COVER STORY • Growing Income Inequality in the World — Trends, Outlooks & Solutions • 3

Interview with Sébastien Lechevalier, Professor at the School for Advanced Studies in the Social
Sciences (EHESS) in ParisE

xpanding Income Inequality
During the Transformationof Japanese Capitalism

By Japan SPOTLIGHT
Economic issues are best seen from a long-term perspective. Income inequality is no exception, andshould be examined from a historical perspective and viewed over the long term. There are some Frencheconomists, regulationists, who are good at analysing the economy in this manner, emphasizing thehistorical and insitutional perspectives of economic progress and development. Dr. Sébastien Lechevalier,a Paris-based French economist, is a distinguished expert in this field, and has recently published The
Great Transformation of Japanese Capitalism, an invaluable analysis of the latest developments in theJapanese economy that provides good lessons for all capitalist nations to consider regarding the future ofcapitalism. Japan SPOTLIGHT had a chance to interview him in Tokyo when he came to Japan to give a
presentation on his book, which also addresses the issue of income inequality.

Introduction
JS: Could you briefly introduce us toyour recent research activities,
including your book The Great
Tr a n s f o r m a t i o n o f J a p a n e s eCapitalism and your activities at
EHESS?

conferences: for example, we had a conferencewith the Japan Science and Technology Agency
on innovation and society in September 2016 in
Tokyo. So I hope this book and our activities
may contribute to a better dialogue between
Japanese and European scholars.

Background to Expanding
Income Inequality in Japan

Lechevalier: Within EHESS, I am conducting
research these days on what we call
JS: How do you see the backgroundinstitutional change. My particular interest is
to expanding income inequality inJapan, and I find it particularly interesting
Japan in recent decades?
because from the viewpoint of many scholars,
especially US scholars, it seems Japan is not
Lechevalier: Until around 10 years ago therechanging at all and always faces the same
was an academic disagreement about thisSébastien Lechevalier, Professor at the School
inability to reform. I first came to Japan inmatter and its causes, but these days I think
for Advanced Studies in the Social Sciences
1998, and findeverybody agrees that inequality has increased.
(EHESS) in Paris
that from theInequalities in Japan are still less than in thelate 1990s to nowadays Japanese
United States, but in the last 30 years have increased much morethan in France. And of course when we think of increasing income
institutions of capitalism haveinequalities, immediately we think about the excellent work of mychanged a lot. This is the topic of thecolleague from EHESS, Thomas Piketty, who looks at them from a
book, which I collaborated withlong-term perspective and explains them with the dynamic of capital,
several professors in writing; I try toespecially the gap between the growth rate of the economy and theshow some empirical evidence andreturn on capital. I think his thesis applies relatively well to Japan inlogic for this change.
the long term, but not to explaining the expanding income
Beyond my research, I created theinequalities during the last 30 years. The thesis I develop in this book
Nichi-Futsu Zaidan (Fondationis that we have to look at the labor side rather than the capital side.
France-Japon de l’EHESS) in 2009, of
The mechanisms are not the same as in the US or in Europe, so thewhich I am the president, to try to
The Great Transformation of
background for me is in labor dynamics, connected to increasing
develop the relationship between
Japanese Capitalism bydispersion of productivity across firms.
Japan and Europe in the academic
Sébastien Lechevalier(Iwanami Shoten, 2015)environment. We organize many
10 Japan SPOTLIGHT • November / December 2016

JS: Are you referring to the increase in non-permanent
employees? Is that one of the main sources ofincome inequality in Japan?
Lechevalier: Not the only source, but it is certainly part of the story.
And of course income inequality is itself the outcome of even deeper
inequalities. But what I found in my empirical research for the book isthat even within regular or permanent workers we observe increasing
income inequalities, and the reason is quite simple. From a historicalperspective, Japan was famous in the 1950s, just after the war, forthe gap between large and small firms known as nijū kō zō at thattime. This gap was reduced, but I think it has increased again during
the last 20 or 30 years; not only between large and small firms but
even among large firms we observe some with high productivity andsome with low productivity. One reason is manufacturing versus nonmanufacturing; another is globalization. So the gap is not limited tothe size of the firm, but is an issue of productivity, and this pattern isvery important for explaining why two permanent workers with thesame educational background do not earn the same income. I think
this is the most significant mechanism, and I will add a second: thefact that given this dynamic, there is no effort to correct theinequalities. In Europe we naturally have some inequalities, but thenas a second step we typically have welfare and fiscal systems tocorrect them, which is not the case in Japan.
JS: It could be said that the Japanese social welfare

