Development Bank of Japan
Research Report
No. 27

Labor’s Share and the Adjustment ofWages and Employment

June 2002

Economic and Industrial Research Department
Development Bank of Japan

Contents
Summary............................................................................................................................................... iii
Introduction ........................................................................................................................................... 1
I

Factors in Labor’s Share Variability and Assessment ............................................................... 2
1. Rising Labor’s Share ............................................................................................................... 2
2. Decomposition to Prices and Unit Labor Cost......................................................................... 5
3. Decomposition of Unit Labor Costs ........................................................................................ 8
4. Relationship between Cyclical Movement and Long-Term Rise .......................................... 12
5. How Should the Current Labor’s Share be Assessed?........................................................... 13

II

Wage Adjustment ........................................................................................................................ 16
1. Nominal Wages and Its Flexibility ........................................................................................ 16
2. Substance of Wage Reductions.............................................................................................. 16
3. How Should Real Wage Variability be Considered?............................................................. 19
4. Wage and Employment Conditions in the First Half of the 1990s ........................................ 22

III Adjustment in Employment........................................................................................................ 25
1. From Labor Shortage to Labor Surplus ................................................................................. 25
2. Is Employment Adjustment Picking Up Speed?.................................................................... 26
IV Growth Expectations and Downward Pressure on Labor’s Share ......................................... 31
1. Corporate Growth Prospects and Labor’s Share Targets....................................................... 31
2. Conclusion and Outlook for the Future ................................................................................. 32
Appendix I

Definition of Labor’s Share ...................................................................................... 35

Appendix II Relationship of Production and the Adjustment of Hourly Wages,
Employment and Working Hours...................................................................................................... 38
References ............................................................................................................................................ 41

Development Bank of Japan Research Report/ No. 27iLabor’s Share and the Adjustment of Wages and Employment
Summary
1. The corporate profit rate declined entering
the 1990s and this hindered long-term growth
partly by discouraging investment. During thesame period, labor’s share showed a clear rising
trend and has remained high until now. In thisstudy, we examine the factors behind this increase in labor’s share, then look closely atmovements in wages and employment in response to other economic variables.
2. Labor’s share rose during the two recessions
in the 1990s and remains at a high level. This
contrasts with the U.S., where labor’s share has
been surprisingly stable for many years. In Japan,
short-term changes have been larger since bothprices and unit labor cost move labor’s sharecounter-cyclically (fall during expansions, riseduring recessions). However, in addition to thedeep and prolonged recessions in the 1990s, thestabilization and decline of prices have made it
more difficult to lower labor’s share even during
expansions and resulted in a sustained increase.
By decomposing the unit labor cost into
nominal wages and productivity, the rise of labor’s share in this decade can be understood as alarger increase in wages than in productivity. In
manufacturing, productivity fluctuates more in a
pro-cyclical manner so the unit labor cost increases more during recessions. In the wholesale
and retail industries, wages fluctuate in line withproductivity, whereas wages increase without
any improvement in productivity in the construction and service industries, accompanying
the hike in the unit labor cost and labor’s share.
Though the level of the share varies amongindustries, the rise in the 1990s occurred in a
broader range of industries. Furthermore, as therise in labor’s share occurred during a recessionary period, it may have been caused byinadequate adjustment.
3. Taking the nominal hourly wage after adjustment in working hours, the premium on the

inflation rate dropped rapidly after 1997 and the
downward rigidity of wages had also been loston average. However, this decrease has beenrealized by raising the ratio of part-time workers
without lowering the wages of general workers.
Also, wages growth has been strongly related to inflation rate, hence real hourly wages havebeen increasing every year except 1998. In contrast, real wages in the U.S. continued to drop
throughout the first half of the 1990s.
The increase of real wages affects labor’s
share by its difference from the growth in productivity. Comparing these two growth rates byindustry, rates of wage increase are similar across industries in each decade. Across time,
however, disparities have begun to widen alongwith stagnation in the growth rates. Also, disparities in the productivity growth rate between
industries have narrowed and wage levels started
to be more closely linked to individual performance.
4. This convergence of productivity growthacross industries is thought to reflect ongoing
adjustments of employment. Changes in labor
input indicate an increase in employment during
the first half of the 1990s in line with the reduction of working hours, which caused concerns
over future labor shortages. Since 1998, however,there has been a steady decline in labor input andemployment did not expand even when theeconomy was in recovery.
Estimations of the adjustment speed of employment indicate that, while employment
adjustments accelerated during the latter half ofthe 1990s, they have slowed recently due in partto a drop in the required employment level. Still,a large proportion of companies think that they
are overstaffed and pressure to adjust employment is increasing. Again in the U.S., the speedof employment adjustment has exceeded that ofJapan throughout the estimation period and theestimates are also stable in the long term.
5.

