Photo by Manuel Cosentino on Unsplash https://bit.ly/3Qi2tEx

Japan ranks 120th among 156 countries in terms of its gender gap, according to the Global Gender Gap Report of 2021. The rate of women’s participation in the labour force is lower than that of men, but this gap is comparable to those present in OECD countries. What explains the large gap between men and women in economic participation is due to significantly lower average earnings of women.

In a recent working paper, we use panel data to investigate the employment and earnings dynamics of women in Japan over their life cycle, and study roles of income tax and social insurance policies.

Japan’s gender gap

We use individual data from the Japan Panel Survey of Consumers (JPSC) and track the labour market experience of women born in the 1960s through 2018. Figure 1(a) shows that these women’s labour participation rates exceed 70% in their mid-20s, but declines to 50% in their early 30s, followed by a gradual increase.

The Japanese labour market is characterised by a two-tiered employment system, which consists of regular and contingent employment. The exact definition of regular and contingent workers can vary depending on the context. In general, regular employees typically work full-time and they are hired directly by employers, and expected to be flexible in engaging in different tasks assigned to them. They are also covered by social insurance programs at work, and employers make partial contributions on behalf of the employees. Contingent workers may share some of these characteristics of regular workers but not all. On average, regular jobs are more stable and pay much more than contingent jobs, while the latter include part-time and temporary jobs, and dispatched labour, often based on fixed-term contracts.

Figure 1(b) shows that the decline in the labour participation rate of women until their mid-30s is explained by the fall in the number of regular employees, while the increase after their 30s is explained by the rise in the number of contingent employees.

Figure 1: Women’s participation rates

Source: Kitao and Mikoshiba (2022), Japan Panel Survey of Consumers.

Figure 2 shows the distribution of employment types by marital status. The pattern of employment differs between single and married women.

The decline in women’s regular employment and overall participation rates in their late 20s and 30s is driven by changes in employment types at marriage and child-bearing ages. The recovery in the overall participation rates in their late 30s and 40s is explained by the return of the married women to the labour market as contingent workers. There is also a large difference in earnings between regular and contingent workers. Earnings of contingent workers are much lower and the profile is flat over the life cycle, showing little growth with experience, contributing to a large gender gap in average earnings between men and women.

Figure 2: Women’s participation rates by marital status

Source: Kitao and Mikoshiba (2022), Japan Panel Survey of Consumers. Note: NILF stands for not in labour force.

The level of earnings also affects how women contribute to the social insurance system in Japan. The system provides public pension, health, and long-term care insurance benefits to all the citizens. The insurance premiums that individuals pay to the program depend on their marital status and earnings. Dependent spouses are exempted from the payment of all premiums provided that they do not earn more than a threshold amount of 1.3 million yen, provided that their spouses are covered by the insurance at work.

Dependent spouses with low income are also eligible for survivors’ pension benefits after the death of a main earner. Moreover, individuals, in most cases husbands, also receive spousal deductions from income taxes if their spouses do not earn more than a cutoff level. Not surprisingly, empirical studies identify that many women adjust their labour supply so their earnings do not exceed these cutoffs.

The roles of income tax and social insurance policies

We build a structural model populated by heterogeneous agents, and evaluate how women’s labour supply is affected by three policies: spousal deductions, insurance premium exemptions, and survivors’ pension benefits. In our model, single and married women at different stages of the life cycle choose the participation, as well as the types of employment, regular or contingent, while accumulating human capital on the job. The growth of earnings depends not only on their age, education levels, and current employment, but also on the employment decisions they make over their life cycle.

We find that the removal of the three policies raises the participation rates and earnings of women. The average participation rates of women aged 25 to 64 rise by 6.5, 6.6 and 1.3 percentage points, if we remove spousal income tax deductions, social insurance premium exemptions, and survivors’ benefits, respectively. The average earnings of women increase by 7.0%, 16.3%, and 4.1%, respectively.

Although policy changes raise the tax burden on women under all policy experiments, the higher earnings of more productive women raise the average consumption and improve welfare when additional net revenues are transferred back to them.

If the three policies are removed altogether, women’s participation rates rise by 12.5 percentage points, and they earn 27.7% more on average. They also pay 19.5% more to the government in taxes and social insurance premiums on their higher earnings. Average consumption of women rises by 3.0% and they enjoy a welfare gain of 2.1% in consumption equivalence. Our findings suggest that there is room to improve women’s participation and earnings by removing the fiscal policies that stand as obstacles to incentivise work. Moreover, the government could raise more tax revenues without generating a welfare loss.

The needs for encouraging women’s participation

Japan faces an imminent need to encourage the participation of women in the professional sphere. This paper demonstrates that the removal of policies that act as a disincentive to work, and to the skill accumulation of women would raise the participation and income of women by a significant amount. Such changes would not only help narrow the country’s notoriously large gender gap in economic participation, but also improve the welfare of women. Eliminating these barriers will also help mitigate the labour shortages that are expected over the coming decades, in addition to the fiscal tensions due to demographic aging.

 

This article is based on Sagiri Kitao and Minamo Mikoshiba (2022) “Why Women Work the Way They Do in Japan: Roles of Fiscal Policies,” Research Institute of Economy, Trade and Industry (RIETI) Discussion Paper 22-E-016.

Leave a comment

Your email address will not be published. Required fields are marked *

*