Table Of ContentAdvances in Japanese Business and Economics 12
Akiomi Kitagawa
Souichi Ohta
Hiroshi Teruyama
The Changing
Japanese
Labor Market
Theory and Evidence
Advances in Japanese Business and Economics
Volume 12
EditorinChief
RYUZOSATO
C.V.StarrProfessorEmeritusofEconomics,SternSchoolofBusiness,
NewYorkUniversity
SeniorEditor
KAZUOMINO
ProfessorEmeritus,KyotoUniversity
ManagingEditors
HAJIMEHORI
ProfessorEmeritus,TohokuUniversity
HIROSHIYOSHIKAWA
Professor,RisshoUniversity;ProfessorEmeritus,TheUniversityofTokyo
KUNIOITO
ProfessorEmeritus,HitotsubashiUniversity
EditorialBoardMembers
TAKAHIROFUJIMOTO
Professor,TheUniversityofTokyo
YUZOHONDA
ProfessorEmeritus,OsakaUniversity;Professor,KansaiUniversity
TOSHIHIROIHORI
ProfessorEmeritus,TheUniversityofTokyo;Professor,NationalGraduateInstituteforPolicyStudies
(GRIPS)
TAKENORIINOKI
ProfessorEmeritus,OsakaUniversity;SpecialUniversityProfessor,AoyamaGakuinUniversity
JOTAISHIKAWA
Professor,HitotsubashiUniversity
KATSUHITOIWAI
ProfessorEmeritus,TheUniversityofTokyo;VisitingProfessor,InternationalChristianUniversity
MASAHIROMATSUSHITA
ProfessorEmeritus,AoyamaGakuinUniversity
TAKASHINEGISHI
ProfessorEmeritus,TheUniversityofTokyo;Fellow,TheJapanAcademy
KIYOHIKONISHIMURA
Professor,TheUniversityofTokyo
TETSUJIOKAZAKI
Professor,TheUniversityofTokyo
YOSHIYASUONO
Professor,OsakaUniversity
JUNJIROSHINTAKU
Professor,TheUniversityofTokyo
KOTAROSUZUMURA
ProfessorEmeritus,HitotsubashiUniversity;Fellow,TheJapanAcademy
AdvancesinJapaneseBusinessandEconomicsshowcasestheresearchofJapanese
scholars. Published in English, the series highlights for a global readership the
unique perspectives of Japan’s most distinguished and emerging scholars of
businessandeconomics.Itcoversresearchofeithertheoreticalorempiricalnature,
in both authored and edited volumes, regardless of the sub-discipline or
geographical coverage, including, but not limited to, such topics as macroeco-
nomics, microeconomics, industrial relations, innovation, regional development,
entrepreneurship, international trade, globalization, financial markets, technology
management,andbusinessstrategy.Atthesametime,asaseriesofvolumeswritten
by Japanese scholars, it includes research on the issues of the Japanese economy,
industry, management practice and policy, such as the economic policies and
business innovations before and after the Japanese “bubble” burst in the 1990s.
Overseen by a panel of renowned scholars led by Editor-in-Chief Professor
Ryuzo Sato, the series endeavors to overcome a historical deficit in the
dissemination of Japanese economic theory, research methodology, and analysis.
ThevolumesintheseriescontributenotonlytoadeeperunderstandingofJapanese
business and economics but to revealing underlying universal principles.
More information about this series at http://www.springer.com/series/11682
Akiomi Kitagawa Souichi Ohta
(cid:129)
Hiroshi Teruyama
The Changing Japanese
Labor Market
Theory and Evidence
123
Akiomi Kitagawa Hiroshi Teruyama
Graduate Schoolof Economics Institute of Economic Research
andManagement KyotoUniversity
Tohoku University Kyoto
Sendai, Miyagi Japan
Japan
Souichi Ohta
Department ofEconomics
KeioUniversity
Minato-ku,Tokyo
Japan
ISSN 2197-8859 ISSN 2197-8867 (electronic)
Advances in JapaneseBusiness andEconomics
ISBN978-981-10-7157-7 ISBN978-981-10-7158-4 (eBook)
https://doi.org/10.1007/978-981-10-7158-4
LibraryofCongressControlNumber:2017946651
©SpringerNatureSingaporePteLtd.2018
Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpart
of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations,
recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission
orinformationstorageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilar
methodologynowknownorhereafterdeveloped.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publicationdoesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfrom
therelevantprotectivelawsandregulationsandthereforefreeforgeneraluse.
