Why did Inequality Decline During the Abenomics Period?

Inequality seems to have declined during the Abenomics period

There was a concern that inequality may widen under Abenomics. That is because Abenomics was seen as pursuing market-oriented policies that resembled the policies of the United States. However, inequality seems to have declined during the period.

There are a number of sources of information that could be used for analyzing inequality. In the analysis below, the Survey on the Redistribution of Income by the Ministry of Health, Labour and Welfare for 2011 and 2017 (latest) will be used. It includes the Gini coefficients for market income, disposable income (market income adjusted for social security contribution and benefits, and tax), and redistributed income (disposable income adjusted for benefit in kind), as well as the breakdown of the impact of redistribution.

Figure 1 shows the Gini coefficients for market income, disposable income, and redistributed income.

It shows that Gini coefficient for market income rose between 2011 and 2014, which was only partly offset between 2014 and 2017. However, Gini coefficient for disposable and redistributed incomes kept on falling between 2011 and 2017 due to the redistribution of income by social security and tax.

Inequality has widened for certain age groups

What would be the situation be like if we look at the changes in equality for different age groups during the period? Figure 2 shows the changes in Gini coefficients for market income, disposable income, and redistributed income for different age groups between 2011 and 2017.

It shows that inequality in market income widened for age groups 10-14, 15-19, 40-44, 45-49, 55-59, and 75 or over. In addition, for the age groups 10-14, 15-19, 40-44, and 55-59, redistribution was not enough to reverse the increase in inequality so that inequality widened in terms of disposable and redistributed incomes. Furthermore, for the age groups 25-29 and 55-59, redistribution effects of social security and tax seem have weakened so that inequality redistributed income had to widen.

Redistribution has weakened for many of these age groups

Figure 3 shows the changes in the redistribution effect of social security and tax. It is the changes in redistribution effect (reduction of Gini coefficients for market income) of social security and tax between 2011 and 2017. If it is positive, it means that the effect of redistribution has weakened so that it has made less contribution to narrowing inequality.

It shows that for the age groups 10-14, 15-19, 70-74, both the redistribution by social security and tax had weakened. In addition, for age groups 5-9, 25-29, 30-34, 55-59, and 65-69, redistribution by social security weakened so that inequality of redistributed income widened (in spite of the stronger redistribution by tax). For the age group 40-44, weaker redistribution by tax was the main reason for the widening of inequality (in spite of the stronger redistribution by social security).

Situation of the single parent households

In the recent years, there have been a couple of concerns that were considered to have led to a widening of inequality. One is the increase in single parent households. The other is the increase in non-regular workers. How have these factors evolved under the overall decline in inequality during the period?

First is the single parent households. The situation with single parent households is shown in Figure 4.

It shows that Gini coefficients for both market income and redistribution income has declined between 2011 and 2017. The narrowing of inequality in this category of households is probably because it consists of both households with children in the age of 0-9 and those with children in the age of 10-19: We saw in Figure 2 that the children in the age of 10-19 faced a widening of inequality, but it narrowed for children in the age of 0-9.

Figure 4 also shows that, during the period, both market and redistributed incomes have increased. However, redistribution effect seems to have become smaller during the period: while benefits were more than payments in 2011 (i.e. redistributed income is more than market income), payments exceeded benefits in 2017 (i.e. redistributed income is less than market income). It is consistent with Figure 3 which showed that the age group 10-14 and 15-19 saw weaker redistribution effects of social security and tax.

Situation of the non-regular workers

Second is the increase in the number of non-regular workers. Since their wages are relatively lower than those of the regular workers, the increase in the number of non-regular workers could lead to widening of inequality.

However, we need to bear in mind that, during the period, shortage of workers became increasingly evident. As a result, increase in wages were observed, but the increase in wages were seen more in non-regular workers than in regular workers. That is because there was a greater demand for non-regular workers, and also because the regular workers’ wage profile was flattening during the period. For a discussion on these points, please see 「Wages rise where it should: Market mechanism at work」(2017/07/11). If that is the case, increase in non-regular workers may not widen inequality between regular and non-regular workers.

The data on wages and number of workers of regular and non-regular workers can be found in the Basic Survey on Wage Structure by the Ministry of Health, Labour and Welfare. According to the Basic Survey, the rate of increase of wages and number of workers between 2011 and 2017, and the weighted wage gaps in 2011 and 2017 are as shown in Figure 5.

As the Figure shows, non-regular workers increased more than the regular workers. It also shows that the rate of increase of wages between 2011 and 2017 for non-regular workers exceeded those for regular workers so that the weighted wage gap between regular and non-regular workers declined during the period. This should be the reason why inequality in market income for the prime-age groups (between the age 20 and 64) has generally declined between 2011 and 2017, with the exception of the age group 40-44.

As for the age group 40-44, the rise in inequality may partly be due to a generational effect. The workers who belong to this group include those who entered the labor market in late 1990s and early 2000s. Because of the negative consequences of the burst of the bubble in early 1990s, companies squeezed the recruitment of new graduates during the period. Many graduates had to take up less satisfactory jobs including non-regular ones. In addition, because of the lifetime employment system, there has been less mobility across companies: As a result, it has been difficult for many of those workers to recover the lost opportunities later in the period. The wider inequality faced by this generation may be showing up as an increase in Gini coefficient of this age group.

Need to review the redistribution system

As we have seen above, the data shows that inequality declined during the Abenomics period.

However, if we look at the situation for different age groups, we find that for certain age groups inequality widened, suggesting that redistribution by social security and tax have been insufficient for those age groups. That was the case for the young age groups 10-14 and 15-19. However, whether they come from the difficulty faced by single parent households or not could not be confirmed at this time.

As for the increase in non-regular workers, it seems that it had not led to a wider inequality. It is because the economic expansion during the period and the resulting tighter situation of the labor market, especially for the non-regular workers, have contributed to raising the wages of the non-regular workers relative to regular workers. Since economic expansion can easily be reversed (as we are seeing after late 2018), it is should be seen as a transitory phenomenon: It does not mean that labor market duality can no longer lead to wider inequality.

There are other age groups that has remained unexplained. Widening of the inequality in redistributed income was seen in the age groups 25-29 and 55-59 as well. Since they are brought about by the weakening of the redistribution effect, it suggests the need to review the social security and tax systems in order to improve the situation for these age groups.