Wage Determination and Distribution in Japan

Citation

Tanaka, Y. (1998), "Wage Determination and Distribution in Japan", International Journal of Manpower, Vol. 19 No. 8, pp. 621-624. https://doi.org/10.1108/ijm.1998.19.8.621.2

This book addresses various aspects of wage determination and wage differentials in Japan by the empirical method. As is now well known, rising wage inequality during the 1980s was one of the most important economic problems in almost all of the advanced economies and the concern of labour economists has been focused on analysing the reasons and remedies for this phenomenon. Japan alone was an exception to this phenomenon and it has been believed that wage equality in Japan is one of the reasons why the Japanese economy performed well during that period. However, although this argument to Japan is not wrong, the author observes that the degree of inequality in the income distribution of Japan has been increasing recently. This observation was one reason why the author wanted to investigate the changes in wage determination and wage differentials in Japan.

This book is composed of 12 chapters, including the Introduction and Conclusion. The main body of its contents is divided into two parts. The first part includes seven chapters, from Chapter 2 to Chapter 8, and examines the first topic in the title of this book, that is, the problems of wage determination and wage differentials in Japan. The second part, from Chapters 9 to 11, analyses the topics of discrimination, the distribution problem, and the working of the labour market in Japan.

In Chapter 2, seven theories of wage determination are at first briefly explained and evaluated for understanding wage determination in Japan. A brief survey of what is so far known about wage determination in Japan is then given. There are two categories of research, the human‐capital approach and the ad hoc statistical approach, in this issue and there are controversies between these two approaches. Also, several empirical stylized facts are indicated, although these are intensively analysed in the subsequent chapters. In Chapter 3, six variables are adopted to estimate wage earnings per hours and, by using the Analysis of Variance method, a time‐series change in wage differentials by these six variables is examined for a very long period after the Second World War. The results obtained are that the most important factor in the determination of wage differentials was sex and that job tenure was the second most important. Also, education appeared to be of little importance in explaining wage differentials, which is interesting. Chapters 4 and 5 investigate the effects of firm size on wage differentials and the inter‐industry wage differentials. One of the main problems in these chapters is identifying the pure effects of these variables on wage differentials, which has not been examined intensively in Japan before. The next two chapters, 6 and 7, examine more intensively the effects of education and occupation. Although it is shown in Chapter 3 that the effects of education and occupation on wage differentials are weak, this issue is here reconsidered by using “a comprehensive individual survey”. Then, it is indicated that there is a strong causal relationship between social background, education, occupation, hierarchy and earnings. Chapter 8 summarizes the analyses of the previous chapters. That is, a model of wage determination is at first developed incorporating some of the stylized facts in Japan discussed in the previous chapters. This model is then estimated by using three key variables, school, firm size and job tenure, in the case of male observations and the following are shown empirically. First, the empirical results were fairly successful for workers who had never changed their employer; and second, the Japanese wage growth path is explained reasonably well by the above three variables.

In Chapter 9, wage differentials by both sex and industry are investigated by using the theory of labour market segmentation, and the discrimination problem implied by these elements is considered in the Japanese labour market. The main results in this chapter are that the empirical work confirms the prevailing discrimination against women, and that wage differentials by industry are explained largely by the concept of labour market segmentation. Chapter 10 considers the distribution problem in Japan. However, the procedure used is not that which is usually used in the study of income distribution. It is conducted by considering workers’ lifetime income streams. In particular, the author’s concern is mainly with the effects of education and of location on the distribution of wages. By investigating the male earnings distribution over time, it is shown that the relative position in the distribution is a much more significant factor than is the level of education in differentiating lifetime earnings. In Chapter 11, labour market flexibility in Japan is considered by examining the Japanese and non‐Japanese studies related to labour adjustment, wages and labour demand, and labour cost. The author stresses that from this examination labour market flexibility in Japan is accompanied by some costs at the sacrifice of females, part‐time workers, etc., although the Japanese labour market is indeed observed as flexible.

There has been a great deal of research conducted relating to wage determination, wage differentials, and income distribution in Japan. However, this book is very useful for those researchers who want to study the Japanese wage structure because it includes the latest data and also because the subjects the author considers in this volume are so comprehensive. The following characteristics and contributions of this book must be also indicated for future research into wage determination and wage differentials in Japan. First, this book shows that education, size of firm, and job tenure are the main variables among the six explaining the determination of wages. Second, although there are two rival hypotheses, that is, the “skill hypothesis” and the “living‐expense hypothesis”, to explain the nenko wage system, this book supports the former hypothesis. Third, this volume contains the first econometric estimation of the pure effect of firm size on wage differentials in Japan. Fourth, attempts to analyse the industry wage differentials are made by dividing industry into two sectors, the competitive and the concentrated sectors. Fifth, illustrated here are the wage differentials by sex representing discrimination against women.

Before concluding this review, the following two subjects only can be discussed because of the limitation of space. First, with regard to wage determination in Japan, there are mainly two different approaches. One is the approach which depends on the theoretical background, such as human‐capital theory, and the other is the “ad hoc statistical approach” in which some factors are evaluated as being the most important factors in wage determination by using multiple‐regression analyses. These two approaches appear as a controversy typically when we consider the nenko wage system, that is, the “skill hypothesis” vs. the “living‐expense hypothesis”. The author concludes that the former hypothesis dominates the latter because the job tenure variable had a somewhat stronger influence on wage differentials than the age variable. Although this finding is an interesting one for understanding which hypothesis is more relevant to Japanese wage determination, we will, however, have to be careful before reaching the final conclusion about this controversy because age is the third most influential variable on wage differentials among the six variables during almost all periods studied, and also age is still considered to be an important variable by Japanese labour economists.

Second, this book shows that sex is the most significant variable in wage determination in Japan, and that wage differentials between males and females are mainly explained by discrimination against women. That is, the author insists that the main reason for wider wage differentials between males and females is the “differential treatment of worker qualifications” between them, and that “equal employment opportunity, equal promotion, equal wage are more important than equal education and training for equalization” (p. 198). This argument by the author is very impressive because the quantitative analysis relating to the differential treatment of workers has been little explored in Japan until now. However, we must also consider the reasons why the differential treatment against women happened, and then we may reach an economic explanation of the wage differentials by sex rather than a sociological and/or cultural one.

Although the readers may not agree with some arguments in this volume, there is no doubt that it does contribute greatly to the research on the wage structure in Japan.