Adjustments of both employment and wages

Development Bank of Japan Research Report/ No. 27iiiare made gradually and, besides the concurrent
economic environment, the future outlook andthe insufficiency of past adjustments are important factors affecting these decisions. Thoughprospects for the economic growth rate are revised only moderately, the higher expected
growth rate than ex post performance in the firsthalf of the 1990s led to the expansion of laborcosts. By estimating the target of labor’s share,
an increase in the share was “intentional”
through 1996 but companies began to pursue adrop in the share (i.e., an improvement in the
profit rate) in 1997 and 1998. However, with thegrowth rates lower than expected, the share increased unintendedly and this high level
persisted through 2000.
6.

The rise of labor’s share during the early

half of the 1990s was caused by the increase inwages and employment due to concerns regarding labor shortages, lower economic growththan expected, and disinflation. In the latter halfof the 1990s, companies became more serious
about lowering labor’s share and tried to restrain
nominal hourly wages and slim down employment due in part to rapid deterioration ineconomic conditions. However, an unexpected
drop in economic growth resulted in a further
rise in labor’s share.
With the higher pressure to squeeze thelabor costs, conventional wage and employment
practices are likely to be restructured. While asafety net for the temporary negative shock to
employment and wages must be prepared, productivity must also be urgently enhanced by fully
utilizing existing human resource.
[Wataru Miyanaga (e-mail: wamiyan@dbj.go.jp)]

iv

Development Bank of Japan Research Report/ No. 27

Introduction
It is widely recognized that labor’s share is stablein the long run, and is at a similar level worldwide. Contrary to this rule of thumb observed
primarily in the Western industrialized countries,
in Japan, there has been a unique movement inlabor’s share in each period of development.
Labor’s share in Japan rose significantly inthe 1970s and again in the 1990s and currently
remains at a high level. The drop in corporate
profits is one factor in the prolonged slowdown
in economic growth through a decline in the motivation to invest. Furthermore, if there is amechanism in which low growth causes an increase in labor’s share, then Japan may have now
fallen into a vicious cycle of a rise in labor’s
share and low economic growth. In addition, of
relevance to recent discussions that lowprofitability sectors are preserved intact, we areinterested in whether the increase of labor’s
share is biased toward specific industries.
In this study, we analyze variability in labor’s share based on its relationship to thebusiness cycle. This is the basic approach to understanding the current high level of labor’s
share and what changes in labor costs and production are foreseeable in future adjustments.

In Chapter I, we examine the background of
the rise in labor’s share in the 1990s based on anumber of factor decompositions and consider
the relationship between business cycles andlabor’s share movement. In particular, we pursue
the impact of the drop in prices and otherchanges during the 1990s on cyclical movement
and the relationship between their short-term andlong-term trends. In addition, we also examine
criteria for assessing the current high level oflabor’s share.
In Chapters II and III, we look at innovations in components of the numerator of labor’s
share: wages, employment and working hours,
and make comparative examinations with the
U.S. on the flexibility and other adjustment capabilities. We also examine industrial disparities
in labor’s share movement, with emphasis onwhether any changes in wage and employment
practices are emerging.
In Chapter IV, after surveying growth expectations in the 1990s regarding income (i.e.
production), the denominator, we examine if theunanticipated economic performance had an
impact on business attitudes, which herald signsof future adjustment. The final section summarizes the discussion.

