Japan ranked 125th among 146 countries in the Global Gender Gap Report of the World Economic Forum last year. While it had high scores in educational attainment, and health and survival, it was significantly behind in economic participation (123rd) and political empowerment (138th).

Japanese women’s labour force participation rate is impressive — at 73 per cent — and much higher than the OECD average of 61 per cent. But the average earnings of women are far below men’s and the gender wage gap is much wider than in other countries, developed and developing.

Women’s college enrolment exceeds 50 per cent, similar to men’s. The World Economic Forum’s education indicator reports that women are as skilled as men, at least upon the completion of their education. At the beginning of their careers, there is no difference between men and women, both in terms of participation rates and average earnings. Their trajectory in the workplace thereafter though is very different.

One important factor is the disincentives for women’s work and career building that are embedded in the fiscal system. In previous decades, when societal expectations confined women to home and childcare, the government introduced policies that were designed to help dependent spouses with limited earnings.

Dependents earning less than a threshold amount of 1.3 million yen (US$8410) are entirely exempted from making contributions to social insurance programs if their partners have insurance coverage at work. These insurance programs include public pension, health insurance and long-term care insurance. Once earnings exceed the threshold, all earnings are taxed at about 30 per cent, which is equally shared by employees and employers. For those making around the threshold level of income, there is clear evidence of employment adjustment so that employees stay just below the cut-off.

Many Japanese companies also provide spousal benefits to employees if their dependent spouses do not earn much. The threshold is often aligned with the social insurance policy. The government also provides income tax deductions to support dependents, which works as a tax on labour force entry and deters spouses from joining the workforce.

In addition, survivor’s pension benefits provide generous annuity income for low-income dependents, guaranteeing up to 75 per cent of a deceased spouse’s employer-based pension. Yet, an existing employer-based pension, if any, may be forfeited if the survivor’s benefit is taken up. Since the survivor’s pension is typically larger, it can effectively replace the forfeited pension, rendering the same payment to the recipient regardless of their own contributions to the system.

Research using a macroeconomic model simulates how these policies influence the career decisions of women. Without these policies, it shows that the participation rates of the cohort of women born in the 1960s would have been 14 per cent higher. And more importantly, they would have on average earned 30 per cent more.

This large lift in earnings is a consequence of many women shifting from low-income contingent jobs to higher-paying roles in the workforce. In these positions, they accumulate more human capital at earlier stages of their careers and enjoy stronger growth of their earnings. With the removal of these outdated policies, households would have to pay more taxes to the government, but household income and consumption wouldn’t necessarily be lower since they would earn more. Even after taking account of increased working hours, household welfare would improve.

Japan suffers from a severe labour shortage that will be exacerbated over the coming decades, creating many problems in different sectors of the economy. The total fertility rate hit a record low of 1.26 in 2022 and decreased further in 2023. The government is struggling to boost the birth rate. Yet, there is doubt about the chance of its measures lifting the fertility rate anywhere close to the population replacement level.

While the pool of workers continues to shrink, labour force participation rates of women and the elderly are already very high. The number of foreign workers is rising and is projected to continue increasing. Yet it is unlikely that the inflow of foreign workers will be sufficiently large to offset the decline in the Japanese workforce.

Japan has few options to prevent the labour supply from diminishing to a disastrous level. Crucially, Japanese workers must be more productive. The underutilised potential of women offers much room for lifting productivity.

Japan is slowly re-examining and adjusting old policies. The reform needs to be expedited, as outdated policies are no longer protecting low-income individuals but are instead a major drag on women’s productivity and wage growth.

Sagiri Kitao is Professor at the National Graduate Institute for Policy Studies (GRIPS).