The
Employment
for Aged
Workers
and the Financing of Unemployment Insurance 45
Reviewof Population
and Policy
Social Policy,
No. 7,
1998, 45–60.

The Employment Policy for Aged Workers andthe Financing of Unemployment Insurance
Yoshihiro KANEKO*

Abstract
In the reform of the Japanese public pension system and unemployment insurance in 1995, a wage subsidy for aged workers funded by unemployment insurance was introduced. According to time series data, the wage
elasticity of the labor demand for aged employees is elastic, whereas that of thelabor supply is inelastic. Hence, the subsidy increases the demand for older workers by enabling fiirms to reduce their labor costs. At the same time, it raises the
take-home pay of aged workers and improves their economic welfare. This fact isconfirmed by the estimated results of the augmented demand system for aged
workers. However, because unemployment insurance is financially dependent on
the aging population, the contribution rates of unemployment insurance will risein the near future.

1.

Introduction

The proportion of people over age 65 to the population as a whole has been risingmore rapidly in Japan than in Western industrialized countries. To meet this challenge, the government has reduced public pension benefits by raising the pension
age from 60 to 65. At the same time, to maintain the living standards of people
between 60 and 64, it has encouraged their participation in the labor force so theycan earn a living wage. In 1995 the Japanese public pension system and unemployment insurance were thus reformed to defer pension eligibility gradually until age
65 with the employment of these workers.
In this reform, the government introduced wage subsidies for workers aged between the ages of 60 and 64 who are continuously employed by the same company
or reemployed by another company after the retirement age (age 60). The subsidies
consist of “basic benefits for continuous employment of the elderly” and “benefits
for reemployment of the elderly.” From the viewpoint of income redistribution,these subsidies are paid to those employees whose wages from continuous work areunder 85% of their final monthly salary before the retirement age at their company(i.e., the salary at the age of 59).
The government expects that these benefits will increase the opportunities of__________________________________________________________________________________
This is the English version of an article in Keizai Kenkyu (Economic Studies), Vol. 49, No. 1, January,
1998.
* National Institute of Population and Social Security Research and Ochanomizu University.
[ 45 ]

46

Yoshihiro KANEKO

aged workers to enter the labor force, because these subsidies will reduce the laborcosts of the companies that employ aged workers and provide an economic incentive to hire older workers. But employment opportunities for these workers will
depend on the overall economic condition of Japanese industries. During the recession following the collapse of the bubble economy in the late 1980s, the unemployment rate for male and female workers over age 55 increased faster than that of
their younger counterparts (Table 1). Hence we should investigate the effects ofthese subsidies on the demand for elderly workers as well as on their participationin the labor force.
To this end, it is useful to examine the effects of these subsidies on the wage
elasticity of the labor demand for and the supply of people in their early sixties. If
the demand for aged workers with respect to wage rates is inelastic, the amount of
the subsidies might be greater than it would in the case where the labor demand iselastic in order to maintain a certain level of job opportunities for elderly people.
When the average subsidy for continuous employment is large, the total cost ofthese subsidies becomes larger and larger as the society is aging. Today we can relyon the employment stabilization fund to support unemployment insurance, but theincreasing cost of these subsidies will affect the financial stability of the insurance inthe long run.
Nevertheless, it is necessary to maintain coordination between the public pension
system and the employment policy for aged workers because we must deal with thegraying of our population in the next century. The aim of this essay is threefold.
Table 1 The labor force participation (LFP) rate, the share of employees on the labor
force, and unemployment rates by age group (%)
LFP rate
Year

a.v.

1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995

63.0
62.8
62.6
62.6
62.9
63.3
63.8
64.0
63.8
63.6
63.4

Percentage of employees*

Age group
55–59* 60–64
70.0
69.7
70.5
70.7
71.6
72.7
74.0
74.2
74.9
74.8
75.2

53.7
53.8
53.8
53.8
54.6
55.5
56.8
57.2
57.1
56.6
56.7

a.v.
45.5
45.6
45.4
46.0
46.9
47.9
49.0
49.7
50.1
50.1
50.1

Age group
55–59 60–64
42.8
43.0
43.4
44.4
46.6
48.7
51.1
52.5
54.2
54.5
55.6

25.0
25.2
25.1
25.9
27.5
28.8
30.9
32.4
33.4
33.2
33.4

Source: Ministry of Labor (1996), White Paper on Labor.
* The percentage of employees to the total population classified by age group.
a.v. = average value of all age groups.

