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Chapter 2

Income Inequality and Seriousness of Poverty in Japan

Toshiaki Tachibanaki, Kyoto University

1. Introduction

People in Japan seem to have become generally conscious of the rising level of

inequality within this country's society. One indication of this is the way the terms kachigumi

(winners) and makegumi (losers) have become part of everyday conversation. Inequality can

of course be considered on different levels. The simplest way of viewing it is in terms of

inequality of outcomes, as typified by disparities in income. Equality of opportunity is also an

important concept. This has to do with whether everyone is given an equal chance, without

bias, in terms of receiving an education, looking for a job, getting promoted, and taking on

various challenges.

In the following I would like to present some concrete and up-to-date information

about the inequality of outcomes in Japan, that is, the gap between rich and poor, using data

that have recently become available. Also, I present the situation in Japan for those who find

themselves living in poverty. The discussion on poverty continues by investigating how it is

serious, and who are suffering from poverty. Finally, the paper examines the effectiveness of

various policy tools in order to reduce the number of poor people.

2. Already a Land of Inequality

At the end of 2004, the Organization for Economic Cooperation and Development

published the results of a survey of income distribution in its member countries. In Table 1 I

present some of the results, showing the degree of inequality in income distribution in 20 of

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the surveyed countries as measured by the Gini coefficient. The Gini coefficient is an index N

which 0 represents perfect equality and 1 perfect inequality; in other words, the larger the

number, the greater the inequality in income distribution, which is to say, the wider the gap

between rich and poor. The results were calculated on the basis of household disposable

income, adjusted for household size, after deducting taxes and adding transfer payments, such

as pensions.

Table 1: Income Distribution in Japan and Other Advanced Countries Compared

Source: OECD (2004), Income Distribution and Poverty in OECD Countries in the Second Half of the

1990s. Note: An adjustment was made for household size by using an equivalent scale and data on disposable

income.

For our purposes, the most striking thing about Table 1 is the fact that Japan can be

found among the nations with a relatively high degree of inequality in income distribution. If

we divided the countries listed into three groups, with group 1 representing nations with a

high degree of equality, group 2 those with an intermediate degree of equality, and group 3

those with a high degree of inequality, Japan would clearly fall into group 3. In other words, it

has already joined the ranks of nations characterized by a large gap between rich and poor,

alongside the United States, Portugal, Italy, New Zealand, and Britain.

In an earlier work, I pointed out the growing inequality in Japan's income distribution

during the 1980s and the first half of the 1990s. At the time, a number of criticisms were

raised in response to this analysis, among them the assertion that, although inequality may

indeed be progressing in Japan, it gives little cause for concern because, among the world's

industrialized countries, Japan still ranks only a bit above the middle in terms of income

inequality. Table 1 shows that this criticism is no longer valid.

There are a number of factors contributing to the increasing inequality, including the

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aging of the population, the shift in compensation systems toward merit-based and

performance-based pay, the increase in the number of unemployed and low-paid employees as

a result of prolonged economic stagnation, and the impact of the government's tax and social

welfare policies. But the most important underlying factor is this countries embrace of

American-style economic liberalism.

The same OECD survey also compared the poverty rates of member countries. Table

2 presents the results for all 27 member countries using the most recent figures available.

Measuring the poverty rate is not always easy, and international comparisons are particularly

difficult. For one thing, the definition of poverty differs from one country to the next. In

addition, one must find ways of compensating for differences in household size and overall

national living standards. This OECD analysis defines the poverty level in each country as

less than half the median income, with income adjusted for differences in household size.

Table 2: Poverty Rates in OECD Countries (%)

Source: OECD (2004), Income Distribution and Poverty in OECD Countries in the Second Half of the

1990s.

Of course, this definition is adopted expressly for purposes of international

comparison and is by no means ideal. Nonetheless, the shocking fact, as seen in Table 2, is

that Japan has the fifth-highest poverty rate of all the OECD nations, with a figure of 15.3%,

ranking after Mexico, the United States, Turkey, and Ireland.

