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Income Inequality and Poverty in OECD Countries: How Does Japan Compare?

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Income Inequality and Poverty in OECD Countries: How Does Japan Compare? The Japanese Journal of Social Security Policy, Vol.5, No.1 (June 2006) Income Inequality and Poverty in OECD Countries: How Does Japan Compare? Marco Mira d'Ercole 1 1. Introduction treatment of negative income) they remain affected Cross-country comparisons of performance are by other aspects that escape standardisations: for essential tools for analysis of social and economic example, household surveys differ in terms of their policies: they provide a point of reference for frequency, whether data collection is undertaken judging the performance of any given country and at a special time or spread out over the year, and an opportunity to assess the effects of national whether only one or all household members are policies and conditions on the magnitudes of cross- interviewed. Most of these issues are not country differences. To this end, the OECD has long sufficiently understood in an international context aimed to collect better comparative data covering to admit uncontroversial solutions. Because of these various aspects of social development in its limits, OECD countries can be ranked in their levels periodical compendium of social indicators of income inequality and poverty only in the (OECD, 2005a). One specific area of such efforts presence of reasonably substantial differences in relates to information on the distribution of the levels of the various indicators. On the other household income and poverty, an area where hand, the OECD dataset aim to ensure temporal OECD involvement dates back to the 1970s.2 consistency of its data within countries by using Not everyone may share the attention given dataset based on the same statistical source or by to income inequality as a goal for policy. On one chain linking different indicators when different view, income inequalities are simply the sources are used.4 counterpart of better incentives to work and save, i.e. a requirement for better economic Is income inequality in Japan higher than in other performance.3 Others, conversely, may consider OECD countries? such inequalities as conflicting with shared norms The response to the question of whether income of fairness, social justice and equality of inequality in Japan is high or low partly depends opportunities. Whatever the position taken in this on which countries are taken as terms of debate, however, no one is completely indifferent comparisons and on the method used to compare to the distributive outcomes of a market economy. distributions between countries. With respect to the Even when greater inequalities in the distribution first issue, two countries (Turkey and Mexico) stand of household income are required to improve out from other OECD countries for their relatively economic performance, they could exceed their low income per capita and much larger inequality "optimal" level and have undesired side-effects, in the distribution of household income (inequality such as increasing support for policies that harm which is, however, rapidly converging to the OECD economic performance. For these reasons, income average).5 For this reason, they are excluded from inequality and poverty are essential dimensions for most of the comparisons undertaken in this article. comparing social performance across countries and With respect to the second issue, comparisons of for understanding how a better combination of distributions of household income can be based on policies might allow achieving better results. either the distribution of household income (standardised Lorenz curve6) or on summary 2. Some stylised facts measures of inequality drawn from them, which Statistical information about the distribution of however rely on value judgments (i.e. they give household income is subject to several types of more importance to some parts of the distribution uncertainties, which affect cross-country relative to others). Based on the first approach, a comparisons of both the levels of different comparison of the distribution for Japan with that indicators and their evolution over time. While the of other OECD countries shows that household data used by the OECD for its comparative analysis income is unambiguously more unequally overcome some of the most obvious elements that distributed in Japan (i.e. Japan's Lorenz curve lies limi t cros s-country and inter-temporal inside that of the other countries at all points of the comparability (e.g. use of a common adjustment distribution) than in 13 OECD countries (Australia, for differences in household size - the square root Austria, the Czech Republic, Denmark, Finland, elasticity -, exclusion of non-cash components, France, Germany, Ireland, Luxembourg, 1 The Japanese Journal of Social Security Policy, Vol.5, No.1 (June 2006) Netherlands, Sweden and Switzerland), that it is decile (25% higher than in the OECD average). more equally distributed than in the United States Similarly, the share of (equivalised) household (as well as Mexico, Turkey) and that results are