Unemployment rate
a.v.
2.6
2.8
2.8
2.5
2.3
2.1
2.1
2.2
2.5
2.9
3.2

Age group
55–59 60–64
3.3
3.4
3.3
2.8
2.4
2.0
1.7
1.7
1.8
2.4
2.4

4.9
4.9
5.3
4.7
4.2
3.5
3.6
3.7
4.6
5.3
5.7

The Employment Policy for Aged Workers and the Financing of Unemployment Insurance 47

First, it will show the decreasing wage rates for continuous workers aged 60 to 64
compared with the final wage rate at age 59. Then, on the basis of this survey, it
will compare the effects of the subsity for aged workers on their labor force participation and on the labor demand for them by estimating the wage elasticity forlabor demand and supply. Second, it will examine the welfare gain of this subsidy
to the aged workers’ household. Finally, it will attempt to estimate the budgetbalance of unemployment insurance during future periods and consider appropriate changes in unemployment insurance fees over the long term.
2.

The Decreasing Wage Rates of Aged Workers and the Level of
Basic Benefits for Their Continuous Employment

One important function of the basic benefits for continuous employment is tomaintain the income level of aged workers because the wage profile tends to diminish as people age. The Japanese wage system is often referred to as the seniority
wage system, under which salaries and positions rise with the length of service
within a company. But now that the economic growth has slowed, companies
believe that middle-aged and older workers earn higher wages than younger workers who can adapt to the technological change necessary for more efficient production. As a result, the wage profile for middle-aged and older workers becomesflatter and the wage rates for their continuous employment tend to decrease during
the final years of employment.
Hence the basic benefits for the continuous employment of the elderly are designed to be paid to those people aged 60 to 64 whose wages from continuous
employment are under 85% of their final monthly salary at age 59 (See Figure 1).
Since these benefits make the take-home pay larger than the wage rate offered by
the company, it plays an important role in maintaining the income level of theelderly who are ineligible to receive their pension until they are 65.
To calculate the average value of the basic benefits for continuous employment
by sex, we must estimate the decreasing rate of wages earned by male and female
workers in their early sixties. By using the “Basic Survey of Wage Structure” in1994 and 1995, we can estimate the decreasing rate of the salary of workers between ages 60 and 64 compared with those aged 59, the age before mandatory
retirement. We regressed the monthly salary by age group in 1994 to an age
variable and the dummy variable for the mandatory retirement age to get theparameters for wage profiles for male and female workers. According to the estimated parameters, we can obtain the estimated values of the monthly salary formale and female workers at age 59 in 1994. By comparing these values withmonthly salaries of the 60 to 64 age group by the length of service given by the“Basic Survey of Wage Structure” in 1995, we can then determine the decreasing

48

Yoshihiro KANEKO

Figure 1 The basic benefits for the continuous employment of the elderly

rate of the monthly salary of the elderly who are continuously employed after theretirement age of 60. The outcomes are summarized in Table 2.
According to Table 2, the shorter the length of service of the aged workers in acompany, the higher the decreasing rate becomes. Especially for those workers
whose length of service is less than five years, the decreasing wage rate exceeds
15%. The ratio of those workers whose wage rate is under 85% of the final wage
rate at age 59 to the total number of workers between 60 and 64 amounts to about
60% for males and 45% for females. The reason for the prevailing decrease inwage rates is that since a lot of workers between 55 and 59 are reemployed by thesame company after mandatory retirement or by another company after their job
search, their length of service is reduced to less than five years when they arecontinuously employed between ages 60 and 64.
Consequently, there is considerable room for applying the basic benefits forcontinous employment of the elderly. In fact, the average decreasing rates of wagesof the male and female workers between 60 and 64 over that at age 59 amounts to
21.9% and 20.9% respectively. By applying these decreasing rates of male andfemale wages to the schedule for “basic benefits for continuous employment” proposed by the Ministry of Labor, we can obtain the monthly amount of the benefits
for male and female workers, that is, ¥18,048 and ¥9,534 respectively. The increasing rate of the take-home pay by these amounts over the wage rates offered by thecompany becomes 6.8% and 5.7% respectively. In the next section, we consider theThe Employment Policy for Aged Workers and the Financing of Unemployment Insurance 49

Table 2 The wage rate (monthly salary) and the decreasing rate of wages between
age 59 and ages 60–64
Age
Wage rateof wage rate (%) by tenure group (%)

