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A Strategy for Boosting Growth and Raising the Base Level of Incomes Starting with an Increase in Minimum Wages
- A prescription for resolving the problem of the "working poor" drawing on the experience of the United Kingdom -

February 12, 2008


Although corporate earnings are at an all-time high the number of people on low incomes is, if anything, growing, with a rise in the ratio of non-regular employment and an increase in the numbers of the "working poor". Against this backdrop, regional minimum wages were increased far more sharply in fiscal 2007 than in the average year, with a view to raising the base level of incomes. In November 2007, the Minimum Wage Law was revised and, as a result of this revision, regional minimum wages are likely to see far greater increases than they have in the past, for some time to come.

There are three reasons why the need for an increase in minimum wages has come to be debated at this juncture.
(i) A rise in the number of non-regular employees who are "head of household" The number of households of 2 persons or more where the head of household is a non-regular employee has doubled, rising from 1.64 million in 1990 to 3.32 million in 2006.
(ii) Reversal of the relationship of minimum wages to the social welfare system Because the level of minimum wages has until now been set with reference to the "ability to pay" of enterprises, it has in many cases been lower than the social welfare level, the level considered necessary to ensure a minimum level of welfare.
(iii) The lowest levels of minimum wages among the developed countries Among the developed countries of Europe, the level of minimum wages is generally equivalent to an hourly wage in excess of ¥1,000. In the United States, the minimum wage was, until very recently, set at approximately the same level as in Japan but is due to be increased by more than 40%, by the summer of 2009.

In economic terms, raising the minimum wage generally "gives rise to a situation in which wages exceed productivity and thereby leads to higher unemployment, etc.". However, in the event of a persistent "monopsony", where the latent labor supply exceeds demand, wages fall below productivity and therefore raising the minimum wage can lead to a rise in both wages and employment.

In Japan, the fact that the labor market has long been divided into regular and non-regular employees, the wages of non-regular employees, who are more easily affected by the level of minimum wages, have fallen below productivity. It is possible that this situation has arisen among the factories and offices of major corporations in regions where the industrial base is weak and where there are few opportunities for employment, and in highly productive sectors, centering on major corporations, there is scope for raising the wages of non-regular employees without reducing the volume of employment. On the other hand, it is highly likely that small and medium-sized enterprises in provincial areas would suffer.

However, it should be remembered that, as the attrition of regional economies continues, even if the status quo is maintained, small and medium-sized enterprises in many provincial areas will simply be forced, gradually, into poverty. Major corporations and the manufacturing sector offer little hope as generators of wealth for the entire nation and, if domestic sectors with lower productivity, including the small and medium-sized enterprise sector, fail to boost their own productivity, it is inevitable that the number of people on low incomes will gradually rise and that the numbers of the "working poor" will increase.

The experience of the United Kingdom, where economic performance remained strong even after the introduction of a national minimum wage system, has the following implications for Japan:
(i) Success is conditional on continued economic recovery and improved productivity
The reason that the raising of the minimum wage in the United Kingdom did not lead to a rise in unemployment is that, against a backdrop of continued economic recovery, and thanks in part to the benefits of a policy of attracting foreign inward investment and of regional regeneration, the continued improvement in productivity was sufficient to offset the rise in personnel costs. In terms of policy, the simultaneous implementation of macro-policies designed to achieve sustained economic recovery and micro-policies designed to encourage improvements in productivity is necessary if the raising of minimum wages is to have a favorable outcome.
(ii) The importance of diversification of employment formats and of occupational training In labor policy terms, it is important to continue to increase the flexibility of the workforce by pursuing the diversification of employment formats and support the development of worker skills by strengthening occupational training capacities.
(iii) The need for a rebuilding of safety nets
The experience of the United Kingdom shows that in order to correct income disparities, it is essential that, simultaneously with the raising of the minimum wage, measures to encourage continued economic recovery and improvements in productivity, a diversification of employment formats, and the strengthening of occupational training capacities should be implemented as an integrated package, and that, because income disparities are not easily resolved by such policies alone, it is also necessary to implement "income redistribution policies", such as the creation of a system of earned income tax credits.

The experience of the United Kingdom indicates that, if Japan is to recover its economic vitality and solve the problem of the "working poor", it must set medium-term goals and a schedule for the raising of minimum wages and, at the same time, must establish conditions and implement support measures that will allow sectors where productivity is low to adapt on their own initiative, as an integrated package.

For more information on the content of this report, please contact Hisashi Yamada, the Japan Research Institute, Limited.

Tel: 03-3288-4245

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