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

ABSTRACT

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.

KEYWORDS:

• Annual earnings
• Firpo
• Fortin
• Lemieux decomposition
• middle class
• quantile analysis

JEL CLASSIFICATION:

• J21
• J31

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ As the dependent variables in the wage regressions are reported only by working people, there might be a selection bias. If there is a tendency for workers with specific unobserved characteristics to leave the labor market during a recession and the characteristics are correlated with some of the explanatory variables, the estimated coefficients will be biased. Thus, we treat the analysis of male workers as a comparison to that of female workers because the rate of leaving the labor market is much smaller for male workers than it is for female workers. We also conducted an analysis restricting the sample to full-time workers and obtained very similar results. This result implies that selection bias is not a serious problem and the findings of the main analyses are robust.

² In the interpretation of the Mincer-type wage function (Mincer 1974), particularly in Japan, the years of potential experience accumulated in the labor market tend to be regarded as general human capital, whereas tenure in a specific company is interpreted as firm-specific human capital (Akabayashi 2012), although some literature focusing other countries shows some variations in the interpretation of the Mincer-type wage function (Hashimoto 1981; Hashimoto and Raisian 1985; Lazear 2009).

Additional information

Funding

We thank the Ministry of Health, Labour and Welfare for granting us access to the data needed. The views expressed in this article are solely those of the authors and do not necessarily reflect the views of the organizations with which the authors are affiliated.