Of the top five countries, however, Turkey and Mexico should probably be excluded

from any comparison with Japan, since they are still in the early industrializing phase of

development. If we limit the comparison to highly developed countries, then Japan comes in

third, after the United States and Ireland. It is also pertinent to note that Japan's poverty rate,

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which stood at 8.1% in 1994, nearly doubled in less than a decade.

The dramatic rise in poverty in Japan is manifested also in an increase in the number

of people receiving "livelihood protection" assistance, or maybe called “income support

programme” generally. Livelihood protection is a system under which the government uses

public funds to help cover the living expenses of people who have very little or no income

and are thus unable to support themselves. It is the last resort in terms of poverty relief.

The attached Figure 1 shows the dramatic rise in the number of households and

individuals receiving livelihood protection assistance over the past decade. The number of

households receiving assistance has soared in the last several years in particular and now

exceeds 1 million. This is a stunning development, considering that the number stood at only

600,000 households in 1995. And in terms of individuals receiving assistance, the figure has

topped 1.4 million. This rapid increase in the number of people unable to support themselves

is a clear indication that the problem of poverty in Japan is growing ever more serious.

Figure 1: The Number of Income Support Recipients (i.e., Livelihood Protection Assistance)

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One thing that needs to be emphasized here is that the number of people in poverty is

nowhere near the same as the number of people receiving livelihood protection. Whereas

people living in poverty are defined as those whose income falls below a certain level, people

on livelihood protection are those who are in fact receiving public assistance. Simply put, not

everyone in poverty is receiving livelihood protection, and in fact, the number of people in

poverty is much larger than the number receiving livelihood protection. (Using the OECD's

poverty rate of 15.3% and Japan's estimated population as of 2004 [127.69 million], we get a

figure of 19.5 million Japanese living in poverty.)

Inasmuch as everyone living in poverty is by definition enduring economic hardship,

it might be suggested that all such people should receive some form of assistance. However,

the cost of providing livelihood assistance to all of them would place an enormous burden on

public finances. In fact, well under a tenth of Japan's poor are receiving such assistance.

Though the figures are somewhat old, a 1993 estimate found that the "catch rate” - the

percentage of poor people getting livelihood protection benefits - was just 6%.

However, if we define poverty as a situation in which people lack the resources to

maintain a minimum standard of living, it is difficult to know whether this figure is too low

without first ascertaining the actual economic circumstances, state of health, and so forth of

those who are not receiving aid. In fact, no country provides assistance to 100% of its poor; in

the West, the catch rates range between 20% and 60%. Be that as it may, given the rapid rise

in the number of people living in poverty in Japan, it is clear that finding some way of

assisting the poor economically is becoming an important issue.

3. Elderly and Polarization of Youth

We have seen that Japan has a very large number of people living in poverty. The

next question is who these needy people are. To answer it, let us begin by examining the

poverty rate by age group.

Table 3 presents data on the poverty rate by age group and also indicates what share

of the poor each group comprises. The most striking thing about these data is the high rate of

poverty among the elderly. Among people aged 66-75 the poverty rate is 19.5%, and among

those 76 and older it is nearly 24%. This state of affairs is underscored by the fact that the

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elderly account for a full 47% of those receiving livelihood protection assistance. In fact, it

would be fair to say that the face of poverty in Japan is represented by the elderly. Poverty is

especially common among elderly people living alone.

Table 3: Poverty Rates by Age Class in Japan (%)

Source: OECD (2004)

It might be supposed that poverty is uncommon among the elderly, since they are not

expected to be able to work and are therefore eligible for pensions and long-term care

insurance benefits. In fact, however, a large number of elderly people either do not qualify for

pensions or receive very low benefits. Some did not enroll in a public pension plan for

whatever reason; others enrolled but paid only a small amount in contributions.

If we look at other highly developed countries, there is little evidence that the aging

of society has given rise to a swelling population of poor people. The difference is a

well-developed pension system. In Japan, the aging of society has increased the number of

poor and unquestionably contributed to the unequal distribution of income.

