needed if we are to apply the analysis and implement the proposals made in the book which are based on the experience of the United States and Germany.

How can the direction of technological change be influenced?

In closing, an area where Japan may have an advantage should be pointed out. It is about influencing the direction of technological change.

According to Acemoglu (Chapter 17), technological change may certainly replace the tasks that had previously being done by labor (replacement effect). However, it may also increase demand for labor because of the increase in investment in the new technology (productivity effect). It may further create new tasks as a result of the new technology (reinstatement effect).

The important point that has been suggested is that the extent of increase in new tasks that would offset the loss in old tasks depends on the direction of technological change. If the government thinks that the impact of the technological change on inequality needs to be minimized, it should influence the direction of technological change toward that end.

This is in line with what has been suggested by Atkinson (2015) that also discussed ways to address inequality. For my discussion on the Atkinson’s approach in Japanese, please see https://www.jcer.or.jp/j-column/column-saito/2021091.html

The direction of technological change may be considered difficult to influence. However, it is not impossible as the Japanese experience shows. In fact, when the Japanese system was found to be a successful example of a national innovation system in the 1970s by Freeman (1987), forecasting the future opportunities and directing innovation to make the most of those opportunities was one of the important features of the Japanese system. In this regard, we may be able to learn from our own experience in influencing the direction of technological changes and, thereby, dealing with the issue of inequality.

References:
Atkinson, Anthony B. 2015. Inequality: What Can Be Done? Harvard University Press.
Blanchard, Olivier, and Dani Rodrik (2021). Combating Inequality: Rethinking Government’s Role. The MIT Press.
Freeman, Christopher. 1987. Technology Policy and Economic Performance: Lessons from Japan. Pinter Pub Ltd.