Japan and the United States (US) are at similar levels of economic development, yet their income distributions are considerably different. Whereas Japan has a relatively equal income distribution, the US is marked by a high level of income inequality. What are the sources of income inequality in both countries? Our latest research aims to uncover the sources on income inequality in both countries by exploiting detailed household panel survey. For Japan we use the five latest waves (2009–2013) of Keio Household Panel Survey data, and for the US the Panel Study of Income Dynamics for the years 2009, 2011, and 2013. Our results show that differences in the number of years of education and marital status explain a third of income inequality in Japan. In the US, education and working hours are the strongest contributors to unequal income distribution (together over 30%). When introducing additional, country-specific variables, we find that working for a large company and being an irregular worker are important drivers of inequality in Japan. For the US lower wages for African Americans account for up to 9% of income inequality.
Thomas Pikettey’s 2014 book, Capital in the Twenty-First Century, triggered a lot of new research on income inequality, but studies that compare the sources of income inequality across countries are rare.
We chose Japan and the US for the following reasons. First, both countries enjoy a high level of gross domestic product per capita but they have rather different income distributions. Whereas the US has one of the most unequal income distributions among developed countries, Japan is known for its large middle class and less unequal income distribution. Second, detailed household panel surveys are available for both countries and represent a large share of the population. The household surveys contain comparable information on labor income and other socioeconomic variables, which allows for direct comparisons.
Using a so-called decomposition analysis, we find that both countries suffer from considerable income inequality due to both common and country-specific factors. The first important result is that educational achievement can explain a large part of income inequality in both countries. Education is the main driver of income inequality in the US, explaining up to 26%, while in Japan it is the second most important factor, explaining up to 20%. Marital status is the most important driver of income inequality in Japan (17%), whereas in the US being married is the third most important factor (11%). The results become more compelling once we introduce labor market particularities that are different between Japan and the US. In Japan, we observe that working for a large company and having a regular job considerably exacerbates income inequality in Japan (together over 15%), as it equals substantially higher wages than those received by irregular workers. For the US, we find that wage disparity between African Americans and the rest contributes significantly to inequality (about 9%).
These results have important policy implications. First of all, investing in education is an important tool to curb income inequality. Second, both countries should undertake efforts to correct failures in the labor market. In Japan, reform of the two-tiered labor market, which results in high income differences between regular and irregular workers, should be the priority. Irregular workers are paid substantially lower wages and Japanese labor law requires them to change jobs every 3 years. Furthermore, opportunities for career progression are typically limited. The wage gap between regular and irregular workers thus gets bigger over time. In Japan, irregular workers are predominantly women and an important policy measure would be to facilitate the move of irregular workers into regular jobs. If more women moved into more permanent positions, it would reduce both gender inequality and overall income inequality.
In the US, the impact of differences in educational achievement is particular high. Students have free access to high school education, but their educational achievements might not only hinge on personal preferences or talent. For example, the school dropout rate is particularly high in low-income neighborhoods and graduate education is typically limited to students with well-endowed parents as student loans are not always available. One policy option would be to correct market failure for education, targeting high schools with relatively high dropout rates. Finally, lower wages for African Americans may be a sign of racial discrimination, but it could also reflect differences in educational quality among schools with varying racial compositions. Public policies should try to ensure that all racial groups have the same opportunities, especially in terms of education, and racial discrimination must be tackled to achieve more equitable outcomes.
This paper is a first attempt to compare the sources of income inequality between Japan and the US. The results are compelling and call for urgent action to correct failures in their respective labor markets.