The publisher, the authors and the editors are safe to assume that the advice and information in this
book are believed to be true and accurate at the date of publication. Neither the publisher nor the
authorsortheeditorsgiveawarranty,expressorimplied,withrespecttothematerialcontainedhereinor
for any errors or omissions that may have been made. The publisher remains neutral with regard to
jurisdictionalclaimsinpublishedmapsandinstitutionalaffiliations.
Printedonacid-freepaper
ThisSpringerimprintispublishedbySpringerNature
TheregisteredcompanyisSpringerNatureSingaporePteLtd.
Theregisteredcompanyaddressis:152BeachRoad,#21-01/04GatewayEast,Singapore189721,Singapore
Preface
In the1980s, the Japaneseeconomy reached its high watermarkof prosperity with
its GDP growing at an average annual rate of 4%. However, after the burst of the
economic bubble in early 1990s, the Japanese economy entered a long period of
stagnation. Since then, its growth rate has been holding at around 1%, repeatedly
registering negative growth. This drastic deterioration of economic performance
inducedmanypeopletorevisetheirappraisaloftheJapaneseemploymentsystem,
characterized by periodic recruitment of new graduates, lifetime employment, and
seniority-based wages. Before experiencing the long stagnation, the system had
been praised as a source of high productivity and flexibility for Japanese firms.
Now, in contrast, it is criticized as a barrier to the structural changes needed to
allow the economy to adjust to the new environment, with detractors suggesting
thatsuchasystemonlyservestoprotectthevestedinterestsofincumbentworkers
and firms.
This book theoretically and empirically investigates what caused the long
stagnation of the Japanese economy, thereby examining the validity of this cur-
rentlydominantviewoftheJapaneseemploymentsystem.Thebookisdividedinto
five chapters that are organized as follows (authors of each chapter are in paren-
theses).AfteroverviewingrecentdevelopmentsinthestateofJapan’slabormarket
in Chap. 1 (by Souichi Ohta and Hiroshi Teruyama), we present two theoretical
modelsastheirpossibleexplanationsinChaps.2and3(bothbyAkiomiKitagawa).
Then, in Chaps. 4 and 5 (the former by Teruyama and the latter by Ohta and
Teruyama), we use Japanese data to examine the empirical validity of our expla-
nations. Although different authors have written the individual chapters, the five
chapters as a whole provide a unified view of the current state of the Japanese
employment system. As they are aimed at professional economics researchers, the
analyses presented in this book might be somewhat technical. Nevertheless, we
hopethattheywillhelpreadersunderstandthenatureofthecurrentJapaneselabor
market and its macroeconomic impacts.
Ourresearchprojectbeganinthespringof2007,withAkihisaShibataatKyoto
University.Althoughheafterwardfoundhimselftoobusytobecomeacoauthorof
this book, there is no part of the book that has not benefited from stimulating
v
vi Preface
discussionwithhim.Inaddition,manyothercolleagueshavehelpedusimprovethe
original manuscript, either with specific comments on earlier versions of the
chapters or through discussions over the years on some of the covered topics.
A nonexhaustive list includes Masahiro Abe, Kenn Ariga, Koichi Futagami, Yuji
Genda, Ryo Horii, Ryo Kambayashi, Daiji Kawaguchi, Noritaka Kudoh, Makoto
Saito, and Katsuya Takii. Above all, special thanks go to Hiroyuki Toda and
Masako Kimurafor permission toquote from theircollaborative work with two of
us, thereby contributing to the empirical part of this book. Much of the material
found in Chap. 4 is based on Teruyama’s articles coauthored with Hiroyuki Toda.
The empirical results in Chap. 5 are obtained through Ohta and Teruyama’s col-
laborative research with Masako Kimura. We are also grateful to an anonymous
reviewerforusefulcomments(and,ofcourse,forapositiveverdictonpublication).
Much of the research underlying this book received the financial support of the
Japan Society for the Promotion of Science (JSPS KAKENHI Grant Numbers
19330039, 23330060, 24243035, 24330074, 26285068, and 16H03631), and we
would like to acknowledge it.