Another significant feature of the statistics shown in Table 3 is the high poverty rate

among the young: 14.3% among children 17 or younger and 16.6% - second only to the

elderly - among young adults 18-25 years of age. Since young people only rarely have to

worry about health problems, the favors underlying their poverty must be assumed to be

completely different from those that account for poverty among the elderly. The cause, in a

word, is high unemployment stemming from Japan's long economic stagnation. For several

years now, unemployment among young people has topped 10%. In addition to those who are

out of work, moreover, there are now somewhere between 2 million and 4 million so-called

freeters, people without permanent employment, who move from one temporary job to

another. The average yearly income of these workers is around ¥1.4 million, and even among

them the situation is polarized, with one large group making less than ¥1.1 million and

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another making between ¥2 million and ¥1.5 million annually. Those in the former group can

clearly be said to be living in poverty. Even young people with regular employment rarely

earn a high salary, since seniority pay is still the rule, but they can be certain of a steady

income. Thus, a characteristic feature of Japanese society today is a growing economic gap

within this younger age group, between low-income freeters and the perennially unemployed

on the one hand, and the permanently employed on the other.

4. The Plight of Single Mothers

There are two other categories of people on public assistance. The first, consisting of

the injured and disabled, accounts for 35.1% of the total, second after the elderly. The people

in this category are naturally eligible for livelihood protection, being unable to work. With

regard to the disabled, the ideal solution would be to provide work and a way to achieve

independence, but the feasibility of this depends very much on the individual case.

The second category is that of single mothers, who account for 8.8% of the total.

These are women raising children on their own as a result of divorce or the death of their

husbands, and, less commonly, single women with children and no acknowledged father.

It is easy to explain why single-mother households are another typical face of

poverty in Japan. To begin with, women generally have a harder time finding a job than men

in Japan, and women who do work make less than men. This is because Japan has not

developed women workers as a resource in the way that it has men. In addition, in many cases

the children in these households are still very young, making it difficult for the mother to

work outside the home. Moreover, a woman who suddenly decides to work after spending

years as a full-time home- maker is unlikely to find a job that pays decent wages.

5. Estimation of Seriousness in Poverty

The previous section showed how the Japan’s degree of inequality and poverty rate

could be evaluated internationally, and found that it is highly unequal in income distribution,

and very high in poverty rate based on the international comparison. This section investigates

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poverty in Japan in depth, by applying more fruitful data.

The poverty rate, which was presented previously, is unable to indicate the

seriousness (or lightness) of poverty. If the majority of poor people received extremely low

levels of incomes, i.e., the distribution of income of poor people were extremely skewed to

the very poor level, it would imply that poverty is highly serious. If the majority of poor

people received incomes which were somewhat lower than the poverty line, it would imply

that poverty is relatively light (or not so serious), although it does not deny that they are still

poor. In other words, these two cases are concerned with the distribution of poor people,

whether the majority is extremely poor or not.

There are several measures, which are able to indicate such seriousness like poverty

gap ratio, Watts index, FGT index, CHU index, etc. The poverty gap ratio is the multiple of

the head-count ratio (i.e., poverty rate) and the income-gap. The latter is defined by the ratio

of the average income of poor people over the poverty line income, which can indicate the

degree of the discrepancy between the average income of poor people and the poverty line.

The multiple of the income gap ratio with the head-count ratio shows the relative degree of

the seriousness (or simply intensity) of poverty.

The FGT index can tell the seriousness of poverty more sensitively to a decrease in

incomes of poor people who are located in slightly lower levels than the poverty line, while

both the Watts index and CHU index can tell the seriousness of poverty more sensitively to a

decrease in incomes of extremely poor people. In other words, their income levels are much

lower than the poverty line. Since the definition and discussion of these indices or measures

are too technical and require many pages to explain, only the empirical result is presented and

discussed.

Table 4 shows the various measures of poverty index for 1993, 96, 99 and 2002. The

data source is the Income Re-distribution Survey by the Ministry of Welfare and Labour. The

income figure is given by the disposable income which deducted tax payments and social

security contributions from initial incomes, and added various social security benefits. We

adjust for the scale of a household size, by using the Yagi and Tachibanaki (1996) method.

