Business Cycle andWage Inequality in Japan

Using the Basic Survey on Wage Structure from 1989 to 2013, we examine the relationship between business cycle and inequality of employees’ wage: For the wage index, we use real annual earnings deflated by consumer price index. While Gini coefficient and Coefficient of Variation (CV) of real wage among all employed workers increased throughout the period, the relationship between business cycle and wage inequality in 1990s did not show a strong trend. In contrast, during 2000s, wage inequality seems to have become rather more pro-cyclical in booms than in recessions, although inequality tends to increase regardless of business cycle. After 2010, Gini coefficient and CV remain at a high level. According to Gini coefficient and CV of male full-time workers, who are unlikely to repeat entry and exit into labor market so often, wage gap decreased until mid-1990s, gradually increased from mid-1990s to 2008, and again has been shrinking after 2008. The influence booms and recessions have on overtime allowances is asymmetric: the magnitude of drops in overtime allowances during recessions is larger than that of increase in overtime allowances during booms. Exploiting the change in employment structure in 1997, we analyze how the relationship between business cycles and overtime has changed during 1990s and 2000s. Our results reveal that overtime became less responsive to unemployment rate in all quantiles of annual earnings after 1997. The change of labor market structure in 1997 enabled firms to adjust employment more easily. Consequently, firms have come to handle fluctuations in labor demand by changing employment rather than overtime after the structural change, and this trend is strong especially among lower wage quantiles. Overtime adjustment used to play a role of absorption of business fluctuations in 1990s, but after 1997, the role has been replaced by employment. JEL Classification Codes: D31, J31, J81