Low Pay For the Highly Skilled Starves Japan of Human Capital

The Myth of Japan’s Missing Millionaires, Part 3

Source: https://tinyurl.com/2y627uk5 Note: Data from 2023; this includes capital gains, dividends, pensions, social security, etc. But, at the median, most of the income is from labor compensation. See text for further explanation.

In Part 1 and Part 2 of this series, I pointed out that, prior to the “lost decades,” Japan had a higher share of millionaires, with greater average wealth, than other rich countries. Then, the number of millionaires was reduced by plunging stock and property prices. In recent years, as asset prices recovered, so did the share of millionaires among Japan’s adults.

Still, there are those who contend that Japan would have even more millionaires, and they’d be wealthier, if not for its tax system. They point out that Japan’s top marginal income tax rate, at 56% for national and local taxes, is the highest among OECD countries. However, that rate applies to few taxpayers. In fact, as I’ll detail in the upcoming final part, Japan taxes the affluent less than most OECD countries. For example, when one compares Japan’s taxes to those of 31 countries in the OECD, it ranks 19th lowest for someone earning two-and-a-half times the average compensation.

The primary obstacle to wealth accumulation is not taxes but Japan’s low salaries. When your salary is too low to save/invest enough year after year, it’s hard to accumulate ¥100 million in wealth ($1.05 million at a Purchasing Power Parity exchange rate). In Japan, the PPP value of the yen is ¥95/$, meaning that ¥95 and $1 can buy the same amount of goods and services.

As I’ll detail below, not only does this mean Japan has fewer millionaires than it could, it also means that it has fewer highly-skilled workers than it needs. With human capital being Japan’s only real resource, this shortfall is a major factor in its poor growth and stagnant living standards.

Low Pay For the Highly Skilled

As I discussed in Part 2, building wealth is a lot easier if you earn ¥10 million ($105,000 PPP), but only 7% of Japan’s 108 million adults can do so. This puts Japan 23^rd among 31 wealthy countries. In the typical rich country, those in the top 7% earn at least $140,000 per year. (This figure includes capital gains, but that is only a small share of the income of those in the 93^rd percentile).

It’s even easier to become a millionaire if you earn at least $200,000 PPP or more. However, only 4% of Japan’s adults earn at least $200,000, and a quarter of their income comes from sources other than salaries.

The problem is that occupations that pay $100,000, $200,000, or more in other wealthy countries—such as business and financial managers, PhDs, scientists and engineers, information technology pros, doctors, and lawyers —pay significantly less in Japan.

When it comes to the median adult in 31 rich countries (those in the 50^th percentile), earnings in Japan are 17% below those in a typical rich country ($40,000 PPP in Japan vs. $49,000 elsewhere). That seems understandable because Japan’s real per capita GDP is 19% below the median. However, Japanese in the 90th income percentile are very poorly paid by international standards: just $74,000 vs. $124,000 elsewhere. That puts Japanese pay 40% below that in the median rich country (see chart at the top).

The pay premium for being highly skilled is very low in Japan. We don’t have a direct measure for this. What we can see is that, when it comes to the income premium Japan ranks third to last, with people in the 90th percentile having 1.8 times the income of those in the 50th. For the typical rich country, the ratio is 2.5 times (see chart below).

Unfortunately, this includes all income and I’ve not been able to find statistics with this sort of detail just for labor income. However, there is information on how PhDs and digital professionals don’t get the pay premium that would induce more to choose those careers.

Only 70% of PhDs get a full-time career within a few years of obtaining their doctorate. By contrast, in the rich typical country, more than 90% of PhD holders aged 25 to 34 had found a career. Even for those able to obtain a regular job, salaries are low because corporations don’t want to hire university-minted PhDs, even in digital and STEM areas (see this post). The median annual income of a PhD holder in Japan is just ¥4-5 million ($42-53,000 PPP), no more than the median income among all full-time employees. 40% of PhDs earn less than ¥3 million ($32,000 PPP).

In 2021, the average annual income of a Japanese ICT staffer was just ¥4.4 million ($46,000 PPP). That was 2% below the median salary in Japan, whereas in the US and China, ICT salaries are 8-10% above the median. Averages understate the gap because they hide the big differentials in American and European pay for the most highly skilled ICT pros versus lower-level technicians (see this post).

The result, as I’ll detail below, is that Japan suffers a shortfall in highly-skilled people.

It Was Not Always So

Back in 1992, before the lost decades set in, Japan’s middle class actually got better pay relative to those in other wealthy countries. The problem is that between 1992 and 2023, even though Japan’s per capita GDP grew—albeit slowly—the real income of someone in the 50^th percentile did not grow at all. For them, it was truly three lost decades. As shown in the chart below, their income steadily fell until 2009, when it began to slowly recover. Not until recently has it returned to the 1992 level. Among adults in the 90^th percentile, income grew slowly until the onset of the Great Recession of 2007-09, when it plunged. Today, their income is barely higher than it was two decades ago.

Why did personal income not grow in tandem with per capita GDP? The reason, as I’ve discussed many times, is that wage austerity filled corporate coffers with excess cash flow. It has mostly stayed there, like fallow land.

