MONETARY AND ECONOMIC STUDIES(SPECIAL
2001
StructuralIssues inEDITION)/FEBRUARY
the Japanese Labor Market

Structural Issues in theJapanese Labor Market:
An Era of Variety,
Equity, and Efficiency oran Era of Bipolarization?
Hiroshi Fujiki, Sachiko Kuroda Nakada,and Toshiaki Tachibanaki

This paper describes several structural changes in the Japanese labormarket and related institutional factors with special emphasis on thelabor supplies of part-time workers and discouraged workers. We also
discuss necessary reforms in the labor market and some implicationsof such structural changes on the conduct of monetary policy.
Key words: Part-time worker; Discouraged worker; Japaneseemployment system; Unemployment

Hiroshi Fujiki: Bank of Japan (E-mail: hiroshi.fujiki@boj.or.jp)
Sachiko Kuroda Nakada: Bank of Japan (E-mail: sachiko.kuroda@boj.or.jp)
Toshiaki Tachibanaki: Kyoto University
This paper is a condensed version of a draft presented at the conference on “The Role ofMonetary Policy under Low Inflation: Deflationary Shocks and their Policy Responses”
on July 3–4, 2000 at the Bank of Japan. The authors thank Yukiko Abe, Charles Collyns,
Shin-ichi Fukuda, Jane T. Haltmaier, Jean Hilgers, Grant Kirkpatrick, Nobuko Nagase,
Job Swank, John Taylor, Takeshi Kimura, Masahiro Higo, and Eiji Maeda for theirhelpful comments and suggestions. We are grateful to Toyoichiro Shirota of Institute for
Monetary and Economic Studies, Emi Arinaga, Mieko Ootaka, and other staff in the
Research and Statistics Department for providing us with their valuable support inhandling the data sets. The views expressed in this paper are solely those of the authors,and do not necessarily represent the views of Kyoto University, the Bank of Japan,
Institute for Monetary Economic Studies, or Financial Markets Department.

177

I. Introduction
The Japanese employment system has been considered a key factor in the good
performance of Japanese economy, because the Japanese unemployment rate was very
low and stable compared with those of the United States or most of the European
countries in the 1970s and the 1980s. Taking a long view, however, we can recognizethat there was a persistent rise in the Japanese unemployment rate (Figure 1). In
particular, the unemployment rate surged in the 1990s, and along with the collapseof large financial companies in November 1997, the rate hit 4.9 percent in February
2000. The Japanese unemployment rate now exceeds that of the United States.
Figure 1 Japanese Unemployment Rate
Percent
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1970 72

74

76

78

80

82

84

86

88

90

92

94

96

98

Source: Management and Coordination Agency, Statistics Bureau and Statistics
Center, Labour Force Survey.

In Figure 2, we have plotted the quarterly unemployment rate versus the job
vacancy rate, using the sample period from 1963 to 1999. For the past 36 years, it
seems that the Beveridge curve for Japan, that is, the negative correlation between theunemployment rate and the vacancy rate, has been shifting outward to higher rates ofboth unemployment and vacancies.
Why is the Japanese unemployment rate consistently rising? And why is theBeveridge curve shifting upward in Japan?1 Following Bleakley and Fuhrer (1997),
the outcomes for unemployment and vacancies that are summarized in the Beveridge
curve can be explained by three major factors. Those are (1) increases or decreases in
job-matching efficiency, (2) labor market reallocation caused by job creation anddestruction,2 and (3) inflows and outflows to and from the labor force. Let us look
into each factor briefly.
1. It is often said that increasing geographical, age, or occupational dispersion of workers and job opportunities are
causing the upward shift in the Beveridge curve. In order to examine this hypothesis, we calculated the mismatch
index (see Layard, Nickell, and Jackman [1991]) following Sakurai and Tachibanaki (1992) for the past 25 years
by region, age, and occupation. Table 1 shows the simple five-year average of the mismatch index. Although we
can observe a slight increase in occupational mismatch in the 1990s, there is no evidence of increased mismatch byregion or age.
2. Davis, Haltiwanger, and Schuh (1996) define job creation (job destruction) at time t equals employment gains(losses) summed over all plants that expand (contract) or startup (shutdown) between time t–1 and t.

178 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

Figure 2 Beveridge Curve

6

Vacancy rate, percent

5

73/IV

4
90/IV
87/IV

3

99/IV

2
78/I

63/I

95/IV

1
1

2

3

4

5
6
Unemployment rate, percent

U
JO – JM
Note: u = ——— and v = ———————, where u is employee-based(U + E )(JO – JM ) + E
unemployment rate, v is the vacancy rate, U stands for the number of
unemployed, E is the number of employed persons, JO represents thenumber of active job openings, and JM is the number of job matches(the number of job openings filled by the job applicants). For details, seeFootnote 11.
Sources: Management and Coordination Agency, Statistics Bureau andStatistics Center, Labour Force Survey ; Ministry of Labour, Reporton Employment Service.

Table 1 Mismatch Index for Japan
Regional groups(10 groups)

Age(8 groups)

Occupational(10 groups)

Late 1970s

17.39

20.09

—

Early 1980s

17.32

20.26

22.96

Late 1980s

16.16

20.72

22.81

Early 1990s

18.64

18.14

26.88

Late 1990s

17.92

19.86

24.14

Note: Mismatch index; –2 ∑ u i – vi × 100. u i = U i /U and v i = Vi /V, u i is the relative unemployment rate,1i

and v i is the relative vacancy rate by region, age, and occupation (subscript i refers to a factorof mismatch, either by region, age, or occupation), U stands for the number of unemployment,
V is the number of active job openings minus the number of job matches. Regarding theoccupational mismatch, the number of new job applicants (for unemployment) and the numberof new job openings minus the number of job matches (for vacancies) are used instead.
Sources: Same as those for Figure 2.

First, regarding the job-matching efficiency, the Japanese long-term employment
system and the high investment in skills have made the Japanese spot labor market
very “illiquid,” and this may be causing inefficiency for both workers and firms

179involved in the job-matching process when a large shock occurs. This is one of thepossible explanations of the upward shifts in the Beveridge curve, since the shifts canbe observed after every large negative shock in the past, such as the two oil shocks,
the strong yen period in the early 1980s, and in the 1990s.
The traditional responses of Japanese firms to negative shocks include at least
three factors (see Tachibanaki [1987, 1998], for example). First, a reduction in working hours and overtime payment for currently employed full-time workers.3 Second,less employment of new graduates. Third, an increase in shukko (temporary transfers
between firms) and tenseki (transfers to another company, or change of long-term
employment), both of which effectively reallocate workers within the internal labormarket.4 Such traditional adjustment mechanisms used to prevent the unemploymentof core workers in large firms, if the firms were able to reduce labor costs, and there
was also an increase in shukko and tenseki in small businesses. Figure 3 shows datafrom the Tankan (Short-Term Economic Survey of Enterprises in Japan), which isthe diffusion index of judgments on the excessiveness, adequacy, or shortage of thenumber of employees in the various sizes of firms interviewed. In the past, we can see
from Figure 3 that small firms answered that they had labor shortages, even when
Figure 3 Judgment on the Excessiveness, Adequacy, or Shortage of the Number of
Employees

60

Diffusion index, percentage points

Excessive

Large firms
Medium-sized firms
Small firms

40

20

0

–20

–40
Insufficient–60
1974 76

78

80

82

84

86

88

90

92

94

96

98

00

Source: Bank of Japan, Research and Statistics Department, Tankan (ShortTerm Economic Survey of Enterprises in Japan).

3. Shinotsuka and Ishihara (1977) is the first study to point out that Japanese firms manage to maintain long-term
employment for most of their regular full-time workers during economic downturns by reducing total working
hours flexibly.
4. See Sato (1999) for details of shukko and tenseki in the late 1990s.

180 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

large or medium-sized firms had found that they had surplus labor. In the 1990s,
however, the financial sector crisis may have caused many of these small firms thatwere highly dependent on the full support of their main banks to collapse (see in
Figure 3 that the diffusion index of small enterprises has been showing “excessive”
since 1993). Therefore, the absence of this “buffer” might have exacerbated the shockto the Japanese employment system.
Second, because of the limitations in current Japanese statistics, unfortunately so
far only a few studies on Japanese job creation and destruction are available. Amongthe few that exist, Genda’s (1998) analysis suggests that job creation and destruction
rates in the early 1990s were lower for regular, full-time, and male workers than for
temporary, part-time, and female workers.5 Considering the fact that the ratio ofpart-time workers to the total labor force has been increasing substantially in recent
decades (more details in Chapter II.A), the increase in the proportion of the jobs
with a higher rate of job creation and destruction may be another candidate to
explain the outward shift of the Beveridge curve.
Third, let us take a look at the inflows into and outflows from the labor force.
Until the early 1980s, women tended to leave the labor market either for marriage orchildcare and many of them chose to stay out of the labor force as permanent homemakers. Although there were reentrants to the labor market, most of them worked as
nonregular part-time workers after their children had grown up. Whenever recession
occurred, however, it was quite common for them to withdraw from the labor market(for example, see Shinotsuka [1983], Higuchi, Seike, and Hayami [1987], andTachibanaki and Sakurai [1991]). Such a pro-cyclical inflow into and outflow fromthe labor force could be explained by typical common practices among Japanesefirms. They usually cut back new graduate recruitment and lay off part-time workers
in order to hoard regular full-time employees. It had been said that such “discouraged
workers” were another “buffer” of the Japanese labor market, which in the past
pushed the official Japanese unemployment rate systematically lower. In the past 10
to 15 years, this typical woman’s attitude to labor supply has tended to weaken. Morewomen reenter the labor force after a short period of withdrawal for childcare, andthey tend to remain in the labor market seeking jobs even during a recession. Indeed,
women account for almost all of the growing number of part-time workers, and they
have become a large component in the explanation of the dynamics of the Japaneselabor market. In particular, as the downturn bit deeper into profits in 1990s, cheaper
part-time workers replaced full-time regular workers. According to the Report on theSpecial Survey of the Labour Force Survey in February 2000, the number of regularfull-time workers decreased by 580,000 from the previous year, while concurrently
the number of part-time workers increased by 540,000.
It is possible that during a period of high unemployment in Japan more “core”(this is really an abuse of the word, as it is merely a Japanese way of saying “insiders”),
i.e., full-time regular employees, even in large firms may become unemployed. Such
5. Tachibanaki and Morikawa (1999) report similar results by using microdata obtained from the Census of
Manufactures. They point out that the job destruction in plants with a high-wage and high male-labor ratio tends
to be small.

