Archive | December 2016

Benefits of raising the minimum wage in Japan

We know that the legal minimum wage in Japan is about 798 JPY ($6.52) per hour (make sure that you are paid at least that if you are doing part-time or holiday work!). But I was surprised to learn from an IMF blog  that it is lower than in many other advanced countries,  particularly if it is compared to the average wage in Japan (see chart). And about 10% of the working population receive only this bare minimum or just slightly above it.


Apparently the government realises that raising the legal minimum would help to boost consumption in Japan, which is needed because the government and the overseas sectors have really reached the limits of their ability to raise aggregate demand. They plan to increase the minimum wage by 3 percent every year, which would result in a hike from 798 yen to over 1,000 yen per hour by the year 2023.

The IMF’s research suggests that these raises would be beneficial, not only to the lowest-paid but also to other higher-paid workers, whose wages would consequently rise by at least 0.5% per year. Despite the simple models that imply an increase in unemployment if the minimum wage is raised, this will not happen because the labor market is tight.  However, the researchers do not think that these wage increases would be enough to get Japan out of the deflationary spiral. They additionally argue for measures to give more bargaining power to workers.

The IMF used to be thought of as strong supporters of new classical market-based supply-side policies. Minimum wage legislation and increased labor union power are often cited as impediments to the flexibility of a perfect labor market. It seems as though the IMF’s advocacy of free markets has shifted.