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

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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.

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Bibliographic Info

Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd09-127.

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Date of creation: Mar 2010
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Handle: RePEc:hst:ghsdps:gd09-127

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Keywords: heterogeneity of firms; efficiency wages; job security; effort; productivity differentials; wage inequalities;

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References

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  1. Marco Leonardi, 2007. "Firm heterogeneity in capital-labour ratios and wage inequality," Economic Journal, Royal Economic Society, vol. 117(518), pages 375-398, 03.
  2. Kyoji Fukao & Hyeog Ug Kwon, 2005. "Why Did Japan's TFP Growth Slow Down in the Lost Decade? An Empirical Analysis Based on Firm-Level Data of Manufacturing Firms," Discussion papers 05004, Research Institute of Economy, Trade and Industry (RIETI).
  3. Dunne, Timothy & Foster, Lucia & Haltiwanger, John C. & Troske, Kenneth, 2002. "Wage and Productivity Dispersion in U.S. Manufacturing: The Role of Computer Investment," IZA Discussion Papers 563, Institute for the Study of Labor (IZA).
  4. Masahiro Abe & Isao Ohashi, 2004. "Inter-Industry and Firm Size Effects on Wage Differentials and Efficiency Wages in Japan," Hi-Stat Discussion Paper Series d04-25, Institute of Economic Research, Hitotsubashi University.
  5. Ryo Kambayashi & Daiji Kawaguchi & Izumi Yokoyama, 2008. "Wage distribution in Japan, 1989-2003," Canadian Journal of Economics, Canadian Economics Association, vol. 41(4), pages 1329-1350, November.
  6. William T. Dickens & Kevin Lang, 1985. "A Test of Dual Labor Market Theory," NBER Working Papers 1314, National Bureau of Economic Research, Inc.
  7. DiNardo, John & Fortin, Nicole M & Lemieux, Thomas, 1996. "Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach," Econometrica, Econometric Society, vol. 64(5), pages 1001-44, September.
  8. Alfonso Sousa-Poza, 2004. "Is the Swiss Labor Market Segmented? An Analysis Using Alternative Approaches," LABOUR, CEIS, vol. 18(1), pages 131-161, 03.
  9. Giulia Faggio & Kjell Salvanes & John Van Reenen, 2007. "The Evolution of Inequality in Productivity and Wages: Panel Data Evidence," CEP Discussion Papers dp0821, Centre for Economic Performance, LSE.
  10. Fumio OHTAKE, 2008. "Inequality in Japan," Asian Economic Policy Review, Japan Center for Economic Research, vol. 3(1), pages 87-109.
  11. Bruno Amable & Donatella Gatti, 2004. "Product market competition, job security, and aggregate employment," Oxford Economic Papers, Oxford University Press, vol. 56(4), pages 667-686, October.
  12. Keiko Ito & Sébastien Lechevalier, 2009. "The evolution of the productivity dispersion of firms: a reevaluation of its determinants in the case of Japan," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(3), pages 405-429, October.
  13. Kato, Takao, 2001. "The End of Lifetime Employment in Japan?: Evidence from National Surveys and Field Research," Journal of the Japanese and International Economies, Elsevier, vol. 15(4), pages 489-514, December.
  14. Julia I. Lane & John C. Haltiwanger & James Spletzer, 1999. "Productivity Differences across Employers: The Roles of Employer Size, Age, and Human Capital," American Economic Review, American Economic Association, vol. 89(2), pages 94-98, May.
  15. Leonardi, Marco, 2003. "Firms' Heterogeneity in Capital/Labor Ratios and Wage Inequality," Royal Economic Society Annual Conference 2003 136, Royal Economic Society.
  16. Richard B. Freeman & James L. Medoff, 1983. "Trade Unions and Productivity: Some New Evidence on an Old Issue," NBER Working Papers 1249, National Bureau of Economic Research, Inc.
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Cited by:
  1. 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.

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