181

a view often presumes that more “peripheral workers” (“outsiders”) may choose tostay out of the labor force during a period of high unemployment. The first effect,
particularly the potential risk of unemployment among incumbent prime-aged
workers, has attracted some concern.6 Indeed, there are many studies regarding thesustainability of the so-called Japanese employment system based on the examinationof various aspects of the Japanese labor market (see for example, Tachibanaki andTaki [2000] and Hattori and Maeda [2000]). However, we would like to showthat from the viewpoint of the overall Japanese economy, the secondary effectupon peripheral workers seems to capture the dramatic changes which have beentransforming the Japanese labor market.
The organization of the rest of this paper is as follows. Chapter II explains
why considering the problem in the Japanese labor market from the viewpoint of
peripheral workers is important. Our analysis includes consideration of whether
or not the increase in the number of female part-time workers on low wages andwith little job security could be related to the tax system and the social security
systems which presume that “man is the breadwinner, woman the homemaker.” Thediscouraged workers, who are believed to enjoy “luxury unemployment,” are better
considered as a potential labor supply in the Japanese labor market. We argue
that the omission of those workers from the discussion of unemployment mightunderstate current Japanese unemployment problems, and they may have important
aggregate implications. For example, we consider the effects of the treatment of
the discouraged workers on Okun’s Law in the Japanese context. Chapter III
examines the direction of several structural reforms in the labor market, based on thediscussions in Chapter II, and Chapter IV concludes.

II. Structural Change in the Japanese Labor Market
In Chapter II, we examine the changes in the labor supply attitudes of part-timeworkers (especially female part-timers) and discouraged workers in these years. Putanother way, this chapter will highlight an aspect of the conflict of interest between
incumbent regular workers (mostly men) and nonregular workers (mostly women) or
discouraged workers (out of the labor force).
Along with the establishment of the Japanese long-term employment system in
the 1970s and the 1980s, the institutional factors that reinforced such an employment system tend to presume rigid gender roles in which men are breadwinners(regular full-time workers) and women homemakers. Such institutional factors,
which were established in the old days as we see in more detail in the following
sections, are now influencing peoples’ labor supply unintentionally and may becausing nontrivial distortions in the Japanese labor market.
6. According to Lindbeck and Snower (1988), insiders are assumed to create a special, potentially important, varietyof labor turnover cost by withdrawing cooperation from, and by harassing, entrants who attempt to underbid
them. In the Japanese case, by precedent, it is generally very costly to fire regular full-time workers (see OECD[1999a]). Moreover, given the accumulation of firm-specific human capital, it is beneficial for both employers andemployees to cope with adverse economic shocks through reductions in overtime work or overtime payments,
rather than by firing workers, if the shocks are expected to be temporary.

182 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

A. Part-Time Workers
In Japan, more than one-fifth of employees are now part-time workers (22 percent of
total employees). The rate was only 12 percent in 1985. Such increase in the numberof part-time workers in the past 15 years is attributed to a large growth in female
part-time workers. In this section, we mainly focus on the changing attitudes of thefemale labor supply in these decades.
1. Increasing female part-time workers
In Japan, the number of females participating in the labor force has grown significantlyin the past 15 years (Figure 4). The number of female employees has increased by about
5.6 million since 1986, while the number of male employees has increased by only
3.7 million. Among the extra 5.6 million female employees, about 4.3 million of theincrease has been in the number of part-time workers,7 accounting for three-quartersof total female employment growth. In 2000, the ratio of female part-time workers
to total female employment reached 42 percent. This phenomenon of increases infemales’ labor force participation rate is common among industrial countries. It isinteresting to find, however, that there are two types of trends in these countries. First,
there are countries where simultaneous rises in females’ participation rate and in theratio of part-time to total employment are observed (Japan, France, and New Zealand,
Figure 4 The Number of Employed Persons, Female

21
20
19

Million people

Million people

14
13

Regular full-time workers(right scale)

12
11

18

10

17

9

16

8
7
6

Total employees (left scale)15
14Part-time workers(right scale)

13

5
4

12
1985 86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

Source: Management and Coordination Agency, Statistics Bureau and Statistics
Center, Report on the Special Survey of the Labour Force Survey.

7. Definitions of “part-time workers” differ widely among countries. For differences in definitions, see OECD
(1994) or OECD (1999b) for examples. The Japanese concept of part-time workers are those who are not “core”
regular full-time workers. The employment conditions of typical core regular full-time workers include senioritybased wages, long-term employment, on-the-job training, and various forms of employment protection. Therefore,
although the word “part-time” itself means “a part of full-time,” a “part-time worker” in Japan does not necessarily
work fewer hours than a full-time worker. According to the 1995 Ministry of Labour Report on the General
Survey on Part-Time Workers, at least 16 percent of part-time workers reported that they worked the same numberof working hours as regular workers. However, regarding data on Japanese part-time employment, definitions are
not consistent among statistics. In the Special Survey of the Labour Force Survey, a part-time worker is defined
as someone whose position is classified as part-time by his or her employer. This definition is close to actual“part-time workers” in Japan, and the discussion in this paper is basically based upon this statistics. Houseman
and Osawa (1998) provide comprehensive explanations of differences in the concept of part-time worker between
the United States and Japan.

183

for example). Second, there are countries where only the female participation rate is
growing while the part-time ratio is not, which implies that the growing number ofwomen who work as full-time workers is larger than that of women who work as
part-time workers (such as in the United States and Norway).
2. Relative wages between full-time work and part-time work
In order to find a possible explanation of this rapid and steady increase in the numberof Japanese part-time workers, let us first look at the wages of female regular full-timeworkers and those of female part-time workers. In Figure 5, we can see that averagehourly earnings of full-time workers has increased more than 2.5 times in the past
two decades, while that of part-time workers has merely doubled.8 As a result, thewage differential between full-time workers and part-time workers has widened
greatly, as shown in the downward thick solid line in Figure 5.9 The finding thatthe relative wages are less than 100 throughout the sample period is not the resultof failure to control differences in the following characteristics, such as firm size, age,and job experiences within the same firm (Figure 6).10 Why are wage differentials
between those two groups increasing? Is women’s labor supply toward part-time work
exceeding labor demand? Let us turn to the demand side.
Figure 5 Wages per Hour and Wage Differential, Female

1,400

Full-time = 100, percent

Yen/hour

1,200

100
95

Full-time workers (left scale)

90

1,000

85

800

80

600

75

400

70

200

Part-time workers (left scale)Part-time/Full-time wage differential(right scale)

65
60

0
1976

78

80

82

84

86

88

90

92

94

96

98

Note: Average wage of regular full-time workers = (scheduled cash earnings permonth)/(the actual number of scheduled hours worked). Scheduled cash
earnings: amount of contractual cash earnings, not including overtime
allowances. The average wage of part-time workers is defined as hourlyscheduled cash earnings.
Source: Ministry of Labour, Basic Survey on Wage Structure.

8. Note that in the discussion of wage differentials in figures 5 and 6, only data in the Basic Survey on Wage
Structure are available for part-time workers’ wages, and that part-time workers are defined as those who work
fewer hours per day or days per week than do regular workers.
9. The differential will widen even more when we add bonuses and other fringe benefits, including social security
benefits, to earnings. Regarding non-wage labor costs, see also Footnote 13.
10. Some readers may think that the wage differential between the two jobs may simply reflect the differencesin human capital, especially the differences in the levels of educational attainment. Since wages classified byeducation groups are not available for part-time workers, we can not verify this idea by controlling education in thewage equation à la Mincer. However, when we classify full-time and part-time workers by educational level, theratio of part-time workers to total employees has been increasing constantly in every education group in the past
15 years. For example, the ratio for the university graduate level part-time workers to the total number ofuniversity graduate level workers increased from 16.6 percent in 1986 to 26 percent in 1999. For high school
graduates, the ratio increased from 31 percent in 1986 to 47 percent in 1999. Based on those observations, we canat least assume that the difference in educational level is not the main factor in explaining the wage differential.

184 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

Figure 6 Wage Differentials by Controlling Individual Characteristics, Female
Wage differential, full-time = 100
100
90
80
70
60
50
40
30
20
10
0

Before adjustment

After adjustment

1985 1990 1995

Manufacturing

Wholesale andretail, eating anddrinking placesService

Manufacturing Wholesale andretail, eating anddrinking placesService

Note: Adjusted for firm size, age group, and length of working period in the same firm.
Source: Calculated by Ministry of Labour, in 1997 White Paper on Labour.

3. Demand for part-time workers exceeds supply
Figure 7 shows the ratio of part-time job openings to part-time applicants.11
According to the data shown in Figure 7, the demand for part-time workers increased
Figure 7 Ratio of Job Openings to Job Applicants

4.5

Ratio

4.0
Ratio of part-time job
openings to part-time
job applicants

3.5
3.0
2.5
2.0
1.5
1.0
0.5

Ratio of total job openings to total job applicants

0.0
1972

74

76

78

80

82

84

86

88

90

92

94

96

98

Source: Ministry of Labour, Report on Employment Service.

