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Image contrasting poor and rich

A tale of two classes in the wake of COVID-19

Clarifying the disproportionate economic effect of the pandemic on the poor in Japan

The COVID-19 pandemic has wreaked havoc on society, taking lives, straining healthcare systems, and disrupting economies around the world. Armed with recent data from the Japanese government, researchers are now getting new insight into how the pandemic has affected the economic situation of households in Japan.

Professor Kunio Urakawa of Kyushu University’s Faculty of Economics has been sifting through the data to get a clearer picture of how COVID-19’s economic impact in Japan has been felt by groups with different income levels. In this feature, we talked with Prof. Urakawa about the major messages pertaining to economic inequality and tax and social security policies that he found in the data.

A tale of two classes

One of the most telling trends that Prof. Urakawa found when comparing the Family Income and Expenditure Survey data for 2019 and 2020, corresponding to before and after the onset of the pandemic, is that many of the rich in Japan experienced increased income while spending less, particularly on apparel, education, and leisure. In contrast, the poor have seen their income decrease and have made relatively larger cuts in spending on food and medicine.

Breaking down the income data into ten tiers, Prof. Urakawa found that the top two income groups, which had average annual incomes in 2020 of 13.27 million yen and 8.42 million yen, exhibited increases in average household income by more than one percent in this period. On the other hand, the lowest 40% of incomes decreased by an even greater magnitude.

Outsized impact on single-person households

Furthermore, the data shows that people who live in single-person households experienced on average a loss in annual income, irrespective of their income level. As the number of single-person households has skyrocketed in the last two decades, accounting for almost two in five people—38% of the population—in 2020, this trend is worrisome.

Failing to narrow the economic divide

Another noteworthy fact, according to Urakawa, was that the government’s programs to redistribute income through taxes and social security and other compensation schemes were largely ineffective in narrowing the income divide. The poor in Japan did not sufficiently get the support they needed. This is in a contrast to France, Germany, Italy, and Spain, where compensation schemes specifically targeting the poor seem to have succeeded in narrowing income inequality during the same period.

Government income redistribution schemes, such as through taxes and social security, usually work by transferring income from the rich to the poor. The rich generally bear a greater burden in such programs through higher taxes and social security payments. Under Japan’s current system, however, this is not necessarily the case.

When a government’s policies for income redistribution are effective, household disposable income—that is, income after deducting for taxes and social security—will show less economic disparity than household income before these deductions. When Prof. Urakawa compared household income before and after deducting for taxes and social security between 2019 and 2020, he found almost the same magnitude of economic disparity both before and after deduction.

People that were hit worst economically by COVID were the poor, many of whom live in single-person households with irregular jobs, but Japan’s income redistribution scheme is not built for them.
-Professor Urakawa

Why is Japan failing to provide the support that the poor need?

“COVID-19 highlighted the underlying problem of Japan’s income redistribution programs,” says Urakawa. “People that were hit worst economically by COVID were the poor, many of whom live in single-person households with irregular jobs, but Japan’s income redistribution scheme is not built for them.”

Japanese tax and social security systems mainly reward married salarymen/women with regular jobs and dependents. There is an upper limit to the burden of taxes and social insurance premiums, which makes the percentage of income going to those payments significantly lower for married workers with regular jobs with dependents.

However, this demographic is becoming an “endangered species,” so-to-speak, in twenty-first century Japan, where both partners often have to work to make ends meet and marriage has long been on the decline. In fact, the 2020 Population Survey reveals that, for the first time in Japan’s recorded history, among women aged between 25 and 34, the unmarried outnumbered the married.

Jobless and left out

In the worst-case scenario, people have seen their incomes drop during the pandemic as the result of a loss of employment. While many expect the safety net of unemployment insurance to lessen the pain, recent data shows that is not the case for a significant portion of the jobless population.

For the period from July to September 2021, more than three in four of the 2.1 million jobless people in Japan were left outside the unemployment compensation scheme, and 680,000 people were reported as suffering from a prolonged state of joblessness lasting over a year.

While half of the jobless population qualified for unemployment benefits in the 1980s, less than 30% of the jobless today qualify for the job-loss compensation scheme. This is because the existing job-loss safety net only applies to people who work more than 20 hours per week or who work on contracts that last more than 31 days. These regular types of work, however, have been getting scarcer in the last two decades, according to the 2021 Labor Force Survey.

“Without revising tax and social security schemes and amending labor laws, this part of the population in Japan, who are suffering greatly due to the widened economic disparity brought by COVID-19, is most likely to suffer longer and greater,” concludes Prof. Urakawa.

For more discussion, go to: “Widening income inequality during COVID-19: Differing impact across income brackets,” Kunio Urakawa, Discuss Japan, Jan. 11, 2022. (Also available in Chinese.)