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Table 4: Various Poverty Measures for All Households

Source: Ministry of Welfare and Labour, Income Redistribution Survey. Notes: Poverty line is defined by the 50% figure of the median income. Equivalent incomes are estimated

on the basis of Yagi and Tachibanaki (1996).

Source: Ministry of Welfare and Labour, Income Redistribution Survey. Notes: Poverty line is defined by the 40% figure of the median income. Equivalent incomes are estimated

on the basis of Yagi and Tachibanaki (1996).

The definition of poverty, i.e., the poverty line, is always controversial. We adopt the

most internationally common method. It is defined by the 50 percent or lower income in

comparison with the median income of all samples. The 40 percent of the median income is

also used as an alternative in order to obtain a comparative feature between the 50 percent

definition and the 40 percent definition.

These two tables show several interesting features of poverty in Japan. First, the

estimated head-count ratio (i.e., poverty rate) is 17.3% in 2002, the latest figure, for the 50

percent definition. This is somewhat higher than the figure provided by the OECD study,

which was explained previously. There are two reasons for the difference. On the one hand,

the observation period is different because this study uses the latest data. On the other hand,

the estimation method for the equivalent scale is different between the two, although the two

studies applied the same data set.

Second, the poverty rate increased significantly from 1993 to 2002, by about 1.6%

points. During this period the Japanese economy was in a serious recession. It is very likely

that it has produced a larger number of poor people. The estimated poverty rate clearly

suggests that poverty intensified its seriousness.

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Third, nearly all measures such as poverty gap ratio, Watts, CHU and FGT indicate

that the seriousness of poverty had increased significantly, except for the Watts measure from

1999 to 2002. Since these measures can tell the implication associated with the distribution of

income among poor people, it is possible to conclude that poverty in Japan, regardless of their

relative positions, i.e., extremely poor or lightly poor in comparison with the poverty line,

increased its seriousness. In other words, both extremely poor people and lightly poor people

became poorer and poorer.

Fourth, Table 5 is presented to confirm the third point more visually, which is given

by the estimated poverty measures based on the various indices under the condition that the

poverty line is fixed at the 1996 level. Since the poverty line is fixed at the 1996 level,

increases in the values of various poverty measures can be explained almost exclusively by

the intrinsic increase in the number of poor people. The reason is as follows; if poverty line

were adopted each year as given by Table 4, the estimation of poverty measures would be

influenced by each year’s value of poverty line. Therefore, fixing poverty line is a worthwhile

attempt to obtain the real story of poverty measures.

Table 5: Various Poverty Measures When Poverty Line Is Fixed at the 1996 Level

Source: Ministry of Welfare and Labour, Income Redistribution Survey. Notes: Poverty line is defined by the 50% figure of the median income. Equivalent incomes are estimated

on the basis of Yagi and Tachibanaki (1996).

Table 5 shows a more alarming result with respect to poverty in Japan than Table 4

because increases in the absolute values of various poverty indices are larger than the result in

Table 4. In particular, the estimated head-count ratio and Watts index are 20.5% and 11.4%

respectively which are larger than 20% and 10%. These rates, namely 20.5% and 11.4%, are

not socially acceptable. For example, the poverty rate of about one-fifth of total population is

equivalent to the poverty rates among developing countries. Since Japan belongs to a group of

industrialized, developed and democratic countries, the society has to recognize this fact

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seriously, and make an effort to reduce the number of poor people.

Fifth, the difference in the definition of poverty, namely 50 percent of the median

income versus 40 percent, is fairly significant to differentiate the absolute values of various

measures of poverty. For example, the head-count ratio based on the 50 percent definition is

between 15.6% and 17.3%, while it is between 10.4% and 11.8% based on the 40 percent

definition. The difference in the head-count ratio between the two definitions is about 5.0%

points, which is fairly large. The same story appears also for the other measures of poverty,

although the absolute differences in the values between the two definitions differ considerably

from measure to measure.