11. In Japan, the Employment Security Law of 1947 established a network of Public Employment Security Offices(referred to hereafter as PESOs), and the law allowed PESOs to obtain monopoly power in the employment
placement service. The law had for a long time strictly regulated (fee-charging) private employment placement
services. Therefore, vacant jobs are filled only through the PESOs. The data used for “job openings” in this paper
are vacant jobs registered by job-offering firms at the PESOs. All of those who register at the PESOs are called“job applicants.” The data on such people are collected on a monthly basis. We call cumulative total available job
offers and seekers “active job openings” and “active job applicants.” The ratio of job openings to job applicants
used in Figure 7 is calculated by the number of registered active job openings divided by the number of registeredactive job applicants. “Job openings” has been used as a proxy variable for vacancies in Japanese studies, sincethese registered base data are only available in the form of time-series data.

185

throughout the 1980s. In addition, it should be recognized that even during thecurrent severe recession, the number of employers who are seeking part-time workers
exceeds the number of workers seeking part-time work, while the total number of job
openings is well below the total number of job applicants.
Houseman and Osawa (1998) suggest two possible factors that may have resulted
in the increase in demand for part-time workers in Japan from 1982 to 1992. One
is the “between industries effect,” that is, changes in industrial composition of
employment have increased the employers’ demand for part-time workers. If theemployment share of industries with a high rate of part-time employment increases,
the demand for part-time workers will increase, holding other conditions constant.
The other possible factor is the “within industry effect,” i.e., that employers haveincreased their demand for part-time workers because they face greater competition
than in the past, and thus have come under greater pressure to lower labor costs.
Their empirical analysis regarding the increase in part-time employment in Japanover the period 1982–92 shows that the second factor explained as much as
92 percent of total changes. We can provide supporting evidence that their finding
also applies to the mid-1990s. According to the 1995 Ministry of Labour Reporton General Survey on Part-Time Workers (hereafter, GSPW ), among the reasons forhiring part-time workers, the most frequent answer given by 13,000 establishments
was “to save labor costs” (38.3 percent).
If markets are perfectly competitive, such a unanimous increase in employer
demand for part-time workers in all industries must drive up part-time workers’
relative wage. Considering the fact that the wage differential has been continuously
widening in the past, there must be some reason why the market adjustment
mechanism has been distorted.
4. Some possible explanations for the differential between full-time andpart-time wages
There has been much discussion regarding the explanations of the full-time andpart-time wage differential in Japan, and this discussion has not yet reached aconsensus. We here briefly review some of the points made in this discussion.
a. Institutional factors
Nagase (1997a) points out the possibility that the institutional system encourages
women to work part-time for low wages.12 For example, in 2000 in Japan, a worker
whose earnings are less than ¥1.03 million (about US$10,300 at an exchange rate of¥100 per U.S. dollar) per year is exempted from paying income tax. At the same time,
when a worker’s earnings exceed ¥0.7 million (US$7,000), the amount of her (his)spouse’s tax relief starts to decline and tax relief ends when earnings exceed ¥1.4
million (US$14,000). In addition, since the 1986 public pension reform, a worker(1) whose working hours per day or week are less than three-quarters of those ofregular workers and (2) who earns less than ¥1.3 million (about US$13,000) per year
is regarded as having “dependent” status. Such workers are eligible for health insurance
coverage under their spouse’s plan and are entitled to receive a basic pension from the
12. Doudeijns (1998) discusses from an international perspective how the tax and benefits systems influence a second
earner’s incentive to work.

186 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

government. Such workers are exempted both from the government-mandated pension
contribution and from health insurance payroll taxes.13 In fact, in the GSPW, roughly
40 percent of female part-time workers reported that they limit their working hours inorder to keep their earnings under the income tax threshold or to avoid paying healthinsurance and pension contributions.14
Nagase (1997a) states that the tax threshold did not become a binding constraint
for the labor supply of part-time workers because both full-time and part-time wages
were considerably lower than the threshold. However, the government has notchanged the level of the tax thresholds by fully indexing the realized inflation rate.
She points out that for most part-time workers, the local optimal choice of relatively
low wages that maximize the after-tax income created below the tax threshold seems
to be a reasonable choice, given the potential hours that they may be able to workand their husbands’ income. Therefore, the paradox of an increase in demand forpart-time workers and a decline in the relative wage of part-time workers is consistently explained by the existence of the tax threshold. If there is a considerable
number of part-time workers who limit their working hours to avoid paying taxes,
then raising the hourly wage of part-time workers is not a reasonable strategy forfirms even when they have strong demand for those workers. This is because thehigher they raise the wage of part-time workers, the higher the risk becomes that
their part-time employees adjust their working hours whenever their earnings comeclose to the tax threshold. If the part-time workers do indeed reduce their working
hours, firms have to employ additional part-time workers in accordance with theirbusiness conditions. Since hiring new part-time workers is costly, firms may ask parttime workers to work longer hours during busy business seasons. Part-time workers,
who are afraid of being dismissed for refusing firms’ offers, may choose lower wages
in advance to keep their income below the tax threshold (Furugori [1997]).
Abe and Ohtake (1995) and Abe (2000) argue that although such institutional
factors may affect part-time workers’ labor supply, these factors themselves are not
the major cause of a lowering of the level of part-time wages. Abe (2000) points outthat a substantial decrease in part-time working hours was observed from the late1980s to the 1990s, while part-time wages increased in the same period. This implies
that many of part-time workers were able to shorten their working hours at the sametime as their wages rose in order to keep their income below the tax threshold.
Higuchi (1995) states that part-time workers who shorten their working hours inorder to keep their income below the tax threshold tend to work for lower wages thanthose of part-time workers who do not adjust their working hours. He points out,
however, that it is not yet clear whether such beneficial tax treatment is pushingwages lower for a given working time or shortening part-time workers’ working hours
for a given wage.
13. This also benefits firms. Since social security payroll taxes, including employment insurance contributions, must
be shared equally by employers and employees, hiring part-time workers who do not have to pay such taxes saves
a firm’s labor costs.
14. Of course, this does not mean that every female part-time worker is not paying social security taxes. Abe (1999)
finds that about 30 percent of married part-time workers work more than 30 hours a week, and more than 60
percent of them pay such taxes.

187

b. Compensated wage differential hypothesis
Nakamura and Chuma (1994) and Chuma (1995) analyze the part-time wage
function by using a hedonic approach and show that in urban areas a job thatallows workers to choose working days and hours more flexibly tends to be accepted
at a lower wage. They also find that the length of commuting time from home toworkplace significantly explains the level of part-time wage in urban areas.15 They
point out that, in general, not only the level of wages per hour but also the flexibility
in working days or hours and the amenity of a job (such as job security, the lengthof commuting time, and days of paid leave) affect the acceptance of job offers by
part-time workers. Since part-time workers are mostly homemakers and therefore
responsible for household chores and childcare, they prefer to find jobs near where
they live with low wages but which allow flexible working days and hours instead(Japanese women’s job choices are discussed further in Section II.A.5). Therefore,
some of the wage differential could be understood as compensating to some extent
for this difference.
c. Faster growth rate of female full-time workers’ wages
Osawa (1993) and Abe (2000) state that the widening wage differential between
female full-time and part-time workers can be explained rather by the catchup infemale full-time wages relative to the male full-time wages throughout the 1980s
and the 1990s. Yashiro (1980) argues that the gender wage differential in Japan
can be explained by the difference in training and the accumulation of firm-specificskills. It is often said that Japanese firms pay large costs to train full-time workers
through both on- and off-the-job training. However, firms do not invest as much
firm-specific training for female full-time workers as they do for male full-timeworkers, since they expect the quit rate of women to be higher than that of men. If
the attitudes of such firms have partially improved following the 1986 Equal
Treatment Opportunity Law, the upward revision in female full-time workers’ wage
could be another possible explanation for the widening wage differential between
full-time and part-time workers.
d. Efficiency wage16 for regular workers
Abraham (1990) argues that paying higher wages may be a sensible way of reducing
supervision costs or turnover costs among the firm’s “core” workforce, but that
there is little obvious return from paying high wages to others performing less central
tasks. She goes on to say, however, that establishments that pay high wages toworkers in some tasks tend to pay higher average wages irrespective of the nature oftasks in order to maintain workplaces’ “morale.” Therefore, hiring part-time workers
from the external market at (low) market wages allows firms to lower labor costs
without losing incumbent (efficiency-wage-provided) regular workers’ morale. Osawa

15. (Full-time) workers’ long commuting times are quite common, especially in urban areas, in Japan. Furugori(1997) interviewed people who work in supermarkets in Tokyo and Cleveland, Ohio in 1992. She finds that the
full-time workers’ average commuting time in Tokyo’s supermarkets is 42.2 minutes, while that of part-timeworkers is only 24.2 minutes. She points out that the commuting time for workers in Cleveland’s supermarkets is
not that different between full-time and part-time workers (the average time for full-time workers is 20.3 minutes
while that of part-time workers is 14.8 minutes).
16. Regarding the efficiency wage hypothesis, see Akerlof and Yellen (1986), for example.

