Relationship between Population Decline and Disposble Income Rates

1356 words (5 pages) Essay

18th May 2020 Economics Reference this

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The word “poor” is defined as “having few possessions” by many dictionaries. Merriam-Webster’s online dictionary (n.d.) explains it as “1a: lacking material possessions” and “2a: less than adequate”. Cambridge Dictionary (n.d.) defines it as “A1: having little money and/or few possessions”. I related these definitions to a larger scale and assumed that a poorer society is where people possess less, which then leads to less consumption or investment. In other words, a richer society is where people gain an increasing after-tax income which provides them with richer material well-being. Therefore, in this paper, I focused on the relationship between people’s disposable income and population decline to see if population decline causes the reduction of their money with one possible reason. 

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I searched the relationship between the population decline and the average monthly disposable working household income in Japan. Japan’s fertility rate has fallen to 1.43 in 2017 since 1975 when the number first fell under 2.0 according to The World Bank Group (2019). Also, its “population is in rapid decline” (Ingber, 2018). So, Japan was appropriate for this research. I used data established from Statistics Bureau of Japan (2019-a, 2019-b & 2019-c), a part of Ministry of Internal Affairs and Communications, which annually conducts national censuses.

I measured the relationship by comparing the absolute population and the absolute average of monthly workers’ household disposable income from 2003 to 2017. The income shows the amount which is already deducted by the non-consumption expenditure such as taxes. The population data of 2005, 2010, and 2015 were unavailable so they are remained blank. I found that both figures have fallen gradually, both showing negative trendlines (Figure 1). The use of absolute disposable income for comparison is acceptable in this case since Japanese Consumer Price Index is in increase over the years (Trading Economics, 2019). From this result, I can see that the income level and population decline are correlated; in other words, the society gets poorer as the number of people decreases.

One of the possible reasons for the relationship between the population decline and people’s income is because decreased working people have to assist increased number of the elderly. To justify this assumption, I compared the absolute amount of several taxes and social insurances that working people need to pay monthly. Those taxes and insurances are such as earned income tax, residence tax, health insurance, nursing care insurance, and the public pension insurance. This was done to see what kind of non-consumption expenditure suppresses people’s after-tax income the most. As a result, I found that social insurances, especially the public pension insurance, have an increasing impact on people’s income (Figure 2). This result implies that the burden on working households is increasing due to the aging and decreasing number of working people.

In fact, according to a report from Cabinet Office of the government of Japan (2017), although 12.1 working people had supported one elderly person in 1950, the number has dropped to 2.3 in 2015 and it is expected to further decrease to 1.3 working people per one elderly person by 2065. Also, it has been one of the challenges for the government of Japan to make a reasonable adjustment for social insurance and support for increasing number of elderly people (Yatsui, 2019).

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Lastly, I compared working people’s consumption expenditure and their disposable income to see if the amount of consumption, or material well-being, will decline as they get less income. I did this to support my basic assumption that people’s material well-being would decrease to create a poorer society because of the less amount of disposable income. The result is that people consume less as they get less income, reflecting the income effect. Although people spend 63% of their after-tax income in consumption in 2003, it decreased to 58% in 2017, showing -5.89% change. 

The finding above altogether shows that the population decline due to decline of fertility rate creates a society where less working people have to support more retired people, which then causes less amount of disposable working household income. Also, less income means less consumption, creating a poorer society. This is not only the case for Japan. South Korea, one of the population-declining countries, also faces the pension problem. Now one retired person is supported by 5 working persons, but it is estimated to decrease to 1 per the elderly in 50 years. Such burden on Korean workers is expected to impact on workers’ income a lot that they would have to pay 30 percent of income for pension contribution (Kang, 2019). Therefore, my findings are not limited to one country only.

My finding could be more precise if my data could cover household’s net worth which composes of financial and non-financial assets less liabilities. This is because income is not only the factor to influence people’s consumption and investment for the production of material well-being (Ministry of Social Development, 2017, p.4).

This paper focused on the relationship between population decline and working household’s disposable income, regarding that richness of society is determined by people’s purchasing power. As a result, I found that people’s disposable income decreases as the population declines due to the increased burden of pension insurance on working people.

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