Changes in Income Concentration in Japan Compared to the U.S.

Why hasn't wage income inequality increased in Japan since 1970 as it has in the U.S.? This paper by Moriguchi and Saez says that "corporate governance and union structure are important determinants of wage income inequality" differences between the two countries:

The Evolution of Income Concentration in Japan, 1886-2002: Evidence from Income Tax Statistics, by Chiaki Moriguchi, Emmanuel Saez, NBER WP 12558, October 2006 [alternate link]: Abstract This paper studies the evolution of income concentration in Japan from 1886 to 2002 by constructing long-run series of top income shares and top wage income shares, using income tax statistics. We find that (1) income concentration was extremely high throughout the pre-WWII period during which the nation underwent rapid industrialization; (2) a drastic de-concentration of income at the top took place in 1938-1945; (3) income concentration has remained low throughout the post-WWII period despite the high economic growth; and (4) top income composition in Japan has shifted dramatically from capital income to employment income over the course of the 20th century. ... In contrast to the sharp increase in wage income inequality observed in the United States since 1970, the top wage income shares in Japan have remained remarkably stable over the recent decades. We show that the change in technology or tax policies alone cannot account for the comparative experience of Japan and the United States. Instead we suggest that institutional factors such as corporate governance and union structure are important determinants of wage income inequality.

Comments

[evagrius]

Institutional factors such as corporate governance and union structure may well have an important role in lessening income inequality in Japan, but really, a simpler explanation is easily possible;

The ancient nobility, remnants of the old Shogunate, ( who were the top 1% of income earners before WWII), were simply seen by the majority of Japanese as being the ones primarily responsible for the collapse of Japan. Japan has a very strong communitarian ethos and those given leadership position are held responsible for results.
I think this is quite possible since it became much easier after WWII for lower-class Japanese to become wealthier. The class barriers had been broken to a great degree.

As for the United States, I've yet to see any notion that leaders are to be responsible for results.

[calmo]

A couple of quick notes: not withstanding eva's thoughtful and interesting note about Japanese history about which I know nothing, given France's pattern follows Japan's pretty much, (Fig 6), shouldn't we be looking at how the US's income distribution changed?
Secondly, given the vast computing power at our finger tips and the changes that have occurred under the current administration, couldn't we get a little more up todate information than 2002 from this Oct 2006 paper?
And now to dig into the paper to determine what this Instead we suggest that institutional factors such as corporate governance and union structure are important determinants of wage income inequality.could possibly mean. I bet I'm not going to find it in the executive's abstract, you?

[Emmanuel]

I don't have access to the NBER database, unfortunately. What I'd like to see is whether the relatively higher use of debt relative to equity in financing Japanese corporations also means that dividends are not as concentrated in the hands of wealthy Japanese investors.

As for equality, be thankful that the Yankees will not be winning the World Series for a sixth straight year despite spending, I don't know, the equivalent of several small nations' annual GDPs (sorry Yankees fans). On days like these, I can't complain too much. Kudos to the Detroit Tigers as well.

[Tom Geraghty]

Here's what they say about the institutional factors (pp. 21-22):

Why has the degree of income concentration in Japan remained at the historic low reached in the late 1940s? . . . Most simply, by redistributing assets and reducing wealth (as opposed to income) concentration, [occupation reforms] equalized the distribution of capital income in subsequent years.

First, the fiscal reforms in 1950 made progressive taxation a permanent feature of the Japanese tax system. . . .

Second, the permanent decline in the share of capital income in the top income can be further attributed to measures specific to each capital income component. . . . As a result of both high home ownership rate and more equal land distribution, rental income became a less significant source of income for top income earners in the postwar period. . . . As for interest income, the government expanded tax-exempted saving instruments for small asset holders . . . These measures had likely promoted wealth accumulation among the middle class, equalizing the distribution of interest income. With respect to dividend income, a new corporate governance system characterized by bank-centered debt finance and cross-shareholdings among affiliated companies likely resulted in stable institutional shareholders and low dividend rates . . . As a result, dividends too became less concentrated among top income groups in postwar Japan.

Third, the changes in human resource management and union structure in Japan likely compressed wage distributions within firms. As the so-called “lifetime employment” became a hallmark of human resource management at large firms in the 1960s, most if not all management positions were filled by long-term employees promoted from within . . . Moreover, after violent confrontations in 1945-1955, most large firms in Japan were organized by single enterprise unions that represented both white- and blue-collar employees of the firms. By the 1970s, management regularly consulted with unions over personnel matters including wages and promotions. . . . These changes likely resulted in less wage differentials between white- and blue-collar employees as well as more equitable executive compensation.

[slink/js paine]

to me this paper reads like a swan song

on the order of "yes we were beautiful then..."

why?

cause these institutions
and their consquences
or correlationsin social income structure
are crumbling in japan

inequality is risingrapidly
faster now then in the USA perhaps

the story is all the rage over there
the last few yearsjust gogle inequality in japan
you'l harpoon a whole pod
of whalers tales

like us in the late 80's early 90's

[joan]

When I see that income inequality started to grow in the US in the mid to late 70's and try to match it with what changed, it occured to me, that is when the fed started inflation targeting. Prior to that time full employment was part of its stated goal. Since then we have had relatively high unemployment rates falling to what was normal in the 50's and 60's only for a couple of years in the 90's, and again reciently. Only when unemplyment rates were low did average wages keep up with productivity growth. Does anyone know if this has been look at by economic studies.

[Ken]

I know this was a while ago, but I've just come across it, it's huge big news here in Japan, and everyone has a different opinion.

I think your first commentator was on one of many divergent correct paths, as he said,

The ancient nobility, remnants of the old Shogunate, ( who were the top 1% of income earners before WWII), were simply seen by the majority of Japanese as being the ones primarily responsible for the collapse of Japan.

But I would add not only before, but also after WWII, and also include the political elite. Current Prime Minister is a grandson of a State minister during the war (one arrested as a war criminal no less). Current Foreign Minister is also related to a former prime minister, and to the imperial family by marriage. Former Finance Minister the son of a Prime Minister. Koizumi himself grandson of the former Minister of Posts and Communications. The list goes on forever; the ruling class very much stayed in power and kept its concentration of wealth. Nearly all businesses have the same pay scales, which prevents anyone not in this top 3-5% from entering it.

Of course there's much more to it, and I look forward to actually reading and digesting this paper...

[Donisha Johnson]

this is really interesting. your culture and history is really amazing.i really want to read more so keep it coming.