188 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market(1993) states that such behavior on the part of firms can be also seen in the Japaneselabor market.
5. Women’s labor supply: preference or fixed cost of childcare?
Even if there are such tax exemptions for relatively low earnings, one may think thatwomen can choose full-time jobs with much higher earnings instead of working in
low-waged part-time jobs. Why have women increasingly chosen part-time jobs? To
investigate this question in detail, it is useful to look at the supply side.
a. Many women prefer time flexibility
According to the GSPW, among multiple answers, more than 50 percent of 30,000
part-time workers replied that they prefer part-time work because a part-time job
allows them to choose working days and hours more flexibly. Another 27 percent
replied that they chose part-time work because they wanted to shorten their working
days or hours. Women who replied that they worked part-time just because they
could not find regular full-time jobs totaled only 17 percent.
b. Are they willingly choosing part-time jobs?
We should note that, however, the replies shown in the GSPW may not literally
mean that the most of the part-time workers are willing to accept low-wage jobs.
For example, Nagase (1997b), who empirically examined the occupational choicesof married women in Japan, points out that the number of preschool children
reduces the probability that a woman will participate in the labor market, especiallyas an employee of a firm. She also finds that the presence of a grandmother living inthe same household who can take care of children increases the likelihood of awoman choosing full-time work. The findings suggest that if there are any arrangements to take care of their preschool children—for example, the presence of anotherfamily member—Japanese women might be able to choose full-time work even if
they had preschool children. In addition, the Japanese employment and social
systems, which do not provide an opportunity for a “return match” to restart one’s
career in full-time employment once one has withdrawn from the full-time regular
employment market, also hinders reentrants, regardless of one’s educational level,from working full-time.
We argue that young women in Japan face only “two corner solutions”:(1) quitting full-time work and becoming a homemaker and later reentering thejob market as a low-wage part-time worker, or (2) keeping her career as a regularfull-time worker even at the sacrifice of the chance of marriage or having
children. Moreover, according to Nagase (2000), the “two corner solutions” still
apply to the young women in the 1990s despite the rise in women’s higher education
enrollment.17, 18
17. The more a woman is inclined to maintain her career as a regular full-time worker, the more she tends to give up
becoming a wife or a mother. This fact is to some extent consistent with the calculation done by Chuo University(2000). The analysis shows that once a full-time working, college-educated woman withdraws from the labormarket for five years, she will lose about ¥100 million (that is, about US$1 million at the rate of US$1=¥100)from her lifetime earnings.
18. This phenomenon is not observed in the United States. For example, Nagase (2000) states that only 27 percent
of Japanese women who have their first child in their age group 30 to 34 keep their full-time regular jobs,
while more than 60 percent of women in the United States who have a child less than one year old keep theirfull-time jobs.

189As a result, many women who once withdrew from the labor market, regardless of
their willingness, seek (low-wage) part-time jobs as reentrants. Figure 8 shows thenumber of unemployed women looking for either full-time or part time jobs divided
by the total female labor force (left scale). The same figure also shows the ratio of
women seeking regular full-time jobs to women seeking part-time jobs (dashed thicksolid line, right scale). The figure demonstrates that the number of women looking
for part-time jobs increased in the past two decades. In the 1990s, the number ofwomen looking for part-time jobs has become almost the same as the number ofwomen seeking regular full-time jobs.
Figure 8 Female Unemployment Rate by Type of Employment Desired

2.5

Part-time = 100, percent

Percent

280
260

Regular full-time job seekers’
unemployment rate (left scale)

2.0

240
220
200

1.5

180
Ratio of seekers of regularfull-time jobs to seekers ofpart-time jobs (right scale)

1.0

160
140
120

0.5
Part-time job seekers’
unemployment rate (left scale)

100
80

0.0
1981

83

85

87

89

91

93

95

97

99

Note: The number of unemployed looking for either full-time or part-time jobs
divided by the total labor force.
Source: Management and Coordination Agency, Statistics Bureau and Statistics
Center, Labour Force Survey.

c. Firms’ view
In such an environment, it may be rational for firms to hire many low-wage
part-time workers rather than keep full-time working mothers who may not be able
to work as much as other male regular full-time workers or other female full-timeworkers with no children. In addition, women who reenter the labor market as
part-time workers nowadays are mostly those who had work experience in some firmin the past. Some of those with a high educational level had to give up their career forthe sake of childcare. Therefore, by hiring experienced part-time workers, firms cansave basic training costs.
6. Policy implications
a. The wage-unemployment relationshipIf such institutional factors—being set in the context of rigid gender roles where men
are seen as the primary breadwinners and women as the homemakers—remain in the
future, we have to be cautious about looking at the growth rate of the national

190 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

average wage. The bigger the increase in part-time workers in the total labor force,and the larger the wage differential between full-time and part-time workers, themore stable (and perhaps also low) the national average wage can be observed to be.
However, if an upward revision of tax threshold were made during future booms,
all of a sudden female part-time workers could start working longer hours and thecompetition among firms might gradually increase the relative wage of part-timers.
Although the existence of a stable short-run Philips curve in Japan is still in
dispute, in such a situation the knowledge of the past short-run Phillips curve is not
so powerfully able to extrapolate the future relationship between unemployment
and inflation.
b. The inflow rate and the duration of unemployment
In addition, under the current strong employment protection policy19 (mainly
applied to full-time workers) in Japan, to stop hiring part-time workers is mucheasier for firms than firing full-time regular workers. This means that hiring a new
part-time worker is also easier than hiring a new regular worker. The existence ofstrict penalties for dismissing full-time workers is consistent with the observation thatthe job creation and destruction rates of part-time workers are much higher thanthose of regular full-time workers in Japan, as we stated in Chapter I. Therefore, one
may well expect that the inflow (or outflow) rate of part-time workers who enter(or exit from) the unemployment pool must be much higher than that of regularfull-time workers. To verify our conjecture, in Figure 9, we see the inflow rate andaverage unemployment duration for male and female workers, estimated by the
Ministry of Labour (1999).20 The figures show that there is an increasing trend in the
inflow rate for both male and female workers, but that the female rate is much higher
than the male rate. On the other hand, average male unemployment duration ismuch longer, and it seems to be increasing, but this trend cannot be observed infemale workers. In sum, while the possibility of a female worker losing her job ismuch greater than that of a male worker, the male worker faces greater difficulty than
the female worker in getting out of the unemployment pool once he loses his job.21
19. OECD (1999a) points out that Norway, Portugal, and Japan stand out as offering the highest employment
protection on their summary indicator “difficulty in dismissal,” with the United States and the United Kingdom
at the opposite end of the spectrum. One may wonder if there is a set of outdated laws in Japan. Surprisingly,
there is no statute in Japan requiring valid reasons for dismissal. However, the courts formulate strict requirements for dismissals in the form of case law. The requirements were established during the severe recession causedby the first oil shock in the early 1970s. They include the requirement “that every effort is made to avoid
dismissal as a means of achieving necessary personal curtailment, i.e., the exhaustion of alternative means such as
the reduction of overtime work, suspension of hiring new workers, relocation of workers” (Sugeno and Suwa
[1997]). Blanchard and Portugal (1998) show that Portugal’s high employment protection policy explains thelonger unemployment duration in Portugal compared to that of the United States.
20. Note that this estimate is done for male and female workers, and not for full-time workers and part-time workers.
However, since most of the male workers are working full-time and about 45 percent of female workers areworking part-time, we consider this result as a proxy for full-time and part-time workers.
21. The unemployment insurance system in Japan may be another factor explaining the male’s long unemployment
duration. Under the current insurance system, the amount and the duration of benefit are positively linked to aworker’s tenure and age (the 1999 employment insurance reform amended the system partially, though thelinkage still remains). Since men tend to work longer years than women do and therefore are entitled to longer
and greater benefits, it may be considered that an unemployed man is more likely to remain longer in theunemployed pool to obtain his full benefits than a woman (Tachibanaki [1984] reported that 70 to 80 percent of
the unemployment insurance recipients received their full benefits). Note, however, that the ratio of the benefits
recipients to the total unemployed was only 33 percent in 1999.

191

Figure 9 Trends in Rate of Job Separation and Duration of Unemployment[1] Monthly Separation Rates
Percent
1.6
1.4
1.2
Females
1.0
Total
0.8
0.6
0.4
Males
0.2
0.0
1970

72

74

76

78

80

82

84

86

88

90

92

94

96

98

94

96

98

[2] Average Duration of Unemployment
6

Months

5

Males

4
Total
3
2
Females

1
0
1970

72

74

76

78

80

82

84

86

88

90

92

Note: Separation rate: the monthly flow out of employment to unemployment divided by
the initial level of the labor force. Average duration: the average number of monthsof being unemployed.
Source: Calculated by Ministry of Labour, in the 1999 White Paper on Labour.

The policy implication is that we must also be careful when we look at the average
unemployment rate. Since the unemployment rate is a product of the inflow rate andthe average duration, we should note that the nature of unemployment can be totally
opposite between male and female even when the both unemployment rates appear
on the surface to be moving in the same direction.