Development Bank of Japan Research Report/ No. 27

1

I Factors in Labor’s Share Variability and Assessment
1. Rising Labor’s Share
Labor’s share is defined as the ratio of payment
for labor services to the value added.1 Based on
experience primarily in the Western industrialized countries, it has been pointed out that,besides being extremely stable in the long term,2labor’s share is of virtually the same magnitude.
In Japan, however, in addition to significant
short-term variability due to cyclical factors,
there exists an apparent trend in the medium tolong term. Figure 1-1 (1) shows the movement inlabor’s share since 1955. Each decade saw aspecific trend of the share: a decline in the latter
half of the 1950s and an increase during the latter
half of both the 1970s and 1990s, while the1980s, when labor’s share was relatively stable,

can be seen as an exception. On the other hand,
although labor’s share in the U.S. (Figure 1-1(2))
rose about 5% during the latter half of the 1960s,
it has enjoyed prolonged stability for many years
and provides a good contrast.3
Table 1-1 confirms this difference between
the U.S. and Japan from the statistics. Averagelevels in the two countries were similar boththroughout the entire period and during the
1990s; however, the variability statistics in Japanrose to a level of 3-4 times that of the U.S.
whether in terms of [maximum] – [minimum] orstandard deviation. In addition, Figure 1-2 shows
a comparison with other developed countries formore than the past ten years. A comparison ofabsolute levels is not easy mainly due to differences in definition. However, althoughvariability is relatively large in the U.K., theconsistent trend of increase in Japan is unique,even in Figure 1-2(2), in which the private com-

(1) Japan(%)
90
Recessionary phase
68SNA
93SNA

85
80
75
70
65
60
55

60

65

70

75

80

85

90

95

00
(fiscal year)(2) U.S(%)
90
Recessionary phase

85

Labor’s share

80
75
70
55

60

65

70

75

80

85

90

95

00

(calendar year)

Figure 1-1. Labor’s Share
Notes: 1. Labor’s share = compensation of employees / (national income – personal entrepreneurial income).
2. Shaded areas are recessionary phases from peak to trough.
Source:“National Accounts,” Cabinet Office; “Survey of Current Business,” U.S. Department of Commerce.
1
See Appendix I for a discussion of the specific calculation method.
2
The Cobb-Douglas function, which is frequently used inmacro-models, was introduced with the assumption of aconstant labor’s share.

2

Development Bank of Japan Research Report/ No. 27

3Solow (1958) and Kravis (1959) even cast doubt on thestability of labor’s share (or the definition of stability) in the
U.S.; it is obvious, however, that it was more stable than inJapan during the period of Figure 1-1.

pany ratio4 and other differences in the economic
structure are eliminated to a certain extent.
In this study, the rise in labor’s share during
the 1990s is the primary target of analysis, however, we briefly examine prior periods based on
existing studies. Before the period of intense
growth (prior to the period covered in Figure 1-1),
the weight of the non-modernized small-scale
self-employed sector, which is typical in agriculture, shopkeeping, cottage industries and so forth
was high. While productivity was low in these
sectors due to the existence of labor surplus, labor’s share was at a high level because there wasno drop in wages, which were already at the bareminimum subsistence level. As the economy subsequently expanded, especially in modernizedsectors with relatively low labor’s share, and,since the labor surplus in the non-modernizedsectors was absorbed in that process into the modernized sectors, labor’s share in the nonmodernized sectors also dropped. Thus, labor’s
share of the economy overall was declining and it
has been pointed out that the sudden drop in labor’s share (from 85% to 70%5) in the period of
rapid growth beginning in about 1955 was due tothe steady decline in labor’s share in the large
corporate sector against the backdrop of rapid
growth.6 Thus, labor’s share remained at a low
level throughout the 1960s and it is thought that
allocations to abundant capital supported the rapid
growth through vigorous capital investments.
Entering the 1970s, labor’s share began toincrease. Besides an increase in the ratio ofworkers in management, R&D and other sectors
not directly involved in production during thisperiod, substantial increases were also apparent
in expenses for worker benefits unrelated to cash
earnings (Nishimura and Inoue, 1994). The tendency toward an increase in prices strengthened
at about this time but, when this was restrainedby the Oil Shock in 1973, wages began to rise,affecting a broad range of workers including blue

