Why the earnings of the middle class declined: evidence from Japan

Using rich governmental micro data, we explore the reasons for the decline in earnings of the middle class in Japan. Many developed countries have seen the decrease in middle-class earnings, and Japan, long known for its solid middle class, is no exception. Our analyses revealed that the main reasons for the decline differ between males and females. The decrease in the earnings of middle-class male workers is due to the decrease in general human capital captured by returns to potential experience years. In contrast, the decrease in the earnings of middle-class female workers is mainly due to the increase in the supply of part-time workers. Furthermore, the firm-specific human capital captured by the return to tenure has increased only among high-wage male workers. This implies that Japanese firms invest in a selected few able workers, regardless of age, because they have been changing human resource strategy in response to economic globalization and changes in technology and the management environment.