192 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

B. Discouraged Workers
Discouraged workers are defined as persons who are jobless and want work, but are
not looking for work because they believe that they cannot find it. As we stated in
Chapter I, the discouraged workers, mostly women, who used to withdraw from thelabor force whenever recession occurred, used to be one of the major factors that
could potentially explain the low official unemployment rate in Japan. These workers
have also been considered as “luxury unemployment” and therefore, to the bestof our knowledge, macroeconomists have not paid so much attention to them.
However, the sum of unemployed and discouraged workers can be regarded as one of
the indicators of potential labor supply. As Greenspan (1999), for example, says,
looking at the fluctuation of this potential labor supply may provide another clue as
to what has been happening in the labor market in the recent past.
Let us look at the number of discouraged workers22 (Figure 10). In Figure 10,
male discouraged workers seem to be experiencing an increasing trend along with anincrease in the official number of unemployed, and such unemployment has surged
to the highest level in the past 25 years. On the other hand, for women, although thenumber of discouraged workers is still remarkably high, its growth rate is not that
rapid compared with that observed during the past recession period.
1. Observation 1: The Japanese potential unemployment rate is about
10 percent
In Figure 11, we calculated the discouraged workers adjusted-base unemployment
rate.23 “Discouraged workers adjusted-base (1)” in the figure refers to the official
unemployment plus all the people both in and out of the labor force who answeredthat they would want to work but were not seeking employment opportunities
because there was “no prospect of finding a job,” divided by the total labor force(including discouraged workers). Among those discouraged workers, the people who
answered that they either could not take up, or were undecided about taking up a job
now when offered one, are excluded in the “Discouraged workers adjusted-base (2).”Therefore, the discouraged workers adjusted-base (2) can be regarded as thosepotential workers who are ready to flow into the labor market at any minute. As
shown in the figure, the potential male unemployment rate is 6 to 7 percent, and forthat of females around 12 to 14 percent in 1999. This makes the average national
discouraged workers adjusted-base (1) and (2) unemployment rates 10.66 percent
and 9.02 percent in 1999, respectively (implying that every one out of 10 people inJapan is potentially looking for a job). Bearing in mind that the Japanese official
unemployment rate is about 5 percent, the discouraged workers are still a large
component in the Japanese labor market.
The detailed composition of this category of workers, however, seems to bechanging in several respects.
22. The figures for discouraged workers are calculated by the data from Report on the Special Survey of the Labour
Force Survey collected in February every year. The series is only fully available from 1984 onward, since thequestionnaire of the survey differs in various ways before 1983. Therefore, the figures reported in this section
before 1983 have been adjusted by the authors.
23. The method of constructing this series is similar to the U.S. Bureau of Labor Statistics’ U7. For details andinternational comparisons, see Sorrentino (1993, 1995).

193

Figure 10 The Number of Discouraged Workers[1] Males
Millions of people
2.0
1.8
1.6
1.4
1.2
Unemployed

1.0
0.8
0.6

Discouraged workers

0.4
0.2
0.0
1975

77

79

81

83

85

87

89

91

93

95

97

99

85

87

89

91

93

95

97

99

[2] Females
Millions of people
4.0
3.5
3.0

Discouraged workers

2.5
2.0
1.5
1.0

Unemployed

0.5
0.0
1975

77

79

81

83

Source: Management and Coordination Agency, Statistics Bureau and Statistics
Center, Report on the Special Survey of the Labour Force Survey.

2. Observation 2: Women tend to remain in the labor force
First, in 1987, when the official unemployment was the highest in the 1980s, thefemale discouraged workers adjusted-base unemployment rate was 4.7 times higher
than the official female unemployment rate. In 1999, the rate was just 3.4 times higher(for [2]-base, 3.5 times and 2.7 times in 1987 and 1999, respectively). The decrease in
the gap between the potential unemployment rate and the official unemployment rate

194 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

Figure 11 Unemployment Rate, with Discouraged Workers Adjusted-Base[1] Males
8

Percent

7
6
Discouraged workers adjusted-base (1)5432Discouraged workers adjusted-base (2)Official rate
1
0
1975

77

79

81

83

85

87

89

91

93

95

97

99

95

97

99

[2] Females
18

Percent
Discouraged workers adjusted-base (1)

16
14
12
10
8
Discouraged workers adjusted-base (2)642Official rate
0
1975

77

79

81

83

85

87

89

91

93

Source: Management and Coordination Agency, Statistics Bureau and Statistics
Center, Report on the Special Survey of the Labour Force Survey.

is to some degree consistent with the observation we saw in Section II.A that womentend to choose to remain in the labor force either working as part-time workers or
searching for such jobs rather than withdraw from the labor market during recessions.
However, there are still potentially 2.5 million women who are ready to flow into thelabor market. This number is almost 60 percent of the increase in women’s part-time
employment in these 15 years, as we saw in Section II.A.

195

3. Observation 3: Newly discouraged workers are youths and older workers
over 65
Second, if currently some of the formerly discouraged female workers are getting“undiscouraged,” who is still discouraged? Table 2 shows the composition of the
discouraged workers. For males, the numbers of both “head of household” and “othermembers of household” are increasing, but the ratio of the “head of the household”
to the total seems to have been decreasing in the past 10 years, while the ratio of“other members of household” has been increasing. Looking at age composition, an
increasing number can be seen to be in the young cohort under age 34 and the oldcohort over age 65. Table 3 shows that older people between 55 and 64 are now lessdiscouraged and are remaining in the labor force to find jobs, although male workers
over the age of 65 who used to be in the “happily retired” group seem to be wanting
jobs but are being discouraged. On the other hand, some youths who gave up
searching and drifted out of the labor force have been steadily increasing in these
10 years.24 These young discouraged male workers, not in school, now consist of
10 percent of the total.
4. Observation 4: Newly discouraged female workers are also youths andolder workers
For females, the compositional shifts can also be seen in Table 2. Although “spouse”
is still the largest component in female discouraged workers, the ratio to the total
has been continuously declining in the past 10 years, while the ratio of “othermembers of household” is increasing. In addition, women aged 35 to 44 decreased
substantially in the past decade; in the meantime, young women under age 34, manyof whom are probably living with their parents, are increasing. An increasing numberof female workers aged over 55 are probably the typical Japanese discouraged workers
observed 15 or 20 years ago, those who had played the “buffer” role in the Japaneselabor market.
5. Outlook
The recent changes in composition among discouraged workers imply that theconventional “buffer” for labor market adjustment is vanishing, and that the
young cohort may instead be becoming the new buffer. Although a large number of
discouraged workers still exists in the Japanese labor market, the qualitative natureof the potential labor force may be changing.
To this end, let us look at the answers of discouraged workers who were asked
what type of job they were potentially seeking (Table 4). For both males andfemales, a substantial number of people replied that they wanted to work as part-timeworkers. This suggests that there is potentially a large number of people who will
24. Besides women, recent changes in the attitudes toward labor supply on the part of older workers and youths havealso affected the Japanese labor market. Namely, many older workers, in their late 50s and in their 60s remain in
the labor market searching for jobs. The serious unemployment situation facing older workers could be the reflection of a situation in which there is a mismatch between their productivity and their reservation wage based on
the seniority-based wage system. The mismatch actually requires older workers to choose between low-wage jobs
and unemployment. For young people, youth unemployment has increased more than 2.5 times from two
decades ago, and now accounts for 40 percent of total unemployment. The unemployment of youths should not
be worried about if they prefer leisure or if they are engaged in job searches, but incumbent employees mightsqueeze them out of traditional long-term employment opportunities. For further details regarding older workers
and youths, see Tachibanaki, Fujiki, and Nakada (2000).

196 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

Table 2 Composition of Discouraged Workers by Family and Age
Males
Head ofhousehold

SpouseOthermembers ofhousehold1989 39 (60.00)

0 (0.00)

1990 32 (54.24)

0 (0.00)

1991 31 (56.36)

FemalesOther
members ofhousehold

Livingalone

09 (3.17)

219 (77.11) 44 (15.49)

12 (4.23)

09 (3.35)

204 (75.84) 40 (14.87)

16 (5.95)

08 (14.55)

09 (3.44)

201 (76.72) 40 (15.27)

12 (4.58)

15 (26.32)

13 (22.81)

09 (3.44)

200 (76.34) 40 (15.27)

13 (4.96)

0 (0.00)

21 (33.87)

08 (12.90)

09 (3.17)

223 (78.52) 41 (14.44)

11 (3.87)

0 (0.00)

25 (30.86)

15 (18.52)

09 (2.78)

242 (74.69) 55 (16.98)

18 (5.56)

1995 38 (48.72)

0 (0.00)

27 (34.62)

13 (16.67)

10 (3.25)

229 (74.35) 54 (17.53)

15 (4.87)

1996 37 (52.11)

0 (0.00)

23 (32.39)

11 (15.49)

10 (3.06)

244 (74.62) 54 (16.51)

19 (5.81)

1997 45 (56.96)

0 (0.00)

21 (26.58)

13 (16.46)

10 (3.11)

242 (75.16) 53 (16.46)

17 (5.28)

1998 46 (53.49)

0 (0.00)

27 (31.40)

13 (15.12)

10 (3.10)

238 (73.68) 57 (17.65)

18 (5.57)

1999 52 (54.74)

0 (0.00)

26 (27.37)

17 (17.89)

11 (3.16)

257 (73.85) 63 (18.10)

17 (4.89)

Livingalone

Head ofhousehold16 (24.62)

10 (15.38)

20 (33.90)

07 (11.86)

0 (0.00)

16 (29.09)

1992 29 (50.88)

0 (0.00)

1993 33 (53.23)
1994 41 (50.62)

SpouseMales
15–24(total)

15–24
15–24
(in school) (graduated)

25–34

35–44

45–54

55–64

Over 65

1989 19 (29.69)

18 (28.13)

1 (1.56)

1 (1.56)

1 (1.56)

1 (1.56)

21 (32.81)

21 (32.81)

1990 20 (33.33)

19 (31.67)

1 (1.67)

1 (1.67)

1 (1.67)

2 (3.33)

17 (28.33)

19 (31.67)

1991 17 (30.91)

15 (27.27)

2 (3.64)

2 (3.64)0 (0.00)

1 (1.82)

16 (29.09)

19 (34.55)

1992 15 (26.32)

14 (24.56)

1 (1.75)

1 (1.75)

3 (5.26)

4 (7.02)16 (28.07)

18 (31.58)

1993 23 (37.10)

21 (33.87)

2 (3.23)

1 (1.61)

1 (1.61)

1 (1.61)

15 (24.19)

21 (33.87)

1994 27 (32.93)

26 (31.71)

1 (1.22)4 (4.88)

