How tax and social advantages can prevent women’s participation in the labor market and wage growth

Tax and welfare benefits for low-income spouses are barriers to women’s participation and wage growth in Japan

Japan ranks 120th out of 156 countries in terms of the gender gap, with women earning significantly less than men. This column uses survey data to study the employment and earnings dynamics of women in Japan over their life cycle, and finds that tax exemptions and social insurance benefits for low-income spouses considerably reduce the labor supply and income of women. There is significant scope to improve women’s participation and earnings by removing tax policies that discourage work and skill accumulation. The policy changes would also mean that the government could increase tax revenue without leading to welfare losses.

Certain policies could impede the supply of female labour, hamper their income growth and prevent an economy from utilizing its full capacity (Borella et al. 2019, Doepke and Tertilt 2008).

In Japan, women’s incomes are significantly lower than those of men. Using individual data from the Japanese Panel Consumer Survey (JPSC), we track the labor market experience of women born in the 1960s through 2018 and analyze their employment dynamics and income (Kitao and Mikoshiba 2022). As shown in Figure 1(a), female participation rates exceed 70% in their mid-20s, but drop to 50% in their early 30s, followed by a gradual increase.

The Japanese labor market is characterized by a two-tier employment system, consisting of regular and contingent jobs. On average, regular jobs are more stable and pay much more than precarious jobs, while the latter include part-time and temporary jobs, as well as posted labour, often based on fixed-term contracts. As shown in Figure 1(b), the decline in the labor force participation rate for women until their mid-thirties is explained by the decline in the number of regular employees, while the increase after their thirties is explained by increasing the number of casual employees. employees.

Figure 1 Rate of participation of women in the labor market

Source: JPSC data

Figure 2 shows that there is no significant change in the share of regular employees within a group of single or married women. The overall decline in the share of regular workers is explained by the change in employment status in both marriageable and childbearing age.

Figure 2 Female activity rate by marital status

Source: JPSC data

The earnings of casual workers are significantly lower than those of regular workers, as shown in Figure 3. Moreover, the earnings of casual workers do not increase with work experience and the profile remains stable throughout the employment cycle. life.

picture 3 Women’s earnings by skill and job type

Source: JPSC data

We build an overlapping generations model that explains the pattern of women’s participation in the labor market and the wage structure. We use the calibrated model to analyze the roles of tax policies designed to support low-income spouses and study how they affect the work incentives of women at different stages of their life cycle and their economic well-being.

Our model allows single and married women at different stages of their life cycle to choose both whether they want to participate and the type of employment (regular or casual). Women accumulate human capital at work, and their income growth depends not only on their age, level of education and current employment, but also on the decisions they make throughout their lives.

We focus on the effects of three tax policies: spousal deductions, exemptions from social insurance contributions, and survivors’ pension benefits. Dependent spouses – in almost all cases married women – are eligible for these benefits subject to income thresholds that vary by policy.

The quantitative results show that the three policies remove women’s incentives to work and accumulate skills and reduce their lifetime earnings. Figures 4 and 5 show changes in female labor force participation rates and earnings over the life cycle, comparing outcomes in the baseline economy and alternative scenarios.

Figure 4 Participation rate of women in the reference and alternative scenarios

To note: Exp 1: no deductions for the spouse, Exp 2: no exemption from social insurance premiums, Exp 3: no survivors’ pension, Exp 4: delete the three policies.

Figure 5 Earnings for Women in Baseline and Alternative Scenarios

To note: Exp 1: no deductions for the spouse, Exp 2: no exemption from social insurance premiums, Exp 3: no survivors’ pension, Exp 4: delete the three policies.

The average activity rates of women aged 25 to 64 increase by 6.5, 6.6 and 1.3 percentage points if we remove spousal income tax deductions, exemptions from social insurance contributions and survivors’ pension benefits. Similarly, women’s average earnings increase by 7.0%, 16.3% and 4.1%, respectively. Removing the first two policies leads to a large increase in participation rates of a similar magnitude, but the effects on average earnings are very different. Without spousal deductions, many women choose to participate, but they continue to keep their incomes lower to avoid paying social insurance contributions, which amount to about 15% of their income. Therefore, any increase in participation rates is entirely due to an increase in the number of low-income agency workers, which leads to less change in income compared to the removal of exemptions from paying social insurance contributions. The latter shifts women from non-participation in the labor force and precarious jobs to regular jobs, which generates a large increase in their average earnings as they accumulate more human capital during regular employment. Although policy changes increase women’s tax burden in all policy experiments, the higher incomes of more productive women increase average consumption and improve welfare when the government transfers additional net tax revenue to them.

If all three policies are removed altogether, women’s participation rates increase by 13 percentage points and they earn 28% more on average. They also pay 20% more to the government in taxes and social insurance contributions on their higher incomes. Women’s average consumption increases by 3.0% and they benefit from a welfare gain of 2.1% in equivalent consumption.

Our results suggest that there is significant scope for improving women’s participation and earnings by removing tax policies that discourage work and skill accumulation. Moreover, the policy changes would mean that the government could raise more tax revenue without leading to welfare losses.

Policies that were introduced to support the lives of spouses with no or low incomes worked well in an old economy where the norm was for women to stay home and men to work. These policies now significantly undermine women’s participation in the labor market, productivity and wage growth. Japan faces a severe labor shortage and a growing tax burden that accompanies financing social security expenditures for the elderly over the next few decades. It is essential to remove the barriers that prevent women from participating in the labor market and from taking up jobs that make full use of their skills.

Editor’s Note: The primary research on which this column is based (Morikawa 2021) first appeared as a Work document from the Research Institute of Economics, Trade and Industry (RIETI) of Japan.

The references

Borella, M, M De Nardi and F Yang (2019), “Marriage-related taxes and social security benefits dampen the supply of female labor in the United States”,, 23 November.

Doepke, M and M Tertilt (2008), “Women’s Rights: What’s in it for Men? », 26 May.

Kitao, S and M Mikoshiba (2022), “Why women work the way they do in Japan: Roles of tax policies“, RIETI Discussion Paper 22-E-016.