Decreasing rate

Share of workers

Year

Group

TenureMale

FemaleMale

FemaleMale

Female

1995
1995
1995
1995
1995
1995
1995
1995
1995
1995

60–64
60–64
60–64
60–64
60–64
60–64
60–64
60–64
60–64
60–64

a.v.
0
1
3
5
10
15
20
25
30

300.8
234.3
245.8
266.4
288.8
286.6
305.4
327.4
355.1
409.1

198.1
164.5
165.4
171.9
167.9
187.3
202.1
221.9
255.7
253.9

− 12.4− 31.8− 28.4− 22.4− 15.9− 16.5− 11.0
− 4.6
3.4
19.2

− 6.6
− 22.4− 22.0− 19.0− 20.8− 11.7
− 4.7
4.6
20.5
19.7

100.0
8.1
14.9
12.2
20.4
9.7
7.2
6.7
5.8
15.1

100.0
4.6
9.8
8.8
19.9
17.9
14.5
11.0
7.3
6.2

1994

59 (age) a. v. 343.3 212.1

a.v. = average value.
Note: The wage rate indicates the average monthly salary for regular male and female workers classified byage group. The decreasing rate of wages is defined by the wage rate of those aged 60–64 minus the wage
rate at age 59, divided by the wage rate at age 59. The estimation results of the male and female wage
profiles that are used to obtain the wage rate at age 59 are:male workers: WAGM = 103153 + 17952 × AGE − 253.23 × (AGE2) − 95385 × DUM55.
(10.10)** (15.95)**(− 10.10)**(− 4.81)**
female workers: WAGF = 135167 + 6397.5 × AGE − 105.65 × (AGE2).
(14.49)** (7.39)**(− 6.62)
where WAGM and WAGF indicate the average monthly salary for regular male and female workers
respectively. The value in brackets indicate t statistics and ** shows that the parameter is significant at
the level of 5%.

effect of these benefits on workers between 60 and 64 in terms of their labor force
participation and economic welfare.
3.

The Effect of Basic Benefits for Continuous Employmentof the Elderly on Labor Demand and Supply

To estimate the wage elasticity of labor supply, we regressed the labor force participation rate of workers between ages 60 and 64 to their wage rate, to their social
security benefits, and to the percentage of the population over 65 to the total
population. Here we used the following time series data from 1965 to 1995: maleand female labor force participation rates (LFPRM and LFPRF respectively) fromthe “Labor Force Survey,” the average monthly salary for male and female workers
in the 60–64 age group from the “Basic Survey of Wage Structure” in 1995
(WAGM and WAGF), employees’ welfare pension benefits at the recipient age 60
from the “Annual Report of the Public Pension Agency” (BENM and BENF), and50

Yoshihiro KANEKO

the ratio of the population over 65 to the total population (POPR) from the “Annual Report of the Population Survey” in 1995.
The estimation results of the equation for labor force participation rates for aged
male and female workers are expressed as:
(1)

(2)

LFPRM = − 6.839 − 0.360 × POPR + 0.818 × WAGM − 0.462 ×(− 3.557)** (− 1.456)(2.776)**(0.409)**2
BENM, R = 0.758
D.W. = 1.206
LFPRF = − 4.271 − 0.073 × POPR + 0.612 × WAGF − 0.487 × BENF,(− 1.135) (− 0.189)(1.738)*(− 2.518)
2
R = 0.758

where all of the variables and the regressor are transformed to the natural logarism.
R2 and D.W. indicate R square and the Durbin-Watson statistic respectively, and* and ** indicate the level of confidence of estimated parameters for 10% and 5%
respectively.
By combining the estimated parameters in Eqs. (1) and (2) with the averagemonthly salary at age 60 in 1995, the wage elasticity of the male and female labor
supply with respect to the wage rate (monthly salary) is calculated as 0.204 and0.102 respectively. This outcome implies that the aggregate responses of the maleand female labor supply are inelastic with respect to wage rates.
On the other hand, in order to estimate the wage elasticity of labor demand foraged workers, we used an estimation result of the Cob-Douglas production function
with three production factors: labor of workers over age 55, labor of workers
younger than 54, and real capital stock. The sources of these time series data werethe “Economic Lookout of Japanese Economy” and the “Labor Force Survey.”
The estimation result of this production function is summarized as:(3)

log (GNP)= 2.811 + 0.018 × T − 0.021 × DUM + 0.247 × log (K) + 0.682 × log (Ly)
(4.2)** (1.35)* (− 0.34)(3.51)**(1.28)+ 0.071 × log (L55)(2.15)*
R2 = 0.991, D.W. = 1.276

where GNP is the gross national product in real terms (the base year is 1985), T is
the time trend for technical changes, DUM is the dummy variable for Oil Crises, K
is the real capital stock, Ly is the number of workers under age 54, and L55 is thenumber of workers over 55. The estimation period is between 1965 and 1995. The
two-stage least-squares method for estimating Eq. (3) was used to deal with the
autocorelated disturbance terms.