The fifth result above provides us with an important issue in the analysis and

measurement of poverty. For example, there is a tradition of a controversy between the

absolute concept and level of poverty, and the relative concept and level of poverty in many

countries. The definition based on either 50 percent of the median income or 40 percent

belongs to the relative concept of poverty. Even with the relative concept of poverty the

choice of 50 percent or 40 percent is neither so scientific nor persuasive. We adopted 50

percent definition because most poverty studies, in particular international comparative

studies, have applied this definition.

It should be useful to apply the absolute definition of poverty in order to compare

with the estimated result based on the relative definition. Tachibanaki and Urakawa (2006)

investigated such a comparison comprehensively. Only the conclusion is described; a

comparison between the relative definition of poverty and the absolute one does not provide

us with a significantly different result with respect to the estimated poverty measures.

Interested readers can refer to Tachibanaki and Urakawa (2006). Thus, it is feasible to

conclude that the estimated poverty situation in Japan has worsened considerably during the

past ten years, as shown by this paper.

One method, which enables us to examine whether various poverty measures have

worsened universally from time to time, is to apply the TIP curve (Three indices of poverty).

The TIP curve is given both by the horizontal line, i.e., the cumulative rate of population

arranged by equivalent household incomes from zero to right (higher incomes), and by the

vertical line, i.e., the cumulative sum of poverty gaps per capita.

The TIP curve holds the following properties. First, if the TIP curve approached to a

horizontal line, the value at the horizontal line would be equivalent to the value of head-count

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ratio, and the value at the vertical line would be equivalent to the value of poverty gap ratio.

Second, the degree of concavity at the TIP curve can tell the intrinsic nature of inequality of

intensity of poor people. In other words, if a TIP curve in a certain year dominated the curve

in another year (i.e., stayed higher in a certain year than another year graphically speaking

over all range of the horizontal line of the TIP curve), it would be possible to conclude that

various poverty measures given by Tables 4, 5, and 6 satisfy the Zhang (2000) lemma. The

Zhang lemma shows that if the TIP curve in one year dominated the curve in another year, it

would imply that the degree of poverty would have increased universally and definitely. Thus,

the estimation of the TIP curve in different years is useful to examine whether poverty has

increased universally and definitely.

Figure 2 presents the estimated three years’ (i.e., 1996, 99, 2002) TIP curves. The

result suggests that the TIP curve in 2002 dominates the curve in 1996 over all range,

implying that the degree of poverty had increased universally and definitely from 1996 to

2002. Japan’s poverty intensified significantly during this period. The curve in 1992, however,

and the curve in 2002 intersects, graphically speaking. Consequently, it is not feasible to

describe that the degree of poverty had increased during this period universally and definitely.

Since I take the former finding more seriously because it considers the longer period, I am

inclined to propose that the degree of poverty had increased almost universally and definitely.

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Figure 2: The TIP Curve and Three `I's of Poverty (Equivalent Disposable Income Figures)

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The final examination, which used the Income Redistribution Survey, is the

estimation of poverty for various demographic groups. The previous section speculated that

the majority of poor people would be single mothers, youth and the elderly (in particular the

elderly widows). This section, therefore, attempts to confirm whether or not the above

speculation is true, by estimating various poverty measures for various demographic groups.

Table 6 shows the estimated poverty measures based on various indices for various

demographic groups and age classes. There are totally ten demographic groups. (1) a husband

and a wife, called nuclear household, with more than 3 children, (2) nuclear household with

two children, (3) nuclear household with one child, (4) nuclear household with no children,

(5) single member household, (6) single mother household, (7) an elderly husband and an

elderly wife, (8) and elderly single household, (9) nuclear household with children and older

parents, (10) others.

Table 6 suggests the following observations for particular demographic groups. First,

the highest poverty rate, i.e., 64.4%, is observed by single mothers. The rate higher than 50%

implies that the great majority of households with a mother and children are poor, and more

importantly their seriousness of poverty is explained by very high values of both the Watts

measure and CHU. The majority of these households appeared because of an increasing

number of divorces in recent Japan. These single mothers find difficulty in obtaining jobs

with reasonable wage payments, partly because they have not accumulated enough skills and

partly because they have to spend their considerable time for child-caring. Although the share

of single mothers’ poverty in terms of the relative size among total populations is low, i.e.,

5.6%, it is concluded that the seriousness of their poverty is extremely high.

