Ishiba's ¥1,500 Misleading Minimum Wage Plan Merits a Closer Look

Prime Minister Shigeru Ishiba has stated that he "aims to raise the average minimum wage to ¥1,500 JPY [from its current level of ¥1055] in the 2020s." 

Is that really feasible? What would happen if such an increase to the minimum wage is forced through?

Even though the Ishiba administration has just been launched, its liberal tilt is already obvious to everyone. After all, those are the particles that traditionally emphasize "wages." 

However, in truth, people tend to fixate on wages, which are easy for all to see, without comprehending the fundamental principles of job creation. Although monetary policy is the key to creating jobs, many liberals fail to understand that lowering interest rates increases capital investment in things and also increases employment, which is an investment in people.

Case Studies

The former South Korean government under Moon Jae In also showed this leftist lack of understanding concerning economic policy. It went ahead and raised the minimum wage by 16.4% in January 2018. As a result, within one year, the unemployment rate which had previously stood at 3.6% jumped to 4.4%. 

Earlier in 2010, the Democratic Party of Japan (DPJ) administration failed by following the same approach. Based on the unemployment rate of the previous year, it would have been reasonable to raise the minimum wage by about 0.3%, but the then-ruling party went and raised it by 2.4%. 

The result was that employment conditions worsened and the number of employed decreased by 300,000 while DPJ was in power. The reverse happened during Shinzo Abe's second stint as prime minister. Under Abe, employment increased by more than 3,000,000. 

The Ishiba administration seems destined to share the fate of these earlier left-leaning governments. To achieve a minimum wage of ¥1,500 in 2029, it would have to raise the minimum wage by an average of 7.4% per year for five years straight. 

Actual results since 1980 show the largest annual increase was 6.9% and the average a mere 2.6%. Clearly, the Ishiba administration is not likely to reach its target.

Economic Constraints on Wage Increases

The extent to which the minimum wage can be increased will essentially depend on the inflation rate and unemployment rate during the previous year. But in fact, the unemployment rate can only go so low. 

I won't get into detailed calculations here. Suffice it to say that assuming the floor for the unemployment rate is in the mid-two percent range, the inflation rate will need to be at or above the double-digit level for five consecutive years to achieve Ishiba's goal.

Doesn't the Ishiba administration have any experts who can do such simple calculations? When Abe was prime minister and I was a Cabinet advisor, almost every year he would ask me how high he could raise the minimum wage. 

I was always prepared to answer the Prime Minister's question. The number can be easily determined through a simple application of the Phillips curve, which shows the relationship between the inflation rate and the unemployment rate. In that case, the required inflation rate mentioned above was obtained by using this time-tested inverse relationship formula.

Ideals vs Implementation

During the July 2019 upper house election, the Constitutional Democratic Party of Japan (CDP) pledged to raise the minimum wage to ¥1,300 within five years, while the Reiwa Shinsengumi party set the goal at ¥1,500. There is probably no need for concern since the chances of the CDP or Reiwa Shinsengumi forming a government are minimal. Yet it is astonishing that a similar proposal should emanate from the ruling party. 

Liberals tend to think first about ​​raising the minimum wage but often neglect to think about how to achieve that goal. Prime Minister Abe prioritized the determination of how far the minimum wage could be raised realistically without pushing too far. 

The Ishiba administration is putting ideology first but has not figured out what realistic, concrete steps to take. If it continues down this path, it will surely fail just like the Moon government and DPJ government did in the past. 

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(Read the article in Japanese.)

Author: Yoichi Takahashi

Yoichi Takahashi is a professor at Kaetsu University. He formerly served as a special advisor to the Cabinet.