The Employment Policy for Aged Workers and the Financing of Unemployment Insurance 51

By using the estimated parameter for L55 and the average wage rate (monthly
salary) for workers at age 60, we can calculate the wage elasticity of labor demand
for aged workers. The outcome of this elasticity is 1.535, which implies that thelabor demand for aged workers is elastic. This estimated value of the wage elasticityof labor demand implies that, assuming the company can reduce the wage rate by
5% or 10% (while the take-home pay for the aged workers is compensated by thebenefits of their continuous employment), the labor demand for the aged workers
would be increased by 7.67% and 15.35% respectively.
According to these estimation results based on time series data, the wage elasticity of labor demand for aged employees is elastic, whereas that for labor supply(work force participation) is inelastic. Since the basic benefits for continuous employment for the elderly are designed to increase take-home pay when the wage
rate offered by a company for continuous work is under 85% of the final monthly
salary, this subsidy enables the company to reduce the wage rate without loosing
work incentives for the aged employees. Under the severe economic constraints
imposed by the recession following a bubble economy, companies are urged toreduce labor costs, while they have to cope with controlling dismissals and maintaining the employment of aged workers under the Law on the Stabilization of
Employment of Older People. Hence companies tend to offer decreased wage rates
for aged workers who are reemployed after the retirement age. As a result, thewage elasticity of labor demand for the aged workers becomes elastic. This fact
makes the effect of the basic benefits for the continuous employment of the elderly
on labor demand much larger than that on their labor supply, which is inelastic towage rates.
4.

The Welfare Effect of Basic Benefits for Continuous
Employment of the Elderly

The basic benefits for the continuous employment of the elderly affect not only
labor demand and supply but also the economic welfare of the households whose
income comes from aged workers who are continuously employed. The economic
gain accrues from the increased take-home pay by this subsidy.
In this section, we shall calculate the economic gains from these benefits using
the estimation results of the augmented demand system of aged workers’ households. The demand system used here is the augmented linear expenditure system.
This system was utilized to estimate the excess burden of taxes (Atkinson and Stern,1980) and the child care costs (Blundel, Walker, and Walker, 1994). From thisdemand system, we can easily obtain the expenditure function:(4)e ( p, w (1 − τ ), v) = b 0 w (1 − τ ) + Σ 6i = 1 b i p i + w (1 − τ ) a 0 Πp i a i,

52

Yoshihiro KANEKO

Note:

E0 and E1 indicate the optimal point of aged workers without andwith basic benefits respectively. E2 is the point on a budget constraint whose slope is a wage rate tangent to the indifference curve
which aged workers could attain with wage rate plus basic benefits.

Figure 2 The equivalent variation (EV) for measuring the welfare gain from the basic
benefits for continuous employment of the elderly

and the equivalent variation (See Figure 2). We will adopt the equivalent variation(EV) as the measurement of the economic welfare accruing from the basic benefits
for continuous employment of the elderly.
According to Abbot and Ashenfelter (1976) and Deaton and Muelbauer (1980),
the equations of the augmented linear expenditure system are:(5)
(6)

p i q i = b i p i + a i [M − b 0 w (1 − τ ) − Σ 6i = 1 b i p i ] + µ ij + u ijt , (i = 1, . . . 6)
w (1 − τ ) q 0 = b 0 w (1 − τ ) + a 0 [M − b 0 w (1 − τ ) Σ 6i = 1 b i p i ] + µ 0j + u 0jt .

where p i is the price of the i-th goods, q i is the quantity of the i-th goods, w is thewage rate, τ is the labor income tax rate, and M is the total income that is calculated by w × T. T is a fixed total time. The labor hours (h) are calculated by a fixed
total time (T) minus leisure hours (q 0 ), that is, h = T − q 0 . Goods are defined as: (1)foods, (2) alcohol and other beverages, (3) housing, fuel, and water, (4) clothes andfootwear, (5) furniture and automobiles, (6) other goods, and (0) leisure, µ ij is thedisturbance term for the unknown elements of the demand function for i-th goods
in j-th prefecture and uijt is the disturbance term of the demand function for i-th
goods in j-th prefecture at time t.