Second, the secondarily serious group of poverty is observed for elderly single

households because the poverty share is 21.6%, and the poverty rate is 46.0%. The latter rate,

46.0%, is considerably high because it implies that nearly half of elderly single households

are poor. As shown previously, the great majority of these households are female widows who

lost their husbands. The principal reason for their serious poverty arises from the fact that

their pension payments are considerably low because of the lost public and enterprise pension

benefits.

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Table 6: Various Poverty Measures for Several Demographic Groups and Age Classes

Notes: Elderly here implies that male ages are over 65, and female ages are over 60.

The most important finding in this table regarding elderly single households is their

second highest poverty gap ratio, Watts index and CHU index, implying that those elderly

single households are extremely poor. This is confirmed by the relatively low estimated

poverty measures for households with an elderly household and an elderly wife. In other

words, if a husband and a wife are alive, their economic condition is not terribly bad. If a

husband dies, however, the economic condition of the survived wife is seriously deteriorated.

Third, the third highest rate, if we pay attention to the poverty gap ratio, is observed

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by single member households’ 9.6%. The seriousness is seen also by the high rate of the

head-account ratio, 21.8%. The majority of these people are youth. The figures for age class

under 29 years old support this fact because the head-count ratio is high like 16.3%. It is

widely recognized that the economic conditions of young people are very bad in views of the

fact that the youth unemployment rate is quite high (i.e., about 10 percent), and a large

number of young workers are employed as non-regular workers whose wage payments are

considerable lower than those of regular employees.

Fourth, the lowest poverty measures are occupied by married couples. Their

economic conditions are not so bad unlike single member households of both the elderly and

the youth. It is an interesting subject to inquire whether the difference between married

couples and single member households with respect to their economic conditions is due

largely to their marriage status or to other circumstances rather than marriage status. It should

be true, nevertheless, that if there were several household members, they would able to

commit intra-household members’ transfers within the family. In other words members can

help each other, if one or two members are in an economic trouble.

6. Evaluation of Policies to Reduce Poverty

6.1 Income Support Programme (or Livelihood Protection Assistance) to Poor People

The ultimate policy which intends to reduce the number of poor people is the

governmental economic support programme as mentioned previously. It is important to

evaluate the efficiency of this programme. For examples, is it reducing the number of poor

people effectively? Is it supporting to unnecessary people who are not poor? Is it paying

excessive amounts higher than the requirement to necessary people who are poor? These three

aspects can tell the degree of the efficiency of the programme, and thus it is interesting to

estimate the degree of the efficiency empirically.

There are two types of efficiency when we evaluate the impact of the programme.

Figure 3 presents these two different types of efficiency as shown by Atkinson (1995). Some

explanations are provided in order to show the implication of this figure.

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Figure 3: Two Criteria to Evaluate the Efficiency of Income Support Programmes

source: Atkinson (1995) p.227.

We consider the distribution of income from the lowest income earner to the highest

income earner. The horizontal line shows the index of households that is the rank of their

income in increasing order. Thus, the index is in [0,1] . Thus, it is the inverse of the

cumulative distribution of population which was arranged from the lowest to the highest. The

vertical line represents the income figure. OZ is the income figure which is given by the

poverty line. Thus, OH is equal to the rate of poor people in total population. It is called the

headcount ratio. miny shows the income figure who receives the lowest income in the

society.

The solid line, i.e., miny N, represents the cumulative distribution function of income.

Since it is assumed that the density function of income distribution follows the uniform

distribution, it produces the straight line like miny N. The government adopts the income

support programme in order to reduce the number of poor people. By adopting such an

economic support programme, the cumulative function of income distribution is shifted from

the solid line to the dotted line. Figure 3 shows that the income figures of all people who are

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in the range between miny and N (a break-even point) increase by such an economic support

programme. Thus, the well-being of these people increases. It is noted that the society had the

total amount of poverty represented by the area ZM miny .

