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YANG Jun-Ho

Implications of Japan's Growing Income Polarization to Korea

YANG Jun-Ho

July 5, 2006

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Japan has been steadily developing an income polarization from the late 1990s. Consider the Gini coefficient, a measure for calculating income disparity. Japan's Gini coefficient rose from 0.433 in 1990 to 0.498 in 2002; the higher the number, the greater is the income disparity. A zero Gini coefficient represents a perfect equality, but a reading above 0.4 means high inequality.

This trend is particularly worrying to Japan as it has long taken pride in its even wealth distribution. Japan has been lauded by the world for its ability to spread the fruits of affluence evenly to its population. She has regarded herself as "one big happy middle-class family." That euphoria is vanishing as a growing number of Japanese raise concerns that Japan's vaunted social equality may be disappearing.

A growing income disparity between the rich and poor is acting as a major cause of poverty. Poverty rate in Japan shot up to 15.3% in 2005, up from 8% in 1995.

What causes the widening income disparity in Japan ?

Firstly, big changes that occurred to Japan's workforce over the past decade of economic recession have contributed to growing income polarization. The government has promoted policy for a more flexible labor market, while the corporate sector has increasingly replaced full-time employees with part-time hires to cut cost. Wage disparity between temporary and full-time workers has increased. The unemployment rate has also risen steadily. Japan has produced a large proportion of unemployed young people. The youth unemployment rate started surging since 1998 when companies began choosing new-comers over the experienced people. The youth jobless rate stood at 14% in 2005.

Secondly, changes in the fiscal and taxation policy affected the low-income bracket adversely. Since the late 1990s, the government has sought to spur the economy by cutting back on social security spending and raising consumption tax rates. All of these have been bad news for the working poor. To encourage spending, the government reduced inheritance tax and consumption tax for high-income households; this obviously backfired, further worsening the income gap.

Yet another reason for growing income disparity is the increasing number of elderly people. As the population ages rapidly, income gap has widened between the rich and poor even between the old age groups. In addition, older employees in their 50s and 60s have been the target of lay-off since the 1990s because of higher wages. The rising income disparity between the elderly people prompted widening of the nation's overall income gaps.

From this perspective, the fundamental solution to resolving the problem of income disparity lies in pursuing a well-balanced policy. Korea should adopt a "growth-oriented" reform, while at the same time promote various social policies that aim at integrating the society as a whole. What is crucial here is to harmoniously integrate this growth policy with other social policies.

The first and foremost task for growth policy is to create more jobs. For this purpose, the Korean government should pursue policies that help companies focus on raising investment or start a new business. It should try making labor market more flexible and efficient for the sake of economic efficiency and transparency of corporate management.

In addition, the government spending should be managed in a more productive way to provide proper support to stop further income reduction of the poor. For example, the Korean government may consider adopting Active Labor Market Policy (ALMP) of Sweden, which allows smooth labor movement and more active re-employment. Sweden's ALMP carries out diverse programs to train workers freed by the industries with low productivity so that they can be smoothly absorbed into the sectors with higher productivity.

Korea should understand that such a steady flow of labor transition in Sweden is made possible by combining labor market flexibility with ALMP based on the market economy. Korea can learn a lesson or two from Sweden's example by making good use of the government's resources in order to relieve the social and income polarization.

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