Reporting from Workstation 9

Here was a graph. Can't get it to upload. Inequality rose form 0.30 two decades back(1980) to 0.38 of recent.

Japan’s after tax inequality has shown a clear rise. This is attributed to many reasons and each one plays a part,
-change of pay from performance based to seniority base
-growth in the number of part time workers
-rising returns to business’s especially the few who survived the downturn
-difference in pay of aged, due to some holding executive position and some surviving on poor state pensions
-decrease in the progressive nature of tax

All these reasons point to why equity has been sacrificed for the sake of efficiency. And it is true that this sacrifice is a bad thing at the moment. Especially for an economy where 75% of the people thought they were middle class to an economy ten years later where 36% think they are poor and 46% only think they are still middle class.

This observation is a good point and very relevant to my model. Essentially what is happening now is people are paying more attention to their surrounding. There are indeed many stories of boys who dropped out of college, faring terribly, while those who stuck around to complete it, receive high pay and holding executive positions. But this was the transition period, where people were not paying attention.

Surveys have shown that 90% percent of the population believes that inequality is cause for worry. And when they see that the country has gone from an economy of equality of opportunity to one where only those on one side of the coin have the opportunity, they feel they need to be on that side. Thus the fundamental assumption of my model, is showing up even in the Japanese economy.

The enrolment and completion of education of students at higher education levels closely follows the rising wage gap.

In time, with the rise in wage gap, more and more students will enrol themselves in higher education. Though the gini inequality will keep increasing since the curve will get lower in the initial parts, I would expect the cut off level, which determines the probability of an individual to acquire skill(or the opportunity gain) will rise. As that rises, the supply of high skilled labor will rise too. And more people will have a share in the pie.

Hence, for the Japanese economy to close the income inequality gap, it must not reinforce higher taxes(as some are suggesting, and as some predict the LDP may infact increase it highest rate from 38% to 40%). As students of the free world, we know, efficiency must not be sacrificed, when equity can be otherwise obtained.

What the state can do is let the market forces operate at the top, but get heavily involved at the bottom, with wage subsidies, or on the job training to encourage those at the bottom to reach the higher bracket.

A last comment on elasticity of substiution of skilled and unskilled labour. In my model as the elasticity of substitution(between skilled and unskilled) goes down, skill premium(skilled wage-unskilled wage) goes up. Thus I would recomment that the governnment’s main role must be to bridge this falling elasticity. Then there is hope to achieve moderate levels of inequality, while infact having all the efficiency benefits of a free economy.