3 (3.66)

3 (3.66)

21 (25.61)

24 (29.27)

1995 30 (37.50)

27 (33.75)

3 (3.75)

4 (5.00)

3 (3.75)

2 (2.50)

18 (22.50)

23 (28.75)

1996 23 (31.94)

20 (27.78)

3 (4.17)3 (4.17)

1 (1.39)

3 (4.17)17 (23.61)

25 (34.72)

1997 24 (30.00)

21 (26.25)

3 (3.75)

2 (2.50)

1 (1.25)

2 (2.50)

22 (27.50)

29 (36.25)

1998 28 (32.94)

25 (29.41)

3 (3.53)

3 (3.53)

1 (1.18)

2 (2.35)

20 (23.53)

31 (36.47)

1999 30 (31.58)

26 (27.37)

4 (4.21)5 (5.26)
1 (1.05)
Females

2 (2.11)21 (22.11)

36 (37.89)

25–34

45–54

55–64

Over 65

15–24(total)

15–24
15–24
(in school) (graduated)

35–44

1989 23 0(8.10)

13 (4.58)

10 (3.52)

54 (19.01)

91 (32.04)

60 (21.13)

43 (15.14)

13 (4.58)

1990 23 0(8.52)

15 (5.56)

08 (2.96)

49 (18.15)

81 (30.00)

55 (20.37)

47 (17.41)

15 (5.56)

1991 25 0(9.51)

14 (5.32)

11 (4.18)

48 (18.25)

81 (30.80)

54 (20.53)

42 (15.97)

13 (4.94)

1992 21 0(8.02)

13 (4.96)

08 (3.05)

52 (19.85)

80 (30.53)

53 (20.23)

43 (16.41)

13 (4.96)

1993 24 0(8.45)

15 (5.28)

09 (3.17)

52 (18.31)

88 (30.99)

59 (20.77)

46 (16.20)

15 (5.28)

1994 35 (10.77)

22 (6.77)

13 (4.00)

63 (19.38)

87 (26.77)

69 (21.23)

57 (17.54)

14 (4.31)

1995 34 (11.04)

21 (6.82)

13 (4.22)

56 (18.18)

88 (28.57)

66 (21.43)

52 (16.88)

12 (3.90)

1996 35 (10.67)

24 (7.32)

11 (3.35)

63 (19.21)

84 (25.61)

74 (22.56)

55 (16.77)

17 (5.18)

1997 29 0(9.01)

19 (5.90)

10 (3.11)

61 (18.94)

82 (25.47)

69 (21.43)

62 (19.25)

19 (5.90)

1998 35 (10.84)

24 (7.43)

11 (3.41)

60 (18.58)

80 (24.77)

69 (21.36)

60 (18.58)

19 (5.88)

1999 38 (10.92)

25 (7.18)

13 (3.74)

64 (18.39)

81 (23.28)

75 (21.55)

69 (19.83)

21 (6.03)

Note: Ten thousand people. The ratio to the total is shown in parentheses.
Source: Management and Coordination Agency, Statistics Bureau and Statistics Center, Report on the Special
Survey of the Labour Force Survey.

197

Table 3 Unemployed and Discouraged Workers among Those Aged 55 and Above
Unemployed (10,000)
Official number

Unemployment rate (percent)Discouraged workers

Discouraged workers
adjusted-base

Official number

Males
55 to 64Males
65 and overMales
55 to 64Males
65 and overMales
55 to 64Males
65 and overMales
55 to 64Males
65 and over

1989

21.3

3.2

21.0

21.0

3.8

1.5

7.2

10.6

1990

19.3

2.8

17.0

19.0

3.3

1.2

6.0

9.0

1991

18.0

3.7

16.0

19.0

3.0

1.5

5.4

8.7

1992

20.6

3.5

16.0

18.0

3.3

1.4

5.7

8.0

1993

25.3

4.3

15.0

21.0

4.0

1.6

6.3

8.9

1994

29.4

4.7

21.0

24.0

4.7

1.7

7.8

9.7

1995

30.5

5.8

18.0

23.0

4.8

2.1

7.4

9.6

1996

33.0

5.4

17.0

25.0

5.1

1.9

7.5

9.7

1997

35.1

6.3

22.0

29.0

5.3

2.1

8.3

10.7

1998

43.8

8.6

20.0

31.0

6.5

2.8

9.2

11.8

1999

46.0

9.0

21.0

36.0

6.7

2.9

9.5

13.0

Source: Management and Coordination Agency, Statistics Bureau and Statistics Center, Report on the Special
Survey of the Labour Force Survey.

Table 4 Employment Type Desired by Discouraged Workers
Males (percent)Full-timePart-timeSelf-employed

Piece-worker

Other

1996

18.87

53.77

5.66

2.83

18.87

1997

19.28

56.63

2.41

4.82

16.87

1998

18.18

60.23

3.41

4.55

13.64

1999

20.41

58.16

3.06

3.06

15.31

Females (percent)Full-timePart-timeSelf-employed

Piece-worker

Other

1996

12.47

64.72

2.92

13.00

6.90

1997

11.24

67.44

2.33

13.18

5.81

1998

10.04

69.11

1.54

13.51

5.79

1999

12.88

66.44

2.03

13.56

5.08

Source: Management and Coordination Agency, Statistics Bureau and Statistics Center, Report on theSpecial Survey of the Labour Force Survey.

take part-time jobs if they are offered. If most of them start flowing into the labor
force to seek low-wage part-time jobs, the macroeconomic consequence may be quite
different from what we have expected based on past experience.
6. Aggregate implications
The role of discouraged workers and part-time workers is an important issue not onlyin Japan but also in the United States. For example, the United Auto Workers (1996)
argue that a larger share of the labor force is working in part-time and temporary
positions, hence the problem of structural unemployment may be more severe than issuggested by the official unemployment rate statistics. However, as Poole and Wall
(2000) point out, after four years of continuous economic growth, not only havemore people become employed, but also more people who had been choosing to stay

198 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

out of the labor force flew into the labor market and obtained jobs. The second
factor is generally ignored, while it is also important to consider the transformationof the labor market.
We see the recent change in the number of part-time female workers anddiscouraged workers in Japan in Section II.A and B. We may also safely suppose that,given the current institutional framework, most Japanese part-time female workers
would not dare to work longer hours to increase their wage income at the sacrifice of
their favorable tax treatment. What are the aggregate implications when we take thesefactors into account?
First, the fall and rise in the unemployment rate including discouraged workers(discouraged workers adjusted-base [2]) is faster compared with the official rate,
especially during the late 1980s to the early 1990s (Figure 12). Therefore, thebroader unemployment rate could be useful for understanding the trend of Japanese
output, as Poole and Wall (2000) stressed.25
Second, regarding the statistical relationship between unemployment andaggregate output, once we take into account the effects of discouraged workers, given
the technological progress, we would expect the Okun coefficients to be relatively
small in size.
For example, the ordinary least square regression of the annual log employment
rate computed from the official unemployment rate on a constant term, a time trend,
and log GDP yields estimates of Okun coefficients ranging from 7.3 to 10.1 using
Figure 12 GDP, Inflation, and Unemployment in Japan

12

Percent

Percent
GDP growth rate (left scale)
CPI inflation rate (left scale)
Official unemployment rate (right scale)
Unemployment rate including discouraged workers (right scale)

10
8

10
9
8
7

6

6
4
5
2

4

0

3

–2

2
1

–4
1975

78

81

84

87

90

93

96

99

Sources: Management and Coordination Agency, Statistics Bureau and Statistics
Center, Labour Force Survey, Report on the Special Survey of the Labour
Force Survey and Consumer Price Index ; Economic Planning Agency,
Annual Report on National Accounts.

25. Unfortunately, the figures for discouraged workers are calculated by the data that are collected only once a year in
February. Therefore, current statistics are not sufficient for the sake of the conduct of monetary policy for theimmediate future.

199

the sample period of 1981–99, as can be seen in the second column in Table 5.26 The
ordinary least square regressions using the broader unemployment rate (discouraged
workers adjusted-base [2]) as the independent variable yields estimates of Okun
coefficients ranging from 4.2 to 5.8 using the sample period of 1981–99, as can beseen in the fourth column in Table 5. The example shows that the effects of the
discouraged workers are important for judging the levels and the relevant variables
for estimating the available labor supply and therefore potential output.27
Table 5 Japanese Okun Coefficients

Sample periods

Annualdata,
official rate

Annual data
Quarterly
withYoshikawa
data,
discouraged(2000)
official rate
workers

Kurosaka(1999)

1953–65
1956–6518.04+

1965–7342.35*

42.56

1965–74

77.65*

66.18

1974–80

7.72

10.86*

1974–82

20.19

23.89

7.80

1981–95

10.05

10.12

5.62

1980–98

9.05

9.13

5.78

1981–99

8.29

8.45

5.22

1986–99

7.34

7.59

4.19

Kurosaka
andHamada(1982)

Hamadaand
Kurosaka(1984)

15.24

18.00

40.32
32.00
n.a.

5.38
13.00
10.50
10.50

III. Structural Reforms
Chapter III examines the direction of several structural reforms in the labor market,
based on the discussions in Chapter II. It is true that in the long run monetary policy
cannot and should not be used as a substitute for necessary structural reforms in thelabor market. However, central bankers must correctly address structural problems in
the labor market, which could be obstacles in the achievement of price stability andfinancial stability (Yamaguchi [1999]). More specifically, we point out the necessityof transforming the regulations in the labor markets to meet the current situation of
the labor market, the government job creation program, and work-sharing. We will
also touch on the public pension system and corporate pension schemes.

