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Flattening of the Wage Phillips Curve and Downward Nominal Wage Rigidity: The Japanese Experience in the 2010s

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  • Wataru Hirata

    (Bank of Japan)

  • Toshitaka Maruyama

    (Bank of Japan)

  • Tomohide Mineyama

    (Bank of Japan)

Abstract

In this paper, we examine from both a theoretical and an empirical perspective the validity of the hypothesis that downward nominal wage rigidity (DNWR) induced upward rigidity in wage setting, thereby contributing to the flattening of the wage Phillips curve. We focus in particular on Japanese regular workers, those workers who are characteristically employed on long-term contracts. Our theoretical study, which incorporates long-term employment contracts, indicates that DNWR induces upward wage rigidity through the following two channels: first, due to the lack of sufficient downward wage adjustments during economic downturns, firms may become reluctant to increase wages in economic recovery phases; second, firms contain wage increases even in economic expansion phases as they take into account the risk of pay cuts in the future. The strength of the latter channel largely depends on expected economic growth and its uncertainty. As a result, the wage Phillips curve becomes flatter than would be the case without DNWR. In line with the theoretical result, our empirical study using the panel data of Japanese regular workers reveals that the slower growth of monthly earnings, which excludes bonuses but includes overtime pay, for workers who display a strong degree of DNWR pushed down the growth of monthly earnings at the aggregate level by 0.4 percentage points per year (a range of 0.2 to 0.6 percentage points, given uncertainty regarding the identification of DNWR) between 2010-17. In particular, the channel arising from future pay cut risks became relatively stronger in the late 2010s, when labor market conditions became markedly tighter.

Suggested Citation

  • Wataru Hirata & Toshitaka Maruyama & Tomohide Mineyama, 2020. "Flattening of the Wage Phillips Curve and Downward Nominal Wage Rigidity: The Japanese Experience in the 2010s," Bank of Japan Working Paper Series 20-E-4, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp20e04
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    2. Hideaki Aoyama & Corrado Di Guilmi & Yoshi Fujiwara & Hiroshi Yoshikawa, 2021. "Dual labor market and the "Phillips curve puzzle"," CAMA Working Papers 2021-49, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Daiki Date & Takushi Kurozumi & Takashi Nakazawa & Yu Sugioka, 2023. "Heterogeneity and Wage Growth of Full-time Workers in Japan: An Empirical Analysis Using Micro Data," Bank of Japan Working Paper Series 23-E-11, Bank of Japan.
    4. Shuichiro Ikeda & Haruhiko Inatsugu & Yui Kishaba & Takuji Kondo & Kenichi Sakura & Kosuke Takatomi & Takashi Nakazawa & Kotone Yamada, "undated". "Inflation in Japan: Changes during the Pandemic and Issues for the Future," Bank of Japan Working Paper Series 22-E-18, Bank of Japan.
    5. Ichiro Fukunaga & Kakuho Furukawa & Shunsuke Haba & Yoshihiko Hogen & Yosuke Kido & Tomohiro Okubo & Kotaro Suita & Kosuke Takatomi, 2023. "Wage Developments in Japan: Four Key Issues for the Post-COVID-19 Wage Growth," Bank of Japan Working Paper Series 23-E-4, Bank of Japan.
    6. Danilo Stojanovic, 2022. "The 2003 Tax Reform and Corporate Payout Policy in the US," CERGE-EI Working Papers wp727, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

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    More about this item

    Keywords

    Wage Phillips curve; Downward nominal wage rigidity; Long-term employment contracts;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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