Heterogeneity and Wage Growth of Full-time Workers in Japan: An Empirical Analysis Using Micro Data

In this paper we examine the driving forces behind fluctuations in wage growth of full-time workers in Japan, taking into account the heterogeneity of wage structures among the workers, using micro data including those from the Basic Survey on Wage Structure. Specifically, we first divide the workers into two classes with distinct wage structures, based on a finite mixture model estimated using various characteristics of the workers and the firms they work for. We find that the two classes correspond to what previous studies have called an "internal labor market," where, under long-term employment practices, labor is reallocated within firms and wages follow a seniority-based system, and an "external labor market," where labor moves across firms and wages are mainly determined by supply and demand in the market. We next analyze the effects of economic factors on individual full-time workers' wage growth rates. We show that, in the internal labor market, neither labor market conditions at the industry and firm-size level nor the output gap at the macro level have had an effect on the wage growth rates in recent years, while higher potential growth has had a positive effect. By contrast, in the external and the overall labor markets, improvements in labor market conditions and the output gap have accelerated the wage growth rates, even in recent years.