collar through “inflation preempting” typespringtime wage negotiations. Labor’s share thusrose by 15 points between 1969 and 1975 while
corporate profit in the midst of the recession
dropped sharply in 1974 - 75. As a result of progressive belt-tightening in response to thisespecially in large-scale manufacturing industries, the unemployment rate rose to the 2% level
and the employment of part-time workers became widespread. In addition, labor’s share
finally returned to a stable state during the latter
half of the 1970s due in part to efforts to restrain
the rate of wage increases through labormanagement cooperation at the time of the second Oil Shock.
Thus, in the 1980s as the economy shifted tostable growth, labor’s share remained stable inspite of the appreciation of the yen and other external shocks. The rise in labor’s share during the1970s was not adjusted, which is considered toindicate the realization of a level comparable withthat of other industrialized countries. It was evenasserted that labor’s share should be increased in
preparation for the consumption-oriented society
when the expansion of domestic demand had become a new issue.
Entering the 1990s, labor’s share rapidly
surged from 73.9%, the lowest point, in 1990 to
81.5% in 1994, the pace of which is comparable
to that in the 70s. As the share reached a record
high, the debate turned to its appropriatenessfrom an international perspective. There wasstrong anticipation of a recovery in the businessclimate at the time, however, and the possibility
that this was a transitory phenomenon due to therecession premised on the advance of wage andemployment adjustments has been pointed out(for example, by the Economic Planning Agency
in 1994). To be sure, some of the decline wasevident during the period of economic recovery
through 1996. Subsequently, however, it again
shifted to an increase, rising about 10% through4

See Appendix I.
Values based on the definition of Figure 1-1; likewise
below.
6
The decline in labor’s share during the period of rapid
growth “corresponds to the spurt of capital and construction
investments in the corporate sector; however, the rise in
extrinsic effective demand promoted capital investments
and economic growth while also increasing profits” (Ishikawa, 1994, p. 11).
5

Development Bank of Japan Research Report/ No. 27

3

Table 1-1. Statistics of Labor’s Share in The U.S. and Japan
1955-00
Japan
U.S.
76.8
78.8
84.8
81.5
(FY ’55) (FY ’70)
68.1
76.2
(FY ’69) (FY ’65)
16.7
5.3
4.1
1.2

Average
Maximum
Minimum
Max. – Min.
Standard deviation

1990-00
Japan
U.S.
80.2
78.5
83.7
79.9
(FY ’98) (FY ’92)
73.9
77.0
(FY ’90) (FY ’97)
9.9
2.9
3.1
0.9

Notes: 1. Computed from labor’s share in Figure 1-1; fiscal year for Japan,
calendar year for the U.S.
2. In Japan, based on 68SNA through 1989 and on 93SNA from 1990.

(1) Compensation of employees / distributed national income
(%)

(%)

78

72

76

70

74

68

72

66

70

64

68

62

Japan

66

U.S.
U.K.
Germany
France (right -handgradations)

60
88

89

90

91

92

93

94

95

96

97

98

99

(2) Compensation of employees / (distributed national income- personal entrepreneurial income)
(%)
100
95
Japan

90

U.S.
85

U.K.

80

Germany
France

75
70
88

89

90

91

92

93

94

95

96

97

98

99

Figure 1-2. International Comparison of Labor’s Share
Source: “2000 International comparison statistics,” Bank of Japan.

4

Development Bank of Japan Research Report/ No. 27

out the 1990s to the present level of about 83%.
Looking back to the 1990s, Japan experienced
unprecedented low growth starting with thebursting of the bubble economy but it is hard to
see that external shocks were of any particularconsequence compared to the oil shocks and the
upward reevaluation of the yen of the past. While
the rise in labor’s share during this time is constantly pointed out, it was a gradual increase.
Inflation was furthermore one factor in labor’s
share during the 1970s and, in contrast, the progressive shift from price stability to deflation
during the 1990s is a fundamental difference. In
the following we will examine in particular thisrise in labor’s share during the 1990s.
2.

