What Happened to Wage Inequality in Japan during the Last 25 Years? Evidence from the FFL decomposition method

Using comprehensive government statistics, we show the extent to which wage inequality among men and women has increased in Japan from 1989 to 2013, and the factors that are behind the changes using the Dinardo, Fortin and Lemieux (DFL) and Firpo, Fortin and Lemieux (FFL) decomposition methods. First, we find that the increase in the wage rate prevailed in all quantiles in both genders in the 1990s, and the real wage rate inequality was unchanged. Second, since the 2000s, the wage rate of the middle wage workers has been reduced more than that of any other group. Along with other developed countries, the decrease in wages of the middle class is observed even in Japan during the 2000s, although Japan is known for its solid middle class. Among women, the 90-50 gap increased while the 50-10 gap decreased, which resulted in the unchanged overall inequality for female workers. Finally, our exercise using the FFL decomposition method reveals the contemporaneous occurrence of the decrease in the return on general human capital of males and top females and the increase in the return of firm-specific human capital among male workers with a high wage rate. This suggests that Japanese firms undermined employee involvement and problem solving activities at the grassroots level, which is considered as one of the key elements of Japanese employment system. Moreover, our findings suggest that Japanese firms invest in just a few selected able workers, regardless of their age, because they no longer have enough reserves to invest in all of their employees.