Increasing Wage Inequality in Japan since the End of the 1990s : An Institutional Explanation

Abstract

Using the factor decomposition of micro data, in this paper we examine the validity of the SBTC (skill-biased technological change) and the outsourcing hypotheses regarding the continued rise in wage inequality that first emerged within each age group at the end of the 1990s in Japan. We conclude that these hypotheses are invalid. In Japan, the labour market liquidity is low and wages are chiefly determined on the basis of the wage system of each enterprise; although the demand shifts towards skilled labour owing to information technology (IT) and globalisation, this shift is not likely to directly lead to the wage increase of skilled workers. The influence of IT and globalisation on wages is mainly reflected in the institutional reactions of enterprises. These institutional reactions are influenced not only by IT and globalisation, but also by various internal and external changes in the enterprise, such as ageing of the employees and deregulation. We present the following institutional hypothesis to explain the cause of the rising income inequality since the end of the 1990s in Japan. The most important cause is the reforms in the wage system, such as the introduction of a performance-based wage system and the weakening of the spring labour offensive system. We examine the validity of this ‘wage institution view’ using the factor decomposition of micro data.