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What Prevents Productivity Gains from Translating into Wages: Lessons from Japan's Deflationary Period

Author

Listed:
  • Nobuhiro Abe

    (Bank of Japan)

  • Ryuichiro Hirano

    (Bank of Japan)

  • Sohei Kaihatsu

    (Bank of Japan)

Abstract

What prevents productivity gains from translating into wages? This paper examines the roles of deflation and labor market frictions, with particular emphasis on job security, in driving the widening wage-productivity gap. Our empirical analysis shows that wage-setting in Japan was rigid in both upward and downward directions during the deflationary period, with upward rigidity being more pronounced. These wage freezes suppressed wage growth and contributed to the widening wage-productivity gap. Using a heterogeneous-firm general equilibrium model, we show that downward nominal wage rigidity, together with deflation and an emphasis on job security, suppresses wage growth and widens the wage-productivity gap by inducing firms to impose larger wage markdowns. Alleviating these factors raises not only wages but also aggregate productivity through labor reallocation across firms.

Suggested Citation

  • Nobuhiro Abe & Ryuichiro Hirano & Sohei Kaihatsu, 2026. "What Prevents Productivity Gains from Translating into Wages: Lessons from Japan's Deflationary Period," Bank of Japan Working Paper Series 26-E-12, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp26e12
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    References listed on IDEAS

    as
    1. Kenta IKEUCHI & YoungGak KIM & Hyeog KWON & Kyoji FUKAO, 2018. "Productivity Dynamics in Japanese Small and Medium-Sized Enterprises: An empirical analysis based on the Credit Risk Database (Japanese)," Discussion Papers (Japanese) 18019, Research Institute of Economy, Trade and Industry (RIETI).
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    3. Ikeuchi, Kenta & Kim, Young Gak & Kwon, Hyeog Ug & Fukao, Kyoji, 2018. "Productivity Dynamics Among Japanese Small and Medium-Sized Enterprises: Empirical Analysis Based on the Credit Risk-Database Productivity," Economic Review, Hitotsubashi University, vol. 69(4), pages 363-377, October.
    4. Gabriel Ehrlich & Joshua Montes, 2024. "Wage Rigidity and Employment Outcomes: Evidence from Administrative Data," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(1), pages 147-206, January.
    5. Adrien Auclert & Bence Bardóczy & Matthew Rognlie & Ludwig Straub, 2021. "Using the Sequence‐Space Jacobian to Solve and Estimate Heterogeneous‐Agent Models," Econometrica, Econometric Society, vol. 89(5), pages 2375-2408, September.
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    More about this item

    Keywords

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    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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