In contrast to Japan, personal income kept growing elsewhere (despite some wage austerity in many of these countries). So, here’s the result. Back in 1992, the real income of Japan’s 50^th percentile was actually 12% higher than in the rest of the rich countries: $40,002 vs. $35,770, However, by 2023, zero income growth in Japan sent relative income plunging to a stunning 45% lower than the rest: $40,754 in Japan compared to $73,844 elsewhere (see chart below).

What about those in the 90^th percentile? In 1992, income for those in Japan was 17% below the level elsewhere: $66,461 vs. $80,381. So, the insufficient pay premium for the highly-skilled is not a product of the lost decades, but a longstanding feature of the Japanese labor system. In terms of the pay premium for those at the 90^th percentile, Japan ranked near the bottom in both 1992 and 2023. However, slow growth in Japan meant that, by 2023, the pay differential widened to a breathtaking level. Relative pay for Japan’s 90^th percentile had fallen to 40% below the level elsewhere: $73,844 vs. $121,518. In fact, the income of Japan’s 90^th percentile in 2023 was 8% below the level ($80,381) that the rest of the rich countries had reached 30 years earlier in 1992 (see again the chart below).

Low Pay Erodes Human Capital

Low pay hurts not only those with high aspirations, but also the whole country through a shortfall in highly skilled workers. Too many bright Japanese figure: why miss out on several years of income to get the education needed for these highly-skilled occupations when the pay premium is so low?

Companies complain about being unable to find as many Information and Communications Technology (ICT) professionals as they need, and METI projects the shortfall to worsen to 450,000 to 800,000 by 2030. Low pay is not the only factor, but it’s a big part of the problem. Low pay also makes it harder to compete with other countries that are also trying to lure professionals from other countries. See this post for the details.

Japan is the only major country where the number of PhD holders per million people is lower today than two decades ago. By contrast, Korea’s ratio has risen to three times that of Japan.

For details on these shortfalls and how it stifles commercial innovation, see this post and this one.

Too Few Rich and Super-Rich

Along with having too few moderately rich, Japan has very few super-rich. Among the top 0.1% (100,000 adults in Japan), Japan ranks 23^rd at an income threshold of at least $865,000. Among the top 0.01% (10,000 adults), Japan comes in dead last at a threshold of at least $1.13 million (see chart below). In the median country, the threshold was $4.4 million. At the other extreme, in the US, the threshold was $13.5 million. Notice that Denmark, Norway, and Sweden—hallmarks of income equality—come in 7^th, 8^th, and 9^th with a threshold of $5-6 million. Promoting equality does not have to mean blocking the path to earning millions per year (see chart below). The rich can get richer while the poor and middle class also see their income rise.

The US, on the other hand, makes the super-rich even wealthier via all sorts of “rent extraction” measures that hurt the poor and middle class. Even Disneyland, built for the middle class, has become off limits to them, while the wealthiest 10% now account for half of all consumer spending. For example, via higher compensation packages, the top five executives at publicly-listed corporations got 17-25% of the cash benefits to the corporation itself from two of the big tax breaks in Trump’s 2017 corporate tax cuts. No wonder so many corporate leaders supported Trump’s re-election and now surrender to him so easily. As the OECD reports, all of this hurts the real economy.

Only 1,000 Japanese (the top 0.001%) earn as much as ¥774 million ($8.15 million PPP), according to another source. That’s 40% less than the 24,000 Americans in the top 0.01%.

Corporate Executive Pay

In an interesting trend, the number of corporate executives being paid more than ¥100 million ($1.05 million, PPP) has almost tripled from 400 in 2012 to 1,100 in 2023 (see chart below). This is largely because a growing number of companies on the stock market are paying their executives in stock options, often based on assorted performance indicators. So, the rise in the overall market has increased the value of those options. It’s good that this has become more socially acceptable. However, whether this results in an actual improvement in the metrics that really matter for corporate performance will have to wait for another post. In any case, these executives comprise a tiny sliver of those with such high incomes

.Source: https://www.nippon.com/en/japan-data/h02049/

Japan’s Poor Are Very Poor

This point is outside the main topic of millionaires, but since this post is comparing income trends across countries, it’s worth noting.

While suffering from too few wealthy, Japan also suffers from having too many poor. This is mainly due to the abundance of low-paid, non-regular workers (36% of all company employees), as well as seniors with limited income beyond social security, which is not included in these income figures. These seniors maintain their consumption by drawing on their savings. Among 32 affluent countries, Japan comes in second to last in the income of the adults in the 25^th percentile. At $18,575, their income is about 30% less than the median country income (see chart below).

In Japan, the ratio of the income of the 25th percentile is just 46% of those in the 50^th percentile. In a typical OECD country, the ratio is 61%.

These results are primarily due to low wages, not demographics. Yes, seniors comprise a larger share of the population in Japan, 29% vs. 18% in the rest of the OECD. But 25% of Japan’s seniors have jobs, vs. half of that (13%) elsewhere.

Up Next: Does the MOF Take Away In High Taxes Your Hikes in Compensation?

To receive new posts and support my work, consider becoming a free or paid subscriber.