system was partly supplemented by a family systemin the past, but that is now gone. Is that the reason
we see such an increase in income inequality?
Lechevalier: I think the former welfare system in Japan had not one
but two legs. One was the family, it was absolutely important. The
second was the companies, which also contributed to welfare. And it
seems to me that companies are under pressure from globalization:
they try to be competitive, and some try to innovate, but some try to
cut costs and the incentive to provide welfare to employees has
decreased or become concentrated on some categories of
employees. And on the family aspect, you are right, and thebackground goes beyond the economy and is a social phenomenon:families are getting smaller, and there is no longer the social normthat the family will be a security or welfare provider. So basicallyindividuals are facing the problem by themselves, and are left to finda solution by themselves. As a French person, my first reaction
would be that maybe the state can play a role. Of course this has acost, which we will talk about, but if neither companies nor thefamily are able to support the welfare system, maybe the stateshould do more.
JS: You mentioned there are significant differences in

productivity at the company level, with somecompanies better adapted to globalization thanothers. Some economists would also say adaptability
to information technology (IT) culture might also be
important in these differences. What do you think?
Lechevalier: I think these are two key factors that should be

separated. Globalization is one thing, technology is another. It is truethat in the economic literature both factors have been discussed, andthe general consensus 10 years ago was that new technologies may
have increased inequalities between employees who were able to dotheir best with them and employees who were not; between
companies which could adapt to them and those that could not. But
on globalization, 10 years ago the empirical evidence was mixed, andit was not so easy to identify the links between globalization andincreasing inequalities. But I think what we identify these days isexactly that some companies, for some reason, are enjoying thebenefits of globalization which means you have more markets, cansell your products to China or Europe or the US, but that this is not
automatic: you have to fight, adapt, be very competitive, and somecompanies succeeded in this while some companies failed. There is
economic literature on this, especially a famous article by Andrew
Bernard and J. Bradford Jensen which shows there is a kind of
selection effect, by which globalization helps to select the best firms,
but then there is also a learning effect that will increase the gap evenmore. When you are a Japanese company and start selling yourproducts in Europe, you will learn and improve your production, andI think this is one key process that connects globalization toincreasing productivity dispersion and through it income inequality.
JS: Do you think the adoption of neoliberal economic

policies in Japan also provoked income inequality?
Lechevalier: Normally we observe that neoliberal policies increase
the efficiency of the economy and introduce more market
mechanisms, but often at the cost of increasing inequalities. In thecase of Japan, frankly speaking, I do not see at this stage strong
empirical evidence that shows neoliberal policies directly affected
inequality. However, what I try to show in the book is that they have
had an indirect effect. It is a little like globalization: neoliberal policies
contributed to liberalizing the market and so created more
opportunities for the companies; some were able to take theopportunities, and others were not. From this viewpoint, I thinkliberalization certainly contributed to increasing the gap between
companies, which can then be connected to the background of
expanding inequalities. But again this is an indirect effect, so we need
to be a little careful in assessing the impact of neoliberal policies.
Japan SPOTLIGHT • November / December 201611

COVER STORY 3

though you might improve it to give more place to creativity,
dialogue and debate. I think there is one main problem: the Japanese
education system used to be quite egalitarian, and in some aspects
still is, but to enter the best universities you have no other choicethese days than to invest a lot of money in pre-university education
to train and go to the best preparatory schools. So this system is not
yet like in the US, but there is a strong divide between public andelite schools and this is a problem. In the 1960s many students
coming from remote parts of the country had a chance to enter thebest universities, especially public; my impression is that this isbecoming more and more difficult.