The Employment Policy for Aged Workers and the Financing of Unemployment Insurance 53

To estimate the demand system for aged workers’ households, we will construct
the cohort data of Japanese workers’ households from the monthly income andexpenditures per household classified by the age of the household head and byprefectures reported in the National Survey of Family Income and Expenditures (Management and Coordination Agency, 1974, 1979, and 1984). Since the survey tables
contain data on expenditures for five age groups, we reconstructed them into ten
age groups by combining the columns of the five age classes. The pairs of the
combined age groups are as follows: ages 35 to 39 and 40 to 44 in 1974; ages 40 to
44 and 45 to 49 in 1979; and ages 45 to 49 and 50 to 54 in 1984. Thus we canobtain the expenditure data of the cohort who became middle-aged and older
workers in 1995, when the basic benefits for continuous employment for the elderly
were introduced.
We used the price index reported in the “Subgroup Index” of the Consumer Price
Index. Using the weights in the table, we reconstructed the price indexes according
to the division of the goods for the demand system in 1974, 1979, and 1984, andwe made the indexes equal to one in 1980. The wage rate was calculated as follows:
first we obtained the index of a household’s ability to earn income by the ratio ofincome classified by age group and by prefectures to the average income reported
in the National Survey of Family Income and Expenditures. Next, we obtained the wage
rate by calculating the average monthly salary divided by the monthly labor hours
reported in the Monthly Survey of Wages and Labor Hours (Ministry of Labor, 1996).
Combining the index of the heads of households’ ability with the above wage rate
gave us the wage rates of the heads of households classified by age group and byprefectures.
In order to satisfy the adding-up condition for the demand system, we excluded
the demand function for leisure hours — Eq. (6). For the estimation of the demandsystem of Eq. (5), we imposed conditions of symmetry and homogeneity. Since weused data for ten age groups that were reconstructed by combining the columns of
the five age classes, we applied the error component model for estimating Eq. (5).
In the demand function for goods i, µ ij denotes invariant effects in the j-th cohortthat are unobserved and may be correlated with the regression variables in Eq. (5).
To test E (uijt|Xijt) = 0, we used Hauseman’s specification test. Since Eq. (5) has 13
parameters under the imposed restraints, we have to compare the kai squares
statistic with 13 dimensions of slope vector with the outcome of the Hausman test
static for the error component model. Following this method, summarized in
Baltagi (1995), the null hypothesis for E (uijt|Xijt) = 0 was rejected. Then we madewithin transformation for the variables in Eq. (5). Furthermore, according to theoutcome of Breusch-Pagan test, the null hypothesis of homoscedasticity in disturbance terms was rejected, and we applied the generalized method of moment
estimator for the within transformation regression of Eq. (5). The estimation results

54

Yoshihiro KANEKO

Table 3 Estimation results of the Augmented Linear Expenditure System of aged
workers’ households
(1)
ai

(2)

(3)

(4)

(5)

(6)

(0)

− 0.1627(− 18.42)**6.031(12.81)**
0.368

1.044

R2

0.00310.01640.04290.02130.0344(4.83)** (16.60)** (18.31)** (17.33)** (16.14)**21.99522.84224.71929.76860.468(41.07)** (32.04)** (20.16)** (27.41)** (24.71)**
0.351
0.332
0.281
0.130
0.151

Note:

The values in brackets indicate t statistics; ** shows that the parameter is significant at the level of 5%.

bi− 80.550(− 10.56)**

are summarized in Table 3.
By using the parameter estimates of the demand system, we can calculate theequivalent variation. We regard the ratio of the equivalent variation to the amountof the basic benefits for continuous employment of the elderly as the index of
economic welfare from this wage subsidy. Since the equivalent variation amounts
to ¥20,239 for male workers who are over age 60 while the amount of the subsidy
for them is ¥18,048, the ratio of the welfare gain to the subsidy is 1.12. Thisoutcome implies that the net welfare gain has reached 12% of the wage subsidy forcontinuous employment and that it can improve the economic welfare of aged
workers’ households.
5.