disposable income accruing to the top quintile is ambiguous with respect to ten remaining countries.7 almost 6 times that of the bottom quintile, around These country-by-country comparisons show 20% more than in the OECD average. Both the whether income inequality in Japan is higher or Gini coefficient (an inequality measure that is lower than in other countries but do not inform especially sensitive to the middle of the about the size of these differences. A second way distribution)8 and the mean log deviation (an of comparing countries is through indexes that aim inequality measure that is more sensitive to the to summarise the entire distribution. Figure 1 bottom tail of the distribution)9 are above the compares several summary indices of household OECD average, particularly in the second case. income inequality for Japan to an OECD average The only summary indicator of income inequality that excludes Mexico and Turkey. Most inequality that is below the OECD average is the squared measures are higher in Japan than in the OECD coefficient of variation10; however, as this measure average. The inter-decile ratio (i.e. the ratio is very sensitive to what happens at the top end of between the upper limit of the 9th decile of the the distribution, this result is likely to reflect the distribution and that of the 1st one) is about 30% "truncation" of the top 1% of Japanese respondents higher in Japan than in the OECD average, with from the data used by the OECD - a truncation most of this difference reflecting the large that applies only to the Japanese data available to difference between the median and the bottom the OECD and not to those from other countries. Figure1. Summary measures of inequality in the distribution of household disposable income in Japan relative to the OECD average 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 D9/D1 D5/D1 D9/D5 S80/S20 GINI MLD SCV Note. Values above 1 indicate that the summary measure of inequality in the distribution of household disposable income in Japan is above the average values across 23 OECD countries (excluding Turkey and Mexico). Data refer to the year 2000 in all countries except 1999 for Australia, Austria and Greece; 2001 for Germany, Luxembourg, New Zealand and Switzerland; and 2002 for the Czech Republic. Source. OECD questionnaire on income distribution and poverty. For details see Förster, M. and M. Mira d'Ercole (2005), "Income Distribution and Poverty in OECD Countries in the Second Half of the 1990s", OECD Social, Employment and Migration Working Papers No. 22, OECD, Paris. Is high income inequality a long-term trait of since 1985 (the Lorenz curve dominance condition Japanese society? is satisfied, indicating that inequality clearly The answer to this question seems to be "no". increased). While in 1985 most inequality In the mid-1970s, when Malcom Sawyer provided indicators for Japan were still below the OECD his comparative analysis of income inequality for average (slightly above in the case of the D5/D1 the OECD, Japan figured among the OECD and of the mean log deviation) this changed in the countries with the lowest level of inequality among following years. The increase in income inequality the 12 countries considered - not much higher than was continuous over time, with its pace quickening Sweden and Norway - although this result may have in the second half of the 1990s as the recession reflected the quality of the underlying data.11 The deepened.12 data for Japan used by the OECD in its recent This upward trend in inequality does not analysis show unambiguous increases in inequality reflect idiosyncratic features of the data used by 2 The Japanese Journal of Social Security Policy, Vol.5, No.1 (June 2006) the OECD. Indeed, different Japanese surveys point concepts and value judgements. Poverty measures to similar increases, although differing in the pace can be classified along two dimensions. A first of the rise and, more significantly, in the absolute distinction is that between monetary and non- size of such inequalities. The Income Redistribution monetary measures: most comparative studies refer Survey, which is conducted by the Ministry of to the former, and rely on income as the yardstick Health and Welfare every three years, shows an for comparing "material living standards" across increase in the Gini coefficient for net household countries. A second distinction is based on the income of 11% between the mid-1980s and 2000, threshold that is used to separate the "poor" from only slightly less than the 13% increase reported the "non poor" population, and which can be either in the OECD database on income distribution "relative" or "absolute". The data collected by the (which relies on the Comprehensive Survey). Data OECD take the median equivalised household from the Family Expenditure Survey, which is run disposable income as a proxy of the typical living monthly by the Japanese Statistical Office but standards prevailing in each country, and measure whose sample is not representative of the entire income poverty through different cut-off points population, show a rise in the Gini coefficient for relative to that standard.
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