Sendai, Japan Akiomi Kitagawa
Tokyo, Japan Souichi Ohta
Kyoto, Japan Hiroshi Teruyama
June 2017
Contents
1 Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 The Unemployment Rate Since 1990. . . . . . . . . . . . . . . . . . . . . . 3
1.3 Nature of Japanese Employment Practices . . . . . . . . . . . . . . . . . . 8
1.4 Job-Worker Attachment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.5 Wage Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.6 Has the Complementarity of the System Changed?. . . . . . . . . . . . 18
1.7 Non-regular Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.7.1 Increasing Non-regular Employment. . . . . . . . . . . . . . . . . 20
1.7.2 A Closer Look at Non-regular Employment . . . . . . . . . . . 23
1.8 Nontechnical Summary of This Book . . . . . . . . . . . . . . . . . . . . . 28
1.8.1 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
1.8.2 Implications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Part I Theory
2 Flatter Wage Profiles and Reduced Lifetime Employment:
A Simple Formalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.2 The Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.3 Optimal Design of Wage Scheme . . . . . . . . . . . . . . . . . . . . . . . . 43
2.4 General Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2.4.1 The Riskless Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.4.2 Risky Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
2.5 A Pareto-Improving Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
2.6 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
vii
viii Contents
3 Ranking and Long-Term Unemployment in a Model
with Efficiency Wages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
3.2 The Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
3.2.1 Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
3.2.2 Firms and Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.2.3 Informational Frictions. . . . . . . . . . . . . . . . . . . . . . . . . . . 71
3.2.4 Sequence of Events Within a Period. . . . . . . . . . . . . . . . . 71
3.3 Labor Contracts and Aggregate Labor Demand in Stationary
Equilibria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
3.3.1 Labor Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
3.3.2 Aggregate Labor Demand . . . . . . . . . . . . . . . . . . . . . . . . 75
3.4 Firms’ Belief, Ranking, and Aggregate Incentive Constraints . . . . 79
3.4.1 AIC for n¼(cid:2)1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.4.2 AIC for n2ð(cid:2)1;0Þ. . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
3.5 Stationary Equilibria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
3.5.1 Diagrammatic Expositions . . . . . . . . . . . . . . . . . . . . . . . . 96
3.5.2 Welfare Comparison Among the Existing Equilibria . . . . . 100
3.5.3 A Pareto-Improving Policy. . . . . . . . . . . . . . . . . . . . . . . . 103
3.6 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Part II Evidence
4 Testing the Dual Structure of the Japanese Labor Market. . . . . . . . 119
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
4.2 Wage Profiles in the Dual Labor Market . . . . . . . . . . . . . . . . . . . 121
4.2.1 Estimation of Wage Functions in the Dual Labor
Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
4.2.2 Data and Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
4.2.3 Empirical Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
4.2.4 The Changing Dual Structure of Wage Formation . . . . . . . 138
4.3 Persistence of Employment Status in the Dual Labor Market . . . . 140
4.3.1 Long-Term Consequences of Employment Status upon
Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
4.3.2 Two-State Markov Transition Model of Job
Turnover. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
4.3.3 Empirical Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
4.3.4 Data and Employment Status Transition . . . . . . . . . . . . . . 148
4.3.5 Variables and Estimation Equation Specification . . . . . . . . 151
4.3.6 Empirical Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
4.3.7 Quantitative Evaluation of Employment Status
Persistence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Contents ix
4.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
5 Duration Dependence of Job-Finding Rates in Japan. . . . . . . . . . . . 169
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
5.2 Long-Term Unemployment in Japan . . . . . . . . . . . . . . . . . . . . . . 172
5.3 Data: The Labour Force Survey. . . . . . . . . . . . . . . . . . . . . . . . . . 174
5.4 Overview of Unemployment Duration and the Job-Finding
Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
5.5 DurationDependenceTestBasedonMicro-DataofUnemployed
Workers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
5.5.1 Recursive Probit Estimation . . . . . . . . . . . . . . . . . . . . . . . 179
5.5.2 Quantitative Evaluation of Duration Dependence. . . . . . . . 181
5.6 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Index .... .... .... .... .... ..... .... .... .... .... .... ..... .... 187