26. Those results are consistent with the estimates obtained from the quarterly data shown in the third column, andthe results of Yoshikawa (2000) and Kurosaka (1999).
27. The qualitative nature of our results is also consistent with the findings of Tachibanaki and Sakurai (1991). They
use the sample period of 1963–86, and find that the Okun coefficient with discouraged workers takes the valueof 31.3 while the Okun coefficient using official figures takes the value of 67.6, although Tachibanaki and
Sakurai (1991) estimate the number of discouraged workers using different statistical methods. Readers might
wonder if the difference between the Okun coefficients obtained from official figures and those obtained
from the broader unemployment rate are statistically significant. Using the standard errors of the regression
coefficients, the upper bound of the confidence interval of the former and the lower bound of the confidence
interval of the latter are pretty close.

200 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

A. Deregulation in the Labor Market
As stated in Chapter I, the mismatch in labor allocation is probably one of the most
crucial reasons for the high level of unemployment in Japan. One of the causes forthe discrepancy arises from the fact that some regulations on the labor market andthe industrial relations system restrict the degree of labor mobility that minimizes themismatch. For example, there are regulations governing how private firms conduct
job advertising, job opening, or job allocation. Various kinds of regulations and someother institutional factors prohibit employers and workers from having efficient labor
allocation and mobility. Although a deregulation process is currently under way, it isdesirable to strengthen it further in order to secure greater mobility of labor.
B. Job Creation
One of the most obvious differences between Japan and the United States regarding
the working of the labor market is the lower rate of job creation and job destructionin the former than in the latter, as shown by Genda (1999) in the spirit of Davis,
Haltiwanger, and Schuh (1996). There are various reasons why Japan shows such alower rate, besides the strict employment protection policy stated in Section II.A.6.
One is inefficient access to the capital market, and the other is the lack of entrepreneurship. It is certainly desirable to have a situation such that the Japanese economy
creates more firms, and thus more jobs. It is said that there are plenty of business
opportunities in the fields of care services, health, information technology, finance,and so on. Stronger entrepreneurship and easy access to capital are highly desirable.
C. Efficient Skills Training
Firms have been responsible for providing employees with job training to raise theirskill levels and their productivity. Japanese firms are no longer able to provide all thekinds of training they used to provide for the following two reasons. First, they do
not have sufficient funds because of the recent serious recession. Second, there is nostrong motivation for firms to commit themselves to training their employees, partly
because job training provided by employers and skills accumulated there may become
rapidly obsolete during a period in which technology is changing drastically, andpartly because there is a fear that trained employees may leave their firms in the future.
The public sector must play an important role in providing job seekers or theunemployed with job training in these circumstances. There are various institutions,such as professional training schools or centers and universities, which can organize
the preparation of job training. Employees and job seekers who desire to receive suchtraining have to share the training costs with the contribution from public funds.
D. Employment Insurance
The Japanese employment insurance system has until recently provided only a small
amount of unemployment benefits while accumulating a huge quantity of contributions. However, the recent increase in the number of unemployed eligible to obtain
unemployment benefits led the employment insurance system into severe financial
difficulties, particularly after 1994. More specifically, the current Japanese employment insurance system bears some relationship to the public pension system, because201some of the conditions determining the payment of employment benefits are related
to the age of the workers concerned. In addition, the Japanese employment insurance
system does not cover most female part-time workers, and those who have short work
experience, such as those of the younger generation. Under such circumstances,
Tachibanaki (1999) suggests the following reforms.
First, more workers should join the employment insurance system. For somereason, at most 30 percent of unemployed people receive unemployment benefits.
Perhaps some of those who do not receive benefits must be female part-time workers,
whose working experience is less than one year or who work less than 30 hours
a week. Second, the levels and the terms of benefits could be more benevolent, if
social agreement on this could be established. This is because unemployment benefits
constitute the major proportion of earnings for unemployed people, together
with savings.
Nonetheless, under the current system, more benevolent unemployment benefits
require higher contributions from both firms and workers. Some firms find it too
costly to hire full-time workers given the higher contributions for unemployment
benefits; therefore the introduction of a more benevolent unemployment system
could increase the number of unemployed, or induce firms to hire more part-timeworkers. Moreover, the moral hazard of unemployment could be serious under abenevolent unemployment benefit system.
We need to have further discussion regarding the optimal mechanism design ofsustainable and efficient Japanese employment insurance.
E. Work-Sharing and/or Wage-Sharing
One of the most useful policies that prevents the rate of unemployment from increasing is the introduction of a strategy of work-sharing and/or wage sharing, as the
Netherlands28 has successfully used to lower the rate of unemployment. Decreasing
total working hours per employee is likely to raise the demand for employment, andthus is effective in lowering the rate of unemployment. This policy can be derived by
implication from the insider-outsider theory à la Lindbeck and Snower (1988) in thesense that the insider helps the outsider.29
One delicate issue is the adoption of a policy that lowers the per-hour wage rate
at the same time as increasing the demand for labor. This wage-sharing requires
the consensus of all concerned agents such as employers, employees (both union
members and non-union members), and possibly the government. This policy may
28. In the Netherlands, more than half of the total employed are part-time workers. The growth of part-time jobs in
the Netherlands has a lot to do with the country’s employment program, which has encouraged work-sharing
among workers. The program, which successfully reduced unemployment there, is a combination of welfare
reform and fiscal conservatism with job creation and maintenance of overall social security, according to Visser
and Hemerijk (1997). Among those reforms, regarding the job creation for part-time workers, Dutch people
agree on equal treatment of part-time workers regarding wages per hour, the social security system, legal
safeguards, and period of employment. In the case of Japan, so far there is no such agreement regarding equal
treatment of part-time workers and full-time workers. Therefore, the increase in the number of part-time workers
in Japan should not be compared without qualification to what has happened in the Netherlands.
29. During an economic boom following the implementation of work-sharing, shorter working hours, if taken for
granted, might put upward pressure on nominal wages. Therefore, work-sharing should be encouraged withbroad efforts to improve the flexibility of the labor market in general. We owe this insight to Mr. Job Swank.

202 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

be contradictory to the implication of the efficiency wage hypothesis in termsof Akerlof and Yellen (1986) in the sense that regular full-time workers have tosacrifice their relatively higher wages. Although it is not so easy to reach such an
agreement on wage-sharing partly because the wage-setting framework is currently
fairly decentralized in Japan and partly because skilled workers may refuse a decreasein their wages, there are signs of hope among these concerned agents.
F. Public Pension System30
The current Japanese pay-as-you-go defined benefit public pension system faces
severe financial difficulty due to slower economic growth with a declining and aging
population. In the long run, the Japanese public pension system must be reformed ina consistent manner with age-free, gender-free safety nets in the labor market, which
will help individuals to smooth their lifetime consumption schedules intertemporally.
As we have documented in Section II.A, the current Japanese public pension system
possesses some features that might have reduced working hours for homemakers.
In addition, young Japanese are very skeptical about the sustainability of a national
pension system.
On March 28, 2000, the 1999 pension reform plan was approved by the Diet.
The major features are as follows. First, earnings-related benefits are to be reduced by
5 percent. Second, both the flat-rate basic benefits and the earnings-related pension
benefits once paid are to be CPI-indexed after age 65 from fiscal 2000. Third, thenormal pensionable age for earnings-related old-age benefits is to be increased step bystep from age 60 to 65 for men from fiscal 2013 to 2025. According to Takayama(1999), the above programs specified in this law would reduce aggregate pension
benefits by 20 percent by 2025 (see Takayama [1999] for the details for the 1999
pension reform plan). However, the question of the exemption from the governmentmandated pension for typical homemakers with relatively small incomes has not been
resolved by this reform. Moreover, there is still no consensus on how to fund the
additional government expenditures needed to provide the basic benefits of theJapanese public pension by fiscal 2004.31 Hence, this could be one of the potential
risks regarding lifetime income for Japanese workers.
G. Corporate Pension Schemes32
The Japanese pension scheme is managed on the basis of a defined benefit plan rather
than a defined contribution plan. Moreover, the expected deferral interest rate for
employee pension funds was regulated at 5.5 percent until 1996. Therefore, in theera of low nominal interest rates in the late 1990s, many employee pension funds
30. This section is based on Takayama (1999).
31. In December 1998, the Japanese government decided to keep social security contribution rates for pensions
constant from fiscal 1999, because the increase in the contribution rate for social security became very difficult
politically. This government decision presumed that the Japanese general account should cover 50 percent(currently 33 percent) of basic benefits of the Japanese public pension by fiscal 2004. According to Takayama(1999), if increased general revenue is to be financed by the earmarked consumption-based tax, a 0.8 percentage
point increase in the consumption tax rate (currently 5 percent) will be necessary.
32. This section is based on Tachibanaki and Taiten (1997), Kawamura (1999), and Japan Institute of Labour(1999).

203

were forced to cut their payments, or even worse, were dissolved since they could notaccumulate enough funds to meet the expected deferral interest rate. There musthave been serious deficiencies in their reserves, although firms are not required toreport deficiencies in reserves.
However, a change in accounting standards from March 2001 requires firms not
only to report their total liability for pension and lump-sum retirement payments
but also to correct any shortfall in their reserve funds within 15 years. The shortfall
in such reserves of listed companies now totals several tens of trillions of yen,
and companies will need to respond urgently to this problem (Japan Institute ofLabour [1999]).
As we stated before, given the fact that even large Japanese firms are not free frombankruptcy, many employees feel that their lump-sum retirement payment may not
be risk free. Moreover, there are many independent systems of employee pension
funds, which lack the portability of pension programs.
Therefore, portability between different corporate pension funds and a shift fromdefined benefit plans to defined contribution plans might be necessary for the sake of
employees to be able to hedge their risks regarding earnings, losses, or changes in theirworkplace. Moreover, a division of labor between the public pension system and thecorporate pension scheme should be reconsidered. In this context, the developmentof a Japanese version of the 401(k) plan should be observed carefully.