Decomposition to Prices and Unit Labor
Cost

Labor’s share can be decomposed into factors inseveral ways. This section considers the decomposition to prices and unit labor costs (ULCs).
Labor’s share==

nominal labor compensation
nominal value added

nominal labor compensation
real value added

´

1
ULC
=
prices prices(1-1)
ULCs are the nominal labor costs required
to produce one unit of real value added andEquation (1-1) indicates that labor’s share isdefined as the ratio of labor cost (numerator) tothe value produced (denominator).7
In Figure 1-3, the difference in labor’s sharecompared to the previous year (% points) is contribution decomposed based on Equation (1-1).
During phases of rising labor’s share, as the rateof price inflation remained at a high level during
the latter half of the 1970s, it was outpaced by
ULCs. During the latter half of the 1990s, however, while the inflation rate stabilized,

7

Since labor’s share is a ratio, it is not important if production is one unit or the total volume. In addition, it is not
appropriate to liken production to sales in company accounting practices since it is a value added concept. Refer toAppendix 1.

ULCs continued to grow. In addition, referring to
Figure 1-1, the relationship to business cycles
shows that there is a tendency for labor’s share to
rise during periods of recession and to decline
during periods of economic recovery. However,looking at the period of recovery during the
1990s, in spite of restrained ULC growth in
1993-97 and a sharp decline in 1999-2000, this is
not linked to a decline in labor’s share due todisinflation and deflation, which means deviationfrom the conventional cyclical movement.
In the Japanese economy, there have been
considerable differences in productivity andprofitability between industries and the need forreform in inefficient sectors has been an ongoingdebate. In regard to variability in labor’s share,
let us look at whether or not it is possible to confirm if trends of some industries are strongly
expressed in industry-specific labor’s share in
Figure 1-4. Here, due to data limitations, themethod of calculating labor’s share is different
from that of Figure 1-1, which includes personalentrepreneurial income in the denominator.8 In
the diagram, besides the consistently low electricity, natural gas and water supply industries,
industry-specific tendencies, such as the highlevel of transport and communications industries,
are also evident. However, labor’s share in thefour industries (manufacturing, construction,
wholesaler/retail and service) that account for
65.7% value added weighted (real domestic factor income in FY 1990) indicate similartendencies in the long run.
Accordingly, Figure 1-5 shows a factor de8
Besides this, the calculation in Figure 1-1 also differs in
the following points. (1) The values are calendar year values
due to data limitations. (2) It is about 95% of total domestic
factor income excluding agriculture, forestry, fisheries andaquaculture industries, producers of government services
and producers of private non-profit services to households.
(3) It is deflated by value added deflators by economic
activity and, for the economy as a whole, a slight disparity
occurs due to the difference in the coverage given in (2).
When comparing labor’s share for the economy overall, it ismore than 10% lower than that of Figure 1-1 and it is due
primarily to the inclusion of personal entrepreneurial income in the denominator. In addition, the reason for thesmaller rise during the 1990s is due to the slight rise in theratio of personal entrepreneurial income (including imputedrent). In addition, the imputed portion is large in the realestate and financial/insurance industries, hence they areomitted from the graph because of the difficulty of comparison.

Development Bank of Japan Research Report/ No. 27

5composition of the difference in labor’s sharecompared to the previous year. In Figure 1-5 (1),labor’s share and weight overall are totaled, andthe total is considered to be the share of the contribution of that industry. It can be seen that,(% points)

while the rise in the 1970s was due to the contribution of a broad range of industries, the service, construction and wholesale/retail industries
accounted for a considerable contribution to the(1) Japan

20
ULC factors
15

Price factors (reverse sign)
Labor’s share, difference from the previous year

10
5
0
-5
-10
(fiscal year)-15
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90

91 92 93 94 95 96 97 98 99 00(2) U.S.
1050-5(calendar year)-10
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00

Figure 1-3. Factor decomposition of the Changes in Labor’s Share
Notes: 1. Shaded areas are recessionary phases from peak to trough.
2. The following data was used for each variable:
Prices: GDP deflator
Nominal worker compensation: compensation of employees
Nominal value added: National income – personal entrepreneurial income
3. Japan based on 63SNA prior to 1990.
Source:“National Accounts,” Cabinet Office; “Monthly Labor Statistics Survey,” Ministry of Health, Labor andWelfare; “Survey of Current Business,” U.S. Department of Commerce; “Monthly Labor Review,” U.S. Department of Labor.