The income support programme reduces the total amount of poverty by the area A.

The area B is the amount of excessive payments higher than the requirement (i.e., OZ) to poor

people, and the area C is the amount of unnecessary payments to people who are not poor.

The area D represents the total amount of poverty still remained even after the adoption of the

income support programme. In other words, the programme was unsuccessful in reducing the

number of poor people entirely, but ended up with the remaining poor people.

There are two types of efficiency for the income support programme. The first is

called horizontal efficiency which is represented by the ratio of A over (A+D). The second is

called vertical efficiency, or poverty reduction efficiency, which is represented by the ratio of

A over (A+B+C). The former implies the degree of the success in reducing the number of

poor people, while the latter implies one minus the degree of ineffectiveness, or of

redundancy in reducing the number of poor people. In other words, the higher the latter, the

more effective the programme in reducing the degree of ineffectiveness of the programme.

It is very likely that there is a trade-off between horizontal and vertical efficiency

because raising the former accompanies reducing the latter, and vice versa. We want to

examine whether this trade-off is observed in Japan.

Table 7 shows the estimated result regarding the two types of efficiency. The

statistical source is the Income Redistribution Survey by the Ministry of Welfare and Labour,

both 1996 and 2002. Needless to say, the target policy is the income (economic) support

programme for poor people, called livelihood protection system in Japan. The estimation was

made by Tachibanaki and Urakawa (2006).

Table 7: The Estimated Efficiencies for Income Support Programme (%)

Two different criteria were adopted to define poverty. The first is due to 50 percent of

the median income, which is quite common internationally and was adopted by the OECD as

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shown previously. The second is due to 40 percent of the median income. This definition

suggests the rate of poor people (i.e., the headcount ratio) is higher because the poverty line is

lower than the 50 percent definition.

The table shows the following empirical results regarding the degree of efficiency of

the income support programme in Japan. First, the horizontal efficiency is quite low, say

between the lowest 3.5 percent, and the highest 12.8 percent. It is slightly lower than 10

percent on average. This derives the following conclusion. The income support programme in

Japan is quite ineffective in reducing the number of poor people. An extremely large number

of people remained as poor even after the income support programme was executed. In other

words, the government policy is unsuccessful in reducing the number of poor people. We can

point out several reasons for this ineffectiveness such as the expectation of family supports

rather than public supports, the severe means-test to be qualified for public support, and the

feeling of shyness and stigma of possible candidates for the income support programme.

Second, contrary to the first conclusion, the vertical efficiency is quite high, say

around 90 percent. It is noted that we support the trade-off relationship between horizontal

and vertical efficiency when two efficiencies are compared regarding the effect of the income

support programme.

The high vertical efficiency implies that the government is successful in minimizing

the redundant payment to people who are not poor, or the excessive payment higher than the

requirement to people who are poor. In other words, the government management policy

regarding the effectiveness of the income support programme is quite efficient to minimize

the redundant payment. This is explained largely by the very severe means-test for possible

candidates.

There are several examples of these severe means-tests. Possible candidates have to

write down and report their severe economic conditions to the public authority. Also, their

documents are excessively complicated. The second example is given by zero saving amount

of possible candidates to be qualified for receiving the income support programme. The third

example is given by the condition such that no children of possible candidates can attend

senior high schools.

Third, we pay attention to the difference in the definition of poverty, namely 50

percent or 40 percent of the median income. It is found that the degree of horizontal efficiency

is higher in the 40 percent definition than the 50 percent definition, while the degree of

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vertical efficiency is lower in the former than in the latter. The above result is normal if we

understand the meanings of both horizontal and vertical efficiencies correctly. A more useful

finding is that the difference between the 50 percent definition and the 40 percent definition is

not so large. In other words, the difference in the poverty definition does not matter so much,

but the intrinsic nature of the income support programme in Japan is responsible for the large

difference in the horizontal efficiency and vertical efficiency.

I do not deny the condition of the means-test because the government fund, which

has been contributed by the general tax revenues by all people, is limited, and also we have to

eliminate the free-rider problem of public policies. The problem in Japan is too severe

condition to be qualified for the income support programme. The zero saving condition may

be too severe because all people would like to keep some fund to prepare future uncertainty.

