The Endless Ice Age: A Review of the Cohort Effect in Japan

The cohort effect in the labor market refers to the lasting impact on employment conditions, such as wages and job separation, of a group of people of the same age, gender, and educational background that is created by supply and demand in the labor market at the time of graduation and that group's population size. This article outlines conventional research findings on the cohort effect, and presents the results of research conducted using long-term data, including data from the prolonged hiring slump known in Japan as the "employment ice age." During this time, rising unemployment rates at the time of graduation left graduates unable to find employment immediately after graduation or thereafter, increasing the likelihood that they would obtain provisional employment or remain unemployed altogether. A trend toward declining annual incomes was especially noticeable among high school graduates. This is attributable to the limited employment opportunities available to the less educated during a recession as well as to the effects of a structural pitfall of the Japanese labor market. That is, because of the weakness of the market's evaluation functions and the high level of mobility costs, the inability to find employment immediately after graduation makes it tremendously difficult to improve one's situation later. Helping the employment ice-age generation will require intensive skill development efforts and also efforts by the government and corporate sector aimed at improving the evaluation functions of the labor market.