IV. Conclusion and Directions for Future Research
In this paper, we have considered some structural issues regarding the Japanese labormarket from the viewpoint of the part-time workers (especially women) and thediscouraged workers. The opinions and evaluations regarding those structural issues
may differ depending on one’s gender, age, occupation, and family background.
From the viewpoint of the core Japanese workers, typically full-time male workers
who have accumulated firm-specific skills through on-the-job training, their relatively
favorable employment opportunities may not be sustained during the current
recession, and once they lose their position they must stay in the secondary
labor market forever. Such workers would consider that the Japanese employment
environment is now heading for an era of bipolarization. From the viewpoint ofother Japanese workers, however, styles of jobs such as part-time work, temporary
work, and even work-sharing could be very flexible and attractive employment
opportunities for all Japanese workers, including “core” workers. A variety of job
opportunities could be consistent with the efficient division of labor and equityof working environment, if skills training, the unemployment insurance system, tax
systems, and various safety nets such as the social security systems are not specific toworkplace, gender, or age. The long-term goals of labor market reform to prepare foran era of low birthrate and small workforce should produce a variety of employment
opportunities with some agreed sense of equity and efficiency irrespective of one’s
gender, age, and occupation.

204 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001

Structural Issues in the Japanese Labor Market

Although both labor economists and central bankers cannot identify the
structural changes in the labor market on a real-time basis, they should try to address
the nature of structural changes in the labor market and their policy implications
as best as they can. From the central banker’s view, it will be useful to think
about whether to reconsider the general consensus regarding the unemployment andinflation trade-off in Japan that “the Japanese Phillips curve was very steep,” at leastby the year 1990. As we saw in chapters I and II, factors such as low matchingefficiency, high job reallocation, and changes in peoples’ labor supplies may haveshifted the Japanese Beveridge curve upward recently. If our interpretation is correct,
the natural rate of unemployment has itself shifted upward, and there is no stable
short-run Phillips curve. More effort is needed to address the structural issues that
could affect the conduct of monetary policy.

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Comment
JANE T. HALTMAIER
Board of Governorsof the Federal Reserve System
This was a very interesting paper, which I greatly enjoyed reading. It contains a
wealth of detail about structural changes in the Japanese labor market, along withsome analysis of the possible implications for monetary policy. The paper concludes
with some suggestions for structural reform in the labor market.
The first part of the paper is primarily descriptive, highlighting trends affecting
non-core workers, mainly female part-time workers. The recent behavior of thesegroups has contributed to an overall structural shift in the labor market. The real
strength of the paper is the way in which it draws connections among these changes

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and weaves them into a pattern with potentially significant implications for labormarket behavior.
The main point is that these changes suggest a shift away from lifetime employment to a more flexible system. This is in some ways a good thing, as a more flexible
labor market may be better suited for a rapidly changing world. However, it also has
a downside in the form of low-wage, low-security jobs for women and difficulties forlaid-off workers in finding new jobs. The structural shifts are also likely to result in ahigher equilibrium unemployment rate.
One criticism of the paper is that it does not make clear how important thesestructural shifts are in a quantitative sense. We know that much of the recent rise in
unemployment is cyclical. Although the paper suggests that some is also structural, it
does not attempt to quantify how much.
An Okun’s Law equation was estimated with both the official unemployment rate
and a broader unemployment rate that includes discouraged workers. Since many of
the changes described in the earlier part of the paper involve movements between theofficial labor force and the pool of discouraged workers, the broader series mightoffer both a more consistent time series as well as a potentially more accurate measureof current labor market pressures. The coefficient estimated using the broader measure does appear more plausible, ranging from 4 to 6 in the various specifications,compared with estimates of 7 to 10 derived using the official measure. However, it is
not clear that this is not just a scaling effect, as a chart of the two series shows thatthey move closely together over the cycle. The broader measure is more cyclical, butshows similar timing in terms of upturns and downturns. The fact that there is adifference in amplitude over the cycle does not necessarily mean that the broader
series contains more information. In any case, in order to translate information on
unemployment into an estimate of the output gap, it is necessary to have an estimateof the equilibrium unemployment rate. It might thus have been useful for theauthors to have used their broader unemployment rate to estimate a NAIRU.
The final part of the paper, on structural reform, was a very comprehensive review
of measures needed, some of which are currently underway. Some reforms that seemto be of particular importance are changes to improve projections for the financial
status of the public pension system as well as portability of corporate pensions.
In summary, the paper contains a great deal of valuable information and analysis,
although it would probably be enhanced by an attempt to estimate a Japanese
NAIRU using the broader measure of unemployment. I must admit, though, that
I was a little disappointed to find that the answer to the question posed in the title isthat we need to wait 10 to 15 years to know.

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Comment
GRANT KIRKPATRICK
Organisation for Economic Co-operation and Development
This paper is a good analysis of current problems in the Japanese labor market,
which are often overlooked by observers since the unemployment rate is still low byinternational standards. Before looking at the paper, I would like to place it more
fully in the context of this conference, which is monetary policy under low inflationand subject to deflationary shocks.
Concern with labor markets under these conditions usually focuses on presumed
rigidities of nominal wages, which might in turn lead to rising real wages as the pricelevel falls and to an unfavorable output/price split. However, at very low inflation
rates nominal wage rigidity could well decline over time. In Japan, though, this basic
assumption might be misplaced. In the OECD area, Japan has the highest level ofnominal wage flexibility (the second being Austria, which is also characterized bya steep age/wage profile), and indeed it is this flexibility that is contributing to thecurrent recovery of profits and of investment. With such nominal wage flexibility, adeflationary shock could thus at first lead to a greater movement in prices than in
output, which, under some conditions, could lead to a deflationary spiral and to an
amplification of the shock. Under these conditions—and also a floating exchange
rate—it is even more important for monetary policy to provide the nominal anchor
for the economy in the event of a deflationary shock. In operational terms, thiswould mean boosting the money supply and acknowledging that the interest rate
may be an unreliable indicator at low levels of inflation.
Turning to the paper itself, I fully support the analysis by the authors of
the impact of the tax and social security mechanism on labor supply. Indeed, while
inflation often reduces the impact on labor supply of benefit ceilings (which
introduce high marginal effective tax rates on labor activity), deflation may makethem even more binding. The authors make a good case that the potential labor
supply in Japan is much greater than the labor force participation and current
unemployment rate statistics would indicate. This is important, since it implies thatsome estimates of potential growth might be too pessimistic. On the other hand, thecurrent output gap would also be greater, which would need to be taken into accountin formulating monetary policy at any time—and not just at times of low inflation.
In addition, the authors point out that the structure of the labor market mightwell have other impacts on the information content of important statistics, such as
the wage rate. This warning needs to be kept in mind following the experience of the
Bank of England in using an index of earnings, which proved to be severely distorted.
However, the Bank of Japan faces even greater data problems than this, given thestate of quarterly GDP estimates while price indices are also subject to perhaps evengreater errors than wage data.
The presentation of the labor market as dominated by insiders and increasingly
bipolar I find convincing, but what does this mean for monetary policy? The authors
argue that the extended measure of unemployment is a better predictor of inflation

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General Discussion

than more conventional measures, but here I am less convinced and would like to
see more econometric work on the NAIRU. In passing, I would add that normal
methods of estimating the NAIRU in Japan yield mixed results. If they are right,
then their result would imply that outsiders do in fact have a lot of market power,
which would be hard to reconcile with the evident importance of insiders. The wider
measure of unemployment could, however, merely be a better indicator of shocks
other than included variables and, as noted above, insiders do respond to such shocks
in order to protect their lifetime positions.
Clearly, the monetary authorities and other policy advising institutions should
remain aware of the changing nature of the labor market and be prepared to incorporate these findings into their judgments about potential growth, the output gap, andthe assumptions about the NAIRU.

General Discussion
Toshiaki Tachibanaki agreed with Jane T. Haltmaier on the desirability of distinguishing cyclical factors from structural factors in evaluating the movement of
the unemployment rate including discouraged workers. Hiroshi Fujiki and Sachiko
K. Nakada both commented that research on the relationship between the labormarket and monetary policy has only just begun in Japan and expressed interest inmeasuring the natural unemployment rate and NAIRU as prime items on the agenda
for future study. In relation to this, Charles Collyns stressed the importance of
capturing the magnitude of labor hoarding as information for conducting propermonetary policy. Shin-ichi Fukuda, however, pointed out that while the Japaneseunemployment rate had experienced only very small fluctuations in the past and its
correlation to business cycles was weak, fluctuations in the unemployment rate
appeared to have become large in the 1990s and reflected more sensitively the degreeof cyclical tightness of the supply-demand balance in the labor market. On John
B. Taylor’s question about the relationship between nominal wage elasticity andthe shunto (spring wage offensive), Tachibanaki responded that while there was aclose relationship between wage elasticity and the shunto, the role of the latter was
gradually waning.
On the importance of government skills training raised in the paper, Jean Hilgers
doubted whether there would be room for such programs given Japan’s enormous
fiscal deficits. Fujiki said that it was important as a measure of the reform of fiscal
spending that the content of fiscal outlays be reviewed in order to pave the way toa more effective use of taxpayers’ money. Job Swank presented the Netherlands’
experience and maintained that work sharing could be an effective program when theunemployment rate is high; however, as the economy begins to recover and labormarkets become tighter, it would be hard to return from shortened working hours tonormal hours, and wages would tend to rise. He encouraged participants to be awareof these side effects, and of the need to promote structural reforms that would give
more flexibility to the labor market.

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