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Wage and Productivity Differentials in Japan: The Role of Labor Market Mechanisms

Author

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  • Donatella Gatti
  • Ryo Kambayashi
  • Sebastien Lechevalier
Abstract
Two stylized facts characterized Japan during the so-called Lost Decade (1992-2005): rising wage inequalities and increasing productivity differentials at the firm level. Surprisingly, these features have never been connected in the literature. This paper attempts to fill this gap by proposing an explanation focusing on labor market mechanisms. We first construct an efficiency wage model with two types of firms distinguished by their job security schemes and associated incentive mechanisms. We show that a comparable negative productivity shock at the aggregate level leads to different firm reactions; namely, the model predicts increasing effort from workers in firms employing an efficiency wage mechanism. This leads to increasing productivity and wage differentials and a rise of the share of these firms in the total population of firms. We test this model using Japanese micro data. For the first time, we match the Basic Survey on Wage Structure and the Employment Trend Survey for 2005. The matched worker-firm dataset we obtain allows us to confirm the existence of an efficiency wage mechanism on average. We also divide our sample of firms into two groups using the unknown regime switching regression a la Dickens and Lang (1985), and find that the primary sector, unlike the secondary, is characterized by efficiency wages. We confirm this result with various robustness checks. Finally, we simulate the evolution of the share of the primary sector in the economy and find that it substantially increased between 1981 and 2005 in line with the predictions of our model.

Suggested Citation

  • Donatella Gatti & Ryo Kambayashi & Sebastien Lechevalier, 2010. "Wage and Productivity Differentials in Japan: The Role of Labor Market Mechanisms," Global COE Hi-Stat Discussion Paper Series gd09-127, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hst:ghsdps:gd09-127
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    Cited by:

    1. Kyoji Fukao & Cristiano Perugini, 2021. "The Long‐Run Dynamics of the Labor Share in Japan," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 67(2), pages 445-480, June.
    2. repec:spo:wpmain:info:hdl:2441/3bvs8clr5k9dqqcbq7j5ul2o65 is not listed on IDEAS
    3. IKEUCHI Kenta & FUKAO Kyoji & Cristiano PERUGINI, 2021. "Establishment Size, Workforce Composition and the College Wage Gap in Japan," Discussion papers 21022, Research Institute of Economy, Trade and Industry (RIETI).
    4. repec:hal:spmain:info:hdl:2441/3bvs8clr5k9dqqcbq7j5ul2o65 is not listed on IDEAS
    5. Fukao, Kyoji & Perugini, Cristiano & Pompei, Fabrizio, 2020. "Labour Market Institutions, Technology and Rent Sharing," IZA Discussion Papers 13155, Institute of Labor Economics (IZA).
    6. Jean Barthélemy & Magali Marx, 2012. "Generalizing the Taylor Principle: New Comment," SciencePo Working papers Main hal-03461113, HAL.
    7. Sebastien Lechevalier, 2020. "Kitagawa A., Ohta S. and H. Teruyama: the changing japanese labor market: theory and evidence, XI," Journal of Economics, Springer, vol. 130(2), pages 219-223, July.
    8. Sebastien Lechevalier & Cyrille Dossougoin & Christophe Hurlin & Satoko Takaoka, 2014. "How did the Japanese Employment System Change?Investigating the Heterogeneity of Downsizing Practices across Firms," KIER Working Papers 883, Kyoto University, Institute of Economic Research.
    9. Hiroshi Teruyama & Hiroyuki Toda, 2017. "Polarization and Persistence in the Japanese Labor Market," KIER Working Papers 957, Kyoto University, Institute of Economic Research.
    10. Teruyama, Hiroshi & Goto, Yasuo & Lechevalier, Sebastien, 2018. "Firm-level labor demand for and macroeconomic increases in non-regular workers in Japan," Japan and the World Economy, Elsevier, vol. 48(C), pages 90-105.
    11. Shogo Ogawa, 2019. "Dynamic analysis of a disequilibrium macroeconomic model with dual labor markets," Metroeconomica, Wiley Blackwell, vol. 70(3), pages 525-550, July.
    12. Hiroshi Teruyama & Hiroyuki Toda, 2017. "Wage Profiles in the Japanese Dual Labor Market," KIER Working Papers 961, Kyoto University, Institute of Economic Research.
    13. Fukao, Kyoji & Perugini, Cristiano & Pompei, Fabrizio, 2022. "Labour market regimes, technology and rent-sharing in Japan," Economic Modelling, Elsevier, vol. 112(C).
    14. Kyoji Fukao & Cristiano Perugini & Fabrizio Pompei, 2023. "Non‐standard Employment and Rent‐sharing," Economica, London School of Economics and Political Science, vol. 90(357), pages 178-211, January.

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    More about this item

    Keywords

    heterogeneity of firms; efficiency wages; job security; effort; productivity differentials; wage inequalities;
    All these keywords.

    JEL classification:

    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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