The Effect of Basic Benefits for Continuous Employment of theElderly on the Financial Status of Unemployment Insurance

The major objectives of the basic benefits for continuous employment of the elderly
are two-fold: first, to increase the demand for aged workers since this subsidy
enables companies to reduce the wages they are paying workers aged between 60
and 64, and thus create a demand for them; and second, to improve the economic
welfare of aged workers’ households through an increase in take-home pay provided by the subsidy. But we cannot forget the cost of this subsidy for continuous
employment. Since it is financed by unemployment insurance, we should increase
the employees’ rate of contribution to this insurance to avoid exhausting its funds.
However, this would defeat the purpose of controlling tax burdens and social insurance contributions in an aging society.
The financial status of unemployment insurance is based not only on the payment of basic benefits for continuous employment but also on the total amount ofbenefits for unemployed people. The amount of the total unemployment insurance
benefits depends on the unemployment rate. To estimate the financial status of
unemployment insurance in the long run, we have to estimate (1) the future benefits
for continuous employment of the elderly and (2) the future unemployment rate.

The Employment Policy for Aged Workers and the Financing of Unemployment Insurance 55

To estimate the future unemployment rate, we constructed and estimated amacroeconomic model consisting of the consumption function, the investment
function, the net export function, the tax function determining disposable income,and the Philip’s curve that connects the price level with the unemployment rate.
(The outcomes of the estimated parameters of this model are summarized in the
Appendix.) By using the regression output of this macroeconomic model, we canforecast the long-term change in the unemployment rate. The results are describedin Table 4. This table estimates two unemployment trends: a moderate increase in
the unemployment rate (Case 1), and a relatively high increase in the unemployment rate (Case 2).
To estimate the amounts of basic benefits for continuous employment during
future periods, we assumed that all workers between ages 60 and 64 will receive theTable 4 Estimated trends in the rate of labor force participation and unemployment
(%)

Year
LPF rate
Unemployment
rate

Case 1Case 2

1995

2000 20052010 20152020 2030

2040 2050

2060

63.20
3.20
3.20

62.40 62.40 60.50 60.50 58.50 58.50 58.50 58.50 58.50
3.32 3.43 3.54 3.65 3.74 3.94 4.14 4.34 4.54
3.36 3.52 3.68 3.84 4.00 4.32 4.64 4.96 5.28

The author’s estimation.

Table 5 The number of insured persons and the financial status of unemployment
insurance
Year
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060

Number of theinsured persons
Male Female Total

Male

Female

2,293
2,261
2,173
2,076
2,007
1,974
1,941
1,879
1,801
1,723
1,676
1,655
1,640

14,071
17,932
22,07924,80027,041
31,14539,68947,84554,08956,04561,76568,73785,5806,040 23,809
7,213 29,768
8,442 36,132
9,675 40,814
11,643 45,797
13,361 52,688
16,133 66,084
18,052 78,012
20,621 88,445
22,539 93,030
26,458 104,442
30,354 117,308
36,786 144,862

1,138
1,082
1,016
969
955
955
934
888
838
802
791
792
786

3,431
3,343
3,189
3,045
2,962
2,929
2,875
2,767
2,639
2,525
2,467
2,447
2,426

Total benefits*
Total

Total StatuteContri- Expendibutions tures
17,141
19,45021,63023,922
27,14530,982
34,88838,47542,46447,65854,41462,743
71,797

4,761
5,953
7,226
8,162
9,159
10,537
13,216
15,602
17,68918,606
20,88823,461
28,972

Balance
B1

B2− 4,496 30,373− 7,3030− 10,5440− 12,343
0− 13,5940− 15,849
0− 23,250
0− 29,7480− 34,7080− 33,9660− 37,361
0− 40,583
0− 54,941
0* 100 million yen.
Note: The total benefits include the basic benefits for continuous employment for the elderly and the unemployment benefits for unemployed persons. B1 indicates the difference between the total benefits and thetotal contributions, while B2 indicates the balance of the fund including interest income of the unemployment insurance. The contribution rate is assumed to be constant at the current rate of 1.15%.

56

Yoshihiro KANEKO

average wage subsidy estimated in §2. The number of male and female workers
between 60 and 64 was calculated by multiplying the male and female populationof this age group by the rate of their labor force participation. The benefits for
unemployed persons classified by age group is calculated by multiplying the average amount of male and female unemployment benefits reported in the Ministry ofLabor’s Annual Report on the Unemployment Insurance (1995) by the number of male andfemale unemployed persons in future periods. The latter numbers are obtained bymultiplying the estimated male and female labor force by the estimated unemployment rates in the macroeconomic model. The ratio of the future male and female
labor force to the future population classified by the age group is assumed to be thesame as the labor force participation rate classified by the age group in 1995.
Hence the future total contributions for unemployment insurance are calculated bymultiplying the number of male and female workers in the age group by the ratesof their contribution to unemployment insurance. These rates are set to construct avariety of schedules for increasing these rates, which enable us to examine theeffects of the population structure and unemployment rates on the budget of unemployment insurance.
Table 6 Projected financial status of unemployment insurance, Cases A and B
Case A
Total
Total Statutory
Year Benefits* Contri- Expendibutions
tures
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060

