SustainablePathtoInclusiveGrowthinJapan:HowtoTackleIncomeInequality? Japan PurvaKheraandYunGao SIP/2024/026 IMFSelectedIssuesPapersarepreparedbyIMFstaffasbackgrounddocumentationforperiodicconsultationswithmembercountries.ItisbasedontheinformationavailableatthetimeitwascompletedonApril152024.ThispaperisalsopublishedseparatelyasIMFCountryReportNo24/119. 2024 JUN ©2024InternationalMonetaryFundSIP/2024/026 IMFSelectedIssuesPaper AsiaandPacificDepartment SustainablePathtoInclusiveGrowthinJapan:HowtoTackleIncomeInequality? PreparedbyPurvaKheraandYunGao AuthorizedfordistributionbyRanilSalgadoJune2024 IMFSelectedIssuesPapersarepreparedbyIMFstaffasbackgrounddocumentationforperiodicconsultationswithmembercountries.ItisbasedontheinformationavailableatthetimeitwascompletedonApril15,2024.ThispaperisalsopublishedseparatelyasIMFCountryReportNo24/119. ABSTRACT:MarketincomeinequalityinJapanhasbeenonasteadyrisesincethe1980s,andisnowclosetotheOECDaverage.Grossanddisposableincomeinequality,ontheotherhand,haverisenmuchlessbutremainhigherrelativetoseveralcomparatorcountries.Thispaperemploysinequalityindexdecompositionsbyincomesourceusinghouseholdpanelsurveydatafrom2010-19toidentifythefactorsdrivingincomeinequalityinJapan.Resultsindicatethatwhileincreaseintheemploymentoffemalesandtheelderlyinthelastdecadehashelpedlowerincomeinequality,thishasbeenoffsetbythembeingmostlyemployedinlow-paidpart-timenonregularjobs.Rapidagingofthepopulationhasalsoexacerbatedincomeinequalityovertime.Moreover,whilefiscalredistributiveeffectsofsocialtransfersarefoundtobeasomewhatequalizingforce,itsimpactoninequalityisrelativelyweaker. RECOMMENDEDCITATION:Khera,P.andY.Gao.2024.“SustainablePathtoInclusiveGrowthinJapan:HowtoTackleIncomeInequality?”IMFSelectedIssuesPaper(SIP/2024/026).Washington,D.C.:InternationalMonetaryFund. JELClassificationNumbers: E26;J21;J31 Keywords: Inequality;labormarketduality;wagegap;fiscaltransfers Author’sE-MailAddress: PKhera@imf.org;ygao@hkma.gov.hk SELECTEDISSUESPAPERS SustainablePathtoInclusiveGowthinJapan:HowtoTackleIncomeInequality? Japan PreparedbyPurvaKheraandYunGao1 1Theauthor(s)wouldliketothankYanCarrière-SwallowandtheJapaneseauthoritiesforprovidinghelpfulcomments.YanGaoisamanagerattheHongKongMonetaryAuthority(HKMA), April15,2024 JAPAN SELECTEDISSUES PreparedByPurvaKhera(APD)andYunGao(OAP) ApprovedBy AsiaandPacificDepartment CONTENTS SUSTAINABLEPATHTOINCLUSIVEGROWTHINJAPAN:HOWTOTACKLEINCOMEINEQUALITY?2 A.Introduction2 B.MacroeconomicTrendsinIncomeInequality2 C.EmpiricalAnalysis:DataandMethodology3 D.Results5 E.PolicyRecommendations11 BOXES 1.Household-SurveyDatabase13 2.MethodologyforFactorDecompositionoftheGiniIndex14 FIGURES 1.GrossandDisposableIncomeInequalityHigherthanComparatorCountries3 2.GiniCoefficientinJHPSSurveyDatavs.Macro-BasedIndicators5 3.CompositionofHouseholds’GrossIncome6 4.GiniDecompositionbyIncomeSource6 5.SourceofChangesinIncomeInequality,2010-197 6.ImpactofDemographicsandSocialTransfers9 7.LaborMarketDualismExacerbatesIncomeInequalityAcrossGenderandAge11References16 SUSTAINABLEPATHTOINCLUSIVEGROWTHINJAPAN:HOWTOTACKLEINCOMEINEQUALITY?1 A.Introduction 1.Incomeinequalitymattersforgrowthandsustainability.Increasingconcentrationofincomesisfoundtoreduceaggregatedemandandunderminegrowth,becausethewealthyspendalowerfractionoftheirincomesthanmiddle-andlower-incomegroups(CarvalhoandRezai,2016).Higherinequalitymayalsoleadtopolicychoicesthathurtgrowth.Forinstance,itmayincreasedemandsforhikesinpublicexpendituretocounterinequality,resultingintaxincreasesdownthepipelinethatmayhavenegativeimplicationsforgrowth(Dabla-Norrisandothers,2015). 2.InthispaperweseektounderstandthekeysourcesofincomeinequalityinJapanandidentifythepoliciesthatcouldhelpmaketheJapanesesocietymoreequal.Thisisarelevantexerciseas:(i)IncomeinequalityinJapanhasbeenonariseandishighacrosscomparatorcountries.(ii)ReducinginequalityisakeyfocusofPMKishida’sNewCapitalismagenda.(iii)WhilemostofthecurrentliteratureprovidestheoreticalargumentsforwhatmightbedrivingtheincomeinequalityinJapanusingmacro-leveldata(ColacelliandAnh,2018;Aoyaguandothers,2015),ourpaperprovidesacomprehensiveanalysisbydiggingdeeperintomicrohousehold-levelsurveydatatobetteridentifytheunderlyingfactorsthatdriveinequality,includinghowthesedriversvaryacrossdifferenthouseholdcharacteristics. B.MacroeconomicTrendsinIncomeInequality 3.MarketincomeinequalityinJapanhasbeenonasteadyrisesincethe1980s.TheGinicoefficientformarketincome(incomebeforetaxesandtransfers)hasbeenonasteadyrisesincethe1980s–increasingbycloseto60percent between1980-2019–andisnowclosetotheOECDaverage.Thisriseispartiallyattributabletothedemographictransition,i.e.,theriseintheshareoftheelderlyinthepopulation(Aoyagiandothers,2015). 4.Grossanddisposableincomeinequalityhaverisenmuchless,reflectingtheactiveroleoffiscalredistributionthroughtaxesandtransfers.TheGinicoefficientofgrossincome(incomeaftertransfers)worsenedbycloseto19 percentbetween1980-2010,buthassomewhatstabilizedinthelastdecadebeforethepandemic 1PreparedbyPurvaKh