The Japanese senior high school attendance rate is over 90 percent among the common age

group of 15 years old currently. Under this circumstance nearly all parents would hope that

their children go to senior high schools. These conditions are the examples of too severe

means-test.

Let us conclude the usefulness and efficiency of the income (economic) support

programme to reduce the number of poor people. It is not so effective to reduce the number of

poor people in Japan. In other words, there are a large number of poor people who should be

supported economically by the government. It is quite effective, however, to minimize the

redundant payment to non-poor people or even to poor people.

6.2 Public Pension Programme

The method to estimate the degree of two types of efficiencies is very useful as

shown by the example of the income (economic) support programme to poor people. Thus,

another public policy is evaluated based on the same method. That is the effectiveness of

public pension programme to reduce the degree of poverty. We apply the same estimation

technique and the same data set, but to the different sample. Since we are interested in the

effect of public pension programme, we restrict the sample within people whose age are 65

years old and over.

Table 8 shows the estimated result of two types of efficiency, namely horizontal and

vertical. The most impressive observation given by this table is that the degree of the

horizontal efficiency is about 80 percent on average. This implies that the public pension

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benefit is very effective to reduce the number of poor old people. If there had been no public

pension programme, there would have been an extremely large number of poor old people.

The public pension programme is crucially important to eliminate poverty of old people.

Table 8: The Estimated Efficiencies for Public Pension Programme to Reduce Poverty (%)

Two important sources used to be common to support income of retired people in the

past. The first is economic support from their adult children. This kind of intergenerational

economic transfers from children to aged parents was quite common. The second is

self-support of retired people in the form of personal savings, retirement payments, etc. These

two social and economic customs, which support income after retirement from the labour

market, have eroded considerably for various reasons. The public pension programme was

introduced in order to compensate such erosion. It has developed gradually and gradually

during the past 30 years since the year 1973 which is called the beginning of the welfare

system in Japan. The public pension programme played a crucial role to minimize the number

of poor old people, and thus it worked quite well not to produce poverty among older people.

It is noted, nevertheless, that we should emphasize the previous result such that the

most important group of poverty is observed by older people. Is this contradictory to the result

which is given by the efficient effect of the public pension programme? The answer is “No.”

We have to stress about 20 percent figure of horizontal inefficiency of the public pension

programme. The remaining 20 percent figures suggest that there is a non-negligible portion of

older people whose public pension benefits are considerably low or who receive no public

pension benefits, for various reasons.

The degree of the vertical efficiency in Table 8 is about 30~40 percent which is

somewhat lower than 50 percent. It is, however, much lower than the estimated vertical

inefficiency of the income support programme to poor people. Therefore, it is concluded that

some excessive pension benefits or some redundant pension benefits are paid to older

pensioners. This is not a bad result because the purpose of the public pension system is not

only to reduce the degree of poverty among older people, but also to support the decent level

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of economic life of older people. Thus, it is not surprising to see the fact that the public

pension programme pays benefits which are higher than the poverty line. This leads to

produce about 30~40 percent of vertical efficiency of the public pension benefit.

7. Concluding Remark

The paper showed the most recent situation of income inequality and poverty in

Japan. An emphasis was placed on an international comparison, and it was concluded that the

degree of income inequality, and in particular of poverty in Japan was one of the highest.

The paper investigated the cause of poverty, and estimated how it became serious by

showing various poverty measures quantitatively. It was concluded that poverty had worsened

universally and definitely. Estimation of poverty degree was made for various demographic

groups. The highest seriousness in poverty is observed for single mothers, the youth and the

elderly.

Finally, several policies which intend to reduce the number of poor people were

evaluated. Public assistance payment to poor people is not sufficient at all, while public

pension programme is effective to a certain extent to reduce the number of poor people. The

result implies the following; first, it is necessary to improve the livelihood protection

assistance (or income support programme) to poor people significantly. Second, if there had

been no system of public pension, there would have been a larger number of poor people.