23,80929,76836,13240,81445,797
52,68866,08478,01288,44593,030104,442
117,308
144,862

17,141
19,45021,63030,162
34,22639,06443,99048,51253,54260,091
68,61079,111
90,526

4,761
5,953
7,226
10,203
11,44913,172
16,521
19,503
22,111
23,257
26,11029,32736,215

Case B

B1

B2− 4,496− 7,303− 10,544− 5,005− 5,292− 6,354− 12,220− 17,327− 20,881− 18,761− 20,088− 20,823− 31,798

37,99817,580
0
0
0
0
0
0
0
0
0
0
0

Total Statutory
Contri- Expendibutionstures
17,141
24,52427,27238,483
43,66849,841
56,12561,89568,31376,66887,537
100,935
115,499

4,761
7,442
9,033
12,244
13,73915,806
19,82523,403
26,53327,90931,33235,19243,458B1

B2− 4,496− 1,507− 3,947
2,332
3,008
3,141
− 1,189− 4,905− 7,055− 3,555− 2,816− 1,063− 8,655

37,99823,375
16,311
3,593
22,121
48,06772,35974,39066,22058,01564,79976,22180,965* 100 million yen.
Note: The total benefits include the basic benefits for continuous employment for the elderly and the unemployment benefits for the unemployed persons. B1 indicates the difference between the total benefits andthe total contributions, while B2 indicates the balance of the fund including interest income of theunemployment insurance. In Case A, the contribution rate is increased from 1.15% to 1.45% and thestatutory expenditure from 20% to 25% in 2015. In Case B, the contribution rate is increased from
1.15% to 1.45% in 2005 and 1.45% to 1.75% in 2015, while the statutory expenditure is increased from
20% to 25% in 2005 and from 25% to 30% in 2015.

The Employment Policy for Aged Workers and the Financing of Unemployment Insurance 57

Table 7 Projected financial status of unemployment insurance, Cases C and D
Case C
Total
Total
Year Benefits* Contributions

Statutory
Expenditures

2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060

4,813
7,613
9,343
128,042
145,948
167,855
215,272
253,847
293,935
309,308
353,907397,621498,806

24,066 17,141
30,455 24,524
37,372 27,272
42,681 36,403
48,649 41,308
55,952 47,147
71,758 53,091
84,613 58,549
97,979 64,620
103,100 72,524
117,969 82,805
132,540 95,479
166,268 109,256

Case D

B1

B2

Total Statutory
Contri- Expendibutions
tures− 47,021 37,792 17,141− 20,228 21,561 26,215− 48,777 10,457 29,153
10,258
0 40,563
10,113
0 46,029
8,560 2,306 52,535− 51,615
0 59,159− 95,261
0 65,241− 137,298
0 72,005− 106,041
0 80,812− 122,853
0 92,268− 117,258
0 106,391− 236,395
0 121,742

B1

4,813 − 4,702
7,613
− 587
9,343 − 3,280
12,804
4,557
14,594
5,019
16,785
5,430
21,527− 10
25,384 − 3,846
29,393 − 7,459
30,930 − 3,567
35,390 − 4,252
39,762 − 2,462
49,880 − 13,040

B237,792
22,997
20,867
14,93949,877
96,582
147,828
179,135
207,662
241,796
304,410
381,640
468,423* 100 million yen.
Note: The total benefits include the basic benefits for continuous employment for the elderly and the unemployment benefits for unemployed persons. B1 indicates the difference between the total benefits and thetotal contributions, while B2 indicates the balance of the fund including interest income of the unemployment insurance. In Case C, the contribution rate is increased from 1.15% to 1.45% and thestatutory expenditure from 20 % to 25% in 2015. In Case D, the contribution rate is increased from
1.15% to 1.45% in 2005 and from 1.45% to 1.95% in 2015, while the statutory expenditure is increased
from 20 % to 25% in 2005 and from 25% to 30% in 2015.

