A Comparison of Income Inequality in the United States and Japan

A Comparison of Income Inequality in the United States and Japan
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A Comparison of Income Inequality in the United States and Japan
Income inequality represents the gap between the rich and the poor. Over the years, this gap has widened in many countries, especially developed countries. Examining income inequality is important because, according to Taghizadeh-Hesary et al. (2019), high levels of income inequality affect not only the economic growth of a country but also economic sustainability. Further, the trends in income inequality are different from country to country, even if the countries have the same level of economic development (United Nations, 2020). An example is the United States (US) and Japan. These two countries are developed economies with high GDP per capita levels but different income distribution trends (Aizawa et al., 2017). Therefore, they make good case studies for income inequality comparison. Although both countries have experienced a rise in income inequality, Japan has a lower income inequality when compared to the US. This difference has been attributed to several factors that will be discussed in this paper.
Changes in Income Inequality Since 1980
In the last 40 years or so, both Japan and the US have experienced changes in the distribution of income among the poor and the wealthy. According to Albert et al. (2017), following the Great Recession, many developed countries, including the US and Japan, have experienced a rise in income inequality. This section explores how the changes in income inequality in Japan have compared to the changes in the US.
Japan has, in the past, been considered one of the countries with the lowest income inequality. Taghizadeh-Hesary et al. (2019) indicate that there has been a notion that all Japanese are middle class in the past, which has contributed to lower-income inequality compared to the US. However, in the last several decades, Japan has experienced significant changes in income inequality due to several factors. According to Taghizadeh-Hesary et al. (2019), in the 1980s, Japan had the lowest income inequality among the G7 countries, but its income inequality has now risen to 0.5, which is the average income inequality for G7 countries.
In the 1980s, income inequality increased gradually and remained at the same levels the 1990s, as shown in figure 1. According to the World Inequality Database (WID) (n.d.a), in 1980, Japan’s pre-tax national income was 10.9% for the top 1%, 36.5% for the top 10%, and 19.3% for the bottom 50%. By 1990, these figures had changed to 14.8%, 41.8%, and 17.5%, respectively. It is worth noting that even though the pre-tax income for the top 1% and 10% increased significantly, that of the bottom 50% declined slightly. By 2000, the pre-tax income for the top 1%, top 10%, and bottom 50%, was 11.5%, 41.3%, and 16.9%, respectively (WID, n.d.a). As the income for the top10% increased, that of the bottom 50% declined, thereby widening the gap between the rich and the poor. Table 1 shows the pre-tax national income for the last few decades
Table 1: Japan’s Income inequality (1980-2020)

1980

1990

2000

2010

2020

Bottom 50%

19.3

17.5

16.9

16.6

16.8

Top 1%

10.9

14.8

11.5

13.1

13.1

Top 10%

36.5

41.8

41.3

45.0

44.9

Source: Data obtained from (WID, n.d.a)
Figure 1: Japan’s Income Inequality
Source: (WID, n.d.a)
In comparison, the pre-tax national income in the US in 1980 was close to that of Japan but slightly lower, as shown in table 2. However, by 1990, Japan’s pre-tax national income for the bottom 50% was higher than that of the US, although both countries’ pre-tax income for the bottom 50% had declined. The national income for the top 1% and 10% earners increased in both countries, although that of Japan remained slightly higher than that of the US. Over the decades, the US experienced an increase in the national income for the top 1% and 10% from 10.5% and 34.2%, respectively, in 1980 to 18.8% and 45.5% in 2020, as shown in figure 2 (WID, n.d.b). However, the national income for the bottom 50% has declined from 19.1% in 1980 to 13.3% in 2020. Similarly, Japan experienced an increase in the national income for the top 1% and 10% from 10.9% and 36.5% respectively in 1980 to 13.1% and 44.9 % respectively in 2020 (WID, n.d.a). There has also been a decline in the income for the bottom 50% from 19.3% in 1980 to 16.8% in 2020. The degree of change has, however, been different. The US has experienced a change in income for the three groups with a higher magnitude than Japan. For instance, the difference between the change in the income for the top 1% in the US between 1980 and 2020 has been an increase of about 8%, while that in Japan has been an increase of about 2% within the same period. Additionally, the change in income for the bottom 50% in the US between 1980 and 2020 has been a decrease of about 6%, while that in Japan has been a decrease of about 3% within the same period. This shows that although the countries have had a similar trajectory in national income, they have also experienced these changes at different paces. Japan has experienced income inequality at a slower pace than the US because the gap between the rich (top 1%) and the poor (bottom 50%) is smaller in Japan than in the US. As the World Inequality Report 2022 from WID (2020) indicates, the average national incomes, to some extent, indicate whether countries have unequal or equal distribution of incomes. In the case of the US and Japan, there is an indication that upper-income earners continue to earn more income while low-income earners continue to earn less income. However, there has been rapid income growth among upper-income earners in the US than in Japan.
Table 2: US Income Inequality

1980

1990

2000

2010

2020

Bottom 50%

19.1

16.3

14.6

13.5

13.3

Top 1%

10.5

14.3

17.4

17.7

18.8

Top 10%

34.2

38.6

42.9

43.9

45.5

Source: Data obtained from WID, n.d.b)
Figure 2: US Income Inequality
Source: (World Inequality Database, n.d.b.)
Also, there are differences between the shares of wealth owned by the top 10% in each country. As of 2018, the share of wealth owned by the top 10% in Japan is 41% (Organization for Economic Cooperation and Development (OECD), 2020a), while that owned by the top 10% in the US is 79.5% (OECD, 2020b). Japan’s share of wealth is quite low; it is, in fact, lower than that of the OECD average (51.7), while the US is higher than the OECD average. This indicates that Japan has been able to redistribute wealth more effectively than the US, contributing to its lower income inequality. The difference in the share of wealth owned by the top 10% in each country explains why the two countries have had different income inequalities, albeit both being developed countries with high GDP per capita levels. The more share of wealth owned by the top 10%, the less the share owned by the bottom 50%, and this created a larger gap between the two and contributed to greater economic inequality in the country.
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