Income inequality has risen in the United States and United Kingdom since the 1980s. There are several views that emphasise that this situation is the outcome of institutional factors such as deregulation, privatisation, tax reform favourable to high-income earners, reform of social security system, decreasing income transfer and attack on trade unions (Freeman and Katz, 1994; Pontusson, 2005; Krugman, 2007; Goldin and Katz, 2007).
However, the most popular view is the skill-biased technological change (SBTC) hypothesis wherein the main cause of rising income inequality is the demand shift towards skilled labour through the diffusion of the ‘IT-related technique’ (Berman, Bound and Griliches, 1994; Autor, Katz and Krueger, 1998; Autor, Katz and Kearney, 2005). As the SBTC hypothesis assumes that wages are determined chiefly by the supply-demand condition in the labour market, the demand shift towards skilled labour raises the wages of skilled workers. On the other hand, there are some studies that emphasised the influence of globalisation. This view is divided into two hypotheses.
The first one emphasises the relocation (outsourcing) of non-skilled production to developing countries. As such outsourcing lowers the demand for non-skilled workers in developed countries, the relative demand for skilled labour increases, thus widening the wage gap between skilled and non-skilled workers (Feenstra and Hanson, 1996). According to the SBTC and the outsourcing hypotheses, the demand shift towards skilled labour occurs within each industry.
The second hypothesis based on globalisation emphasises the factor price change in developed countries (an increase in the wages of skilled labour and a decrease in the wages of non-skilled labour) as an effect of trade in the Heckscher-Ohlin-Samuelson model (Woods, 1994; Sachs and Shatz, 1994). According to this hypothesis, the demand shift toward skilled labour is caused by changes in the industrial structure that lead to the production of specialised skilled labour-intensive goods in developed countries.
In this paper, using the factor decomposition of micro data, we examine the validity of the SBTC and the outsourcing hypotheses regarding rising income inequality within each age group that has emerged since the end of the 1990s in Japan. If the conclusion is presented in advance, these hypotheses become invalid. In Japan, the labour market liquidity is low and wages are chiefly determined based on the wage system of each enterprise; although the demand shifts towards skilled labour owing to 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. Moreover, the existing labour relations and customary practices act as constraints to the decisions by managers. Instead of the SBTC and the outsourcing hypotheses, we present the following institutional hypothesis to explain the cause of rising income inequality since the end of the 1990s in Japan. The most important cause is the reform 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.
The organization of this paper is as follows. Section 2 examines the validity of the SBTC and the outsourcing hypotheses. Section 3 explains our ‘wage institution view’ and examines its validity. A criticism of the ‘ageing of the population view’, the most popular view in Japan, is presented in Section 4. The effect of non-regularization of employment on wage inequality is analysed in Section 5, and Section 6 presents the conclusion. In addition, Figure 1 illustrates the various views regarding the cause of the rising income inequality.
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