JS: How would income inequality be affected by the

JS: You mentioned that Japan would need toconsolidate social welfare policy to address income
inequality. But given Japan already has a tremendous
amount of debt, what would be the impact on its
fiscal constraints?

aging society?
Lechevalier: This is an interesting case. Through the work ofProfessor Fumio Ōtake of Osaka University we discovered thatindeed, if we observe increasing income inequalities through the Gini
coefficient, an important part of these inequalities was captured by
the aging society. However, various empirical papers — by Professor
Ryo Kambayashi from Hitotsubashi University, for example — havefurther tested this hypothesis and shown that in the last 10 years weobserve increasing inequalities within age groups, for example
among young workers. These inequalities cannot be explained byaging, so there are other phenomena too.
JS: Today some young people have no choice but towork under very strict conditions and cannot earn
unemployment benefits. Could this be a cause?
Lechevalier: I think it is one important factor. I am a little cautious
on unemployment benefits. Sometimes, as in France, we have a quite
generous benefits system, and ideally this can help unemployedpeople to educate themselves and train and so on. In reality this is
not always the case. But in Japan we find some young workers
sticking to a job with no qualifications, and they cannot improve. For
example, I have nothing against kombini (Japanese convenience
stores), but in some kombini if you do always the same job you will
not improve your position. It is pity for them: they earn a low wage,
with no time away to educate themselves or train, and I am afraid
when we see the result 15 or 20 years later that this might become alost generation.

Policies to Correct Income Inequality
JS: Perhaps to solve this we need to reform our
education system. Do you have any ideas on how
this might be done?
Lechevalier: One thing I discovered through many books andarticles is that Japanese people are very critical of their education
system. Frankly speaking, viewed from Europe it is not that bad,
12 Japan SPOTLIGHT • November / December 2016

Lechevalier: It does not seem very realistic to say we should
increase social spending at a time when Japan has such enormous
public debt, I fully agree. But what impressed me in Japan is thatJapanese people seem not so happy with inequalities. When you ask
them in surveys whether inequality is too high, generally the answer
is yes. When you ask the same question in the US, people recognizethat inequalities are high, but they say it is not a problem; in Japan
there is a kind of ideology which is anti-inequality. But then, when
you ask Japanese people the second question, on whether they want
the state to reduce inequalities through tax policy, generally speaking
the answer is no. It seems there is a paradox: Japanese do not likeinequalities but do not want the government to intervene to reduce
them, and you cannot reduce inequalities through the tax or welfare
systems if there is no social consensus.
I would then rephrase the question differently. Clearly Japan needs
to reduce its public debt, but one thing surprising to me is that when
you talk about tax policy in Japan, basically you talk about
consumption tax. But there are other taxes, the fiscal system is much
more complex: you have inheritance tax, corporate tax, and income
tax for example. I remember when Piketty came he tried to introduce
this to the debate and it was a complete failure — people do notwant to talk about it. Companies in Japan are suffering from manythings but I do not think that they are pressured by corporate tax,
which by comparison to Europe or even the US is not so high. So
I would be the advocate of a more balanced approach: I would nottell you to double corporate tax, but corporate or inheritance tax
could be tools to focus on fiscal consolidation while increasing
spending. Another observation is that social spending in Japan isvery much biased towards elderly people, who I am sure need to behelped, but there should be deeper reflection to have the welfare
system also help the young people you mentioned.
JS: Perhaps labor market policy would also be

important in resolving inequality, such as raising theminimum wage or indeed wages in general?
Lechevalier: On this I fully agree with Professor Hiroshi Yoshikawa,
who was one of the first to very convincingly show how since the1990s and the economic stagnation, the answer from companies has
been to keep wages stagnant, which is maybe not bad in terms ofcompetitiveness but has had negative side effects. From thisviewpoint, to me the current Japanese government’s approach towage policy is not enough. If companies are only asked to increase
wages when they can, I do not think they will, so there should be anegotiation. You cannot increase wages without taking into accountthe situation of the companies, and in this regard I think that shuntō(spring labor offensive) in the 1970s was a very useful tool. Of
course your trade unions always wanted higher wages, but there wasa bargaining process between them and the employers which took
into account productivity increase, and so allowed realistic wage
increases while avoiding inflation. I think we should invent a new
institution to allow this kind of bargaining.
JS: Economic growth today is not leading to wage

