Income Distribution and Poverty in Japan
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Discussion Paper No. 80 INCOME DISTRIBUTION AND POVERTY IN JAPAN by Fumihira NISHIZAKI, Yutaka YAMADA and Eisuke ANDO Economic Planning Agency October 1997 Economic Research Institute Economic Planning Agency Tokyo, Japan The views expressed here are the author’s and do not represent those of Economic Planning Agency INCOME DISTRIBUTION AND POVERTY IN JAPAN by Fumihira NISHIZAKI, Yutaka YAMADA and Eisuke ANDO Economic Research Institute, Economic Planning Agency October 1997 Abstract This paper presents some preliminary results of measuring income distribution in Japan, based on the micro data sets of the National Survey of Family Income and Expenditure. The focus is mainly on the changes from 1984 to 1994. The analytical framework of this paper closely follows that of the OECD literature using the micro data base known as the Luxembourg Income Study. Inequality in equivalent disposable income increased and the incidence of relative poverty also rose from 1984 to 1994. Earnings were the largest contributor to the increased overall inequality in disposable income. The increased share of earnings in disposable income played an important role, in addition to the effects of the high level of their share. Work-attachment and the development of earnings were undoubtedly important factors determining relative income and poverty. Taxes and transfer systems effectively redistributed income. The weakness of transfers in redistribution of income is conspicuous in Japan. Transfers were not well “targeted” to the poor; they rather contributed positively to the overall inequality. Taxes, including social security contributions, are quite redistributive. Although the positive contribution of transfers to the overall inequality somewhat increased, taxes became more redistributive, resulting in a partial offsetting of the widening of market incomes. The elderly benefited the most from the tax-transfer system across demographic groups. This tendency was strengthened over the recent decade as the public pension system matured. Households with a young head experienced a significant decline in relative income, reflecting the poor development of their earnings. However, this was probably due to an increase in the labor participation rate for young females. i Table of Contents 1. Introduction 2. Distribution across all population 3. Factors affecting income distribution: an aggregate analysis 4. Changes in well-being for sub-group of the population 5. Poverty and low income Appendix: The National Survey of Family Income and Expenditure Table 1. Trends in inequality indices Table 2. Equivalent disposable income: gains and losses by quintile Table 3. Sensitivity of the results (Gini coefficients) Table 4. Gini coefficients from Income Redistribution Survey Table 5. Gini coefficients from household expenditure surveys Table 6. Allocation of income components across decile groups Table 7. Aggregate inequality indicators before and after taxes and transfers Table 8. Contribution of income components to total inequality: Shorrocks decomposition Table 9. Decomposition of changes in total inequality: SCV Table 10a. Relative disposable income, by degree of work attachment of households Table 10b. Contribution of income components to changes in relative disposable income, by work attachment of households Table 11a. Relative disposable income, by age of households head Table 11b. Contribution of income components to the changes in relative disposable income, by age of households head Table 12a. Relative disposable income, by family type Table 12b. Contribution of income components to changes in relative disposable income, by family type Table 13. Contribution of earnings and employment to changes in earnings: young and older-worker households Table 14. Contribution of earnings and employment to changes in earnings: households with children Table 15. Relative disposable income of non-working households Table 16. Relative disposable income of children, the elderly and single earners with children Table 17. Population structure by work attachment and household type Table 18. Changes in inequality: between-group and within-group effects Table 19. Decomposition of the changes in MLD by work attachment Table 20. Trends in poverty using a relative threshold Table 21. Trends in poverty using a constant threshold Table 22. Poverty rates and poverty structure after taxes and transfers iii INCOME DISTRIBUTION AND POVERTY IN JAPAN1 This paper presents some preliminary results of measuring income distribution in Japan, focusing mainly on the changes over the recent decade. The analytical framework is provided by OECD Secretariat (1997), which closely follows the method used in Atkinson et al. (1995). This allows us to roughly compare our results with those for countries covered by the Luxembourg Income Study (LIS), although deriving a decisive conclusion from such a comparison is dangerous given the differences in definitions across countries. 1. Introduction 1.1 Data and methodology The analyses in this paper are based on the micro data sets of the National Survey of Family Income and Expenditure (NSFIE), for the years of 1974, 1984, 1989 and 1994. However, there are some problems in using the data for 1974, including discontinuity of coverage (see Appendix). Given the purpose of this project toward understanding long-term trends in income distribution, we therefore focus mainly on the comparison between 1984 and 1994, while medium-term movements are occasionally referred. These two years are suited for comparison, since their cyclical positions were similar in the sense that both belonged to the early periods after recovering from long-lasting recessions (1980-1983 and 1991-1993). Since the NSFIE lacks annual data on taxes, we have calculated those data by a micro-simulation method as is often done in other countries. This inevitably results in errors because the simulation formulae were to some extent simplified given the limitation of time. The definitions and methodology then applied for aggregation of data are basically in line with those provided by the terms of reference provided by the OECD Secretariat. The unit of analysis is the household. Since households differ in size, equivalence scales are necessary to adjust income to account for differences in need. The specific equivalence measure used in this paper is mainly the square root of the family size (equivalence elasticity = 0.5). The results adjusted by the family size itself (equivalence elasticity = 1) are sometimes reported as a reference. Household income is re-weighted by the number of people in each unit (“person weight”). 1.2 Main findings Several important findings are worth listing at the outset. 1 This paper was originally presented at the Working Party No.1 of the Economic Policy Committee, OECD, October 9-10, 1997, as a room document. Preparation of the original tables from which the tables presented here were derived was conducted by the Working Group on Income Distribution, whose members were Fumio Funaoka (Shinshu University), Masato Okamoto (Management and Coordination Agency), Mariko Murata (Statistical Information Institute for Consulting and Analysis) and Fumihira Nishizaki (Economic Planning Agency). -1- Inequality in equivalent disposable income increased and the incidence of relative poverty also rose from 1984 to 1994. Earnings were the largest contributor to the increased overall inequality in disposable income. The increased share of earnings in disposable income played an important role, in addition to the effects of the high level of their share. Work-attachment and the development of earnings were undoubtedly important factors determining relative income and poverty. Taxes and transfer systems effectively redistributed income. The weakness of transfers in redistribution of income is conspicuous in Japan. Transfers were not well “targeted” to the poor; they rather contributed positively to the overall inequality. Taxes, including social security contributions, are quite redistributive. Although the positive contribution of transfers to the overall inequality somewhat increased, taxes became more redistributive, resulting in a partial offsetting of the widening of market incomes. The elderly benefited the most from the tax-transfer system across demographic groups. This tendency was strengthened over the recent decade as the public pension system matured. Households with a young head experienced a significant decline in relative income, reflecting the poor development of their earnings. However, this was probably due to an increase in the labor participation rate for young females. 2. Distribution across all population 2.1 Aggregate trends The distribution of equivalent disposable income widened from 1984 to 1994 (Table 1). The Lorenz curve of 1994 was uniformly below that of 1984 and all aggregate inequality indicators (the Gini coefficient, the squared coefficient of variation (SCV), the mean log deviation (MLD) and the Atkinson index with ε=0.5) showed an increase from 1984 to 1994. Changes in distribution largely occurred at the extremes, with progressively smaller movements around the mean (Table 2). A “hollowing out” of the middle was not conspicuous. Changes in aggregate indicators from 1974 and from 1989 were also shown in Table 1. Note that figures for 1974 are not directly comparable with those for other years. Comparison of the distributions of disposable income between 1989 and 1994 is not straightforward since the SCV registered a decrease while other indicators