Forecasts of the financial status of unemployment insurance during the period
from 2000 to 2060 are summarized in Tables 5, 6, and 7. Because we have a baby
boom generation, the financial status of the insurance will depend on both the
population structure and the timing of increasing the rate of contribution to theinsurance. If we maintain the contribution rate at the current rate (Table 5), or if
we postpone increasing the contribution rate until after the baby boomer (thecohort born between 1948 and 1950) is over age 60 (Case A in Table 6), theunemployment insurance will fall into deficit spending. To avoid exhausting thesefunds, the government should increase the contribution rate in the near future(Case B in Table 6). Furthermore, if the unemployment rate is rising to reach morethan 4% after 2020 (Case 2 in Table 4), the government should increase both thecontribution rate and the statutory expenditures for the insurance more rapidly
than if the increase in the unemployment rate is moderate (Case 1 in Table 4). We
can see this result by comparing Case C with Case D in Table 7.

58

Yoshihiro KANEKO

6.

Conclusion

In Japan, coordination of the public pension system with unemployment insurance
means that the government controls the burden of the pension contribution rates
by raising the pension age and maintains aged workers’ income by providing wage
subsidies for their continuous employment. However, this coordination depends on
the population structure and on the future level of unemployment. To ensure theavailability of funds for this benefit, it will be necessary to increase the contribution
rates of and the statutory expenditures for unemployment insurance in the near
future. And we should recognize that the contribution rate of the insurance increases further when the unemployment rate is rising. But this will defeat the
purpose of controlling tax burdens and social insurance contributions in an aging
society.
The employment policy of generating employment opportunities for aged workers by providing basic benefits for continuous employment is a short-term methodfor dealing with aging of the Japanese society. But to maintain the financial stabilityof unemployment insurance and to control the burdens of taxes and social insurance contributions in the long run, the employment policy for aged workers should
be harmonized with macroeconomic policies to cope with increasing unemployment rates and with family policies to avoid a further decrease in the younger labor
force.
Appendix:

Outcomes of the estimated parameters of themacroeconomic model

The estimation results of the macroeconomic model are as follows:
(1)
(2)

(3)

(4)
(5)
(6)

CONS = 24012 + 0.4822 × GNPD + 0.4008 × WELTH, R2 = 0.896(0.896) (2.10)**(1.118)
INV = − 3279 + 0.2799 × GNP_1 − 0.2476 × GNP_2 + 0.8638 × INV_1,(− 1.503) (3.581)**(− 3.231)**(8.941)**R2 = 0.962
INVH = 1603 + 0.017 × GNP_1 − 0.0077 × GNP_2 + 0.8055 × INV_1,(1.394) (0.571)(− 0.256)(6.307)**2
R = 0.885
GNPD = 17758 + 0.7436 × GNP, R2 = 0.991(4.320)** (51.373)**
MONEY = − 99102 + 1.3710 × GNP − 2362.62 × IRATER, R2 = 0.925(− 4.252)** (15.674)**(− 1.348)
NEXPO = − 45236 + 0.0815 × GNP − 97.3519 × DEXRATE(− 4.221)** (5.615)**(− 1.427)

The Employment Policy for Aged Workers and the Financing of Unemployment Insurance 59

(7)

(8)

+ 0.0324 × GNPU, R2 = 0.686(3.764)**DPGNP = 8.3388–2.9459 × UNEMPS + 0.4977 × DPGNP_1,(2.262)** (− 1.864)*(2.932)**R2 = 0.395
ln (Un) = − 1.358 + 0.411 × DUM + 0.959 × ln (KOY)(− 0.098) (5.940)**(1.601)*− 0.0589 × ln (LFP60) − 0.388 × ln (GNP85GP)(− 0.514)(− 0.823), R2 = 0.946

where GNP = gross national product in real terms; CONS = real private consumption expenditures; WELTH = real private total asset holdings; INV = real private
investment expenditures; INVH = real private investment expenditures for housing;
GNPD = real disposable income; IRATER = real interest rate; NEXPO = realamount of net export; DEXRATE = annual rate of change in exchange rate;
GNPU = gross national product in the United States in real terms; DGNP = annual
rate of change in GNP deflator; UNEMPS = unemployment rate in the short term;
Un = unemployment rate in the long term; KOY = ratio of employees to total
population; LFP60 = labor force participation rate between ages 60 and 64;
GNP85GP = GNP gap between GNP in each period and GNP in 1990. _1 and _2
indicate the lag variable of one period and two periods respectively. The base year
for real variables is 1985. The estimation method is the limited maximum likelihood method and the estimation period is between 1965 and 1995. Sources ofthese time series data: Economic Planning Agency (1996); Bank of Japan (1996).
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