increases, and that is a problem. Do you think this isalso important for reducing inequality?
Lechevalier: This engine for growth is missing these days in Japan.
Just after the beginning of Abenomics we observed the recovery ofgrowth, but it did not lead to higher wages and this may explain why
this growth has not been sustainable. At the same time we should be
careful: economic growth does not always mean reduction of income
inequalities, and China is a great example. Certainly two-digit
economic growth has helped many Chinese to get out from poverty,
but at the same time we observe increasing inequalities. So growthby itself is not enough: you need a second characteristic which isgood sharing of value added. What goes to profit should be inbalance with what goes to the workers, and these days in Japan, as
well as in other countries, for some reason we are not able to find agood balance.
JS: The service sector is becoming very important,and if we are able to raise labor productivity in it, this
could help solve the income inequality issue as well.
How might we achieve this?
Lechevalier: With the service sector, we have a problem ofmeasurement of productivity. Based on my own French andEuropean experience, please allow me to contribute with a nuance tothis. People working in cafes and restaurants in Paris are the mostproductive in the world, because for 40 customers you have only one
person. In Japan, by comparison, you enter a small restaurant andthere are five persons serving you. The productivity is very low, but
the satisfaction of the consumer is very high. So it is important toincrease the productivity of the service sector, but not at the cost of
satisfaction. Another side-effect is that in France in the past there
were many people welcoming guests and so on, like in Japan; now
this is very limited, and to me is also one reason for highunemployment rates. I think we should never forget this European
experience.
Having said this, it is true that in Japan there is a problem withproductivity in the service sector. Unfortunately I have no solution in
one minute, but what has surprised me is that Japanese companies
in the manufacturing sector have sometimes been very good atincorporating new technologies to improve productivity. For somereason, it seems to be much more difficult for many companies inthe service sector to incorporate new technologies. So maybe thenon-manufacturing sector in general, and service sector in particular,
could learn more from work organization in the manufacturingindustry, especially in introducing new technologies.

Possible Impacts of Future Innovation &Globalization
JS: Looking toward the future, we are at the beginningof the so-called Fourth Industrial Revolution, definedby phenomena like data-driven innovation and
DUWLILFLDOLQWHOOLJHQFH%DVHGRQKXPDQNLQG·VPHPRU\of the original Industrial Revolution, suchinnovations always led to increased inequality. Do
you think we will see the same story again?
Lechevalier: I am afraid so. Again, theoretically it is true that thisnew technology may give anybody the opportunity to enjoy its
benefits. But the reality is that to benefit from it you need to alreadyhave a certain intellectual background and skills. So we are just at
the beginning of a very large process that will go very strongly in the
direction of increasing inequalities, unfortunately. And if you are toreform your education system, it will be in this area, certainly.
JS: As for the future of globalization, the TPP andother FTAs seem often interpreted as bad for income
inequality. Is that correct?
Lechevalier: I agree with this interpretation. The TPP is full ofopportunities for the best companies and managers, but somepeople will not be able to take them because of different capabilities
and sectors, and we should compensate for those inequalities. But if
you look at what is going on between Europe and the US these days,
there is a strange movement. On the one hand there are more andmore ambitious giant FTAs, which is good, but at the same time
there is more and more opposition. In the case of Japan, it is wellknown that people from the agricultural sector are not happy withthis. But in Europe the TTIP is about to fail and the reason is that
there is an increase of populism there and also in the US: both of the
US presidential candidates were opposing to the TPP, and in Franceand Germany there are many people opposed FTAs. We need tounderstand why, and to give answers. If I have one reproach to the
TPP process and what has been done in Europe, it is true that these
FTAs were very technical so the bargaining process had to be partly
secret, but this meant it was really not democratic and our leadersand policymakers failed to involve or convince the population of thebenefits. You cannot engage your country in such an ambitious
program without convincing people that there are benefits. So I am
not so optimistic about the TPP these days.

Written with the cooperation of Chaobang Ai, a Tokyo-based editor andblogger.

Japan SPOTLIGHT • November / December 201613