6

Development Bank of Japan Research Report/ No. 27

100

(%)

Construction

90

Transport/
communicationsindustry80

Manufacturingindustry
Service industry

All industries

70

Wholesale/retailindustry60

Nonmanufacturingindustry

50

40

Electricity, natural
gas and water supply
industry30
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90

90 91 92 93 94 95 96 97 98 99 00

Figure 1-4. Labor’s Share by Industry
Notes: 1. Calendar year. Data for 1970-90 based on 68SNA, data for 1990-99 based on 93SNA.
2. Labor’s share = compensation of employees / domestic factor income.
3. Real estate, which is at a low level, mining, which has low value added weight, and the financial and insurance
industries of which imputed interest accounts for the majority of SNA value added, are omitted.
Source:“National Accounts Annual Report,” Cabinet Office.

Development Bank of Japan Research Report/ No. 27

7

rise in the 1990s. However, Figure 1-5 (2), in
which weight changes are compiled separately,
approaches the image of Figure 1-4 and, driven
by the construction and manufacturing industries,
the effect of the weight is considerably offset.
Thus, both diagrams indicate a considerably different form of the factors in the rise and thisdifference was greater in the 1990s than in the
1970s. Overall, the construction industry undoubtedly contributed to the rise in the 1990s;
however, it is difficult to attribute the rise in labor’s share to specific industries and, whileaccompanied by a shift between industries, thiscan be considered a phenomenon that progressed
simultaneously in a broad spectrum of industries.
Figure 1-6 shows the same decomposition
as Figure 1-3 seen by industry. In the 1990s, inparticular, the tendency toward deflation
strengthened in the manufacturing and transport/
communications industries and the decline in the
ULCs is not linked to a drop in labor’s share. On
the other hand, in the construction and service
industries, while the usual deeply rooted tendency toward a rise in prices is lost, labor’s sharerises without an adequate drop in the ULCs. Labor’s share thus varies due to the correlation
between prices and ULCs; however, there are
more notable differences between industries dueto the ULCs. Let us look then at the variability
factors in the ULCs in the next section.
3.

Decomposition of Unit Labor Costs

If ULCs are decomposed in accordance with thatdefinition, they can be expressed as indicatedbelow:ULC =nominal labor compensation wLhY== w/value added amountY
Lhæ nominal hourly wage öçç =÷÷ (1-2)
productivityèøwhere, w = nominal hourly wage, the wage rate,
L = number of workers, h = working hours per
worker and Y = value added. Based on thisanalysis, ULCs increase when nominal hourly
wages increase compared to productivity. In
Figure 1-7, the ULC growth rate is factor decomposed based on this equation and expressedby industry.
8

Development Bank of Japan Research Report/ No. 27

When viewing all industries (private sector
excluding agriculture, forestry and fisheries), it ispossible to confirm that ULCs remained at a low
level during the early 1990s because nominal
hourly wages rose while the rise in productivity
slowed. By industry, manufacturing industries
reflect sizable cyclical fluctuations in the production level while productivity is high andmoves pro-cyclically (rises during economic
expansions and falls during recessions). However, the production level itself remained
virtually flat (factor income deflated by the period 1990-2000 increased 2.2%) and it ispossible to identify the cause of the medium- tolong-term rise in labor’s share in the increase innominal hourly wages in the 1970s and in therelative drop in productivity during the 1990s.
In the wholesale/retail industries, fluctuations in productivity and wages were balanced
and ULCs were stable from the 1980s to the mid1990s, while the drop in productivity in recent
years caused the ULCs to rise. Although employment in the wholesale/retail industries
increased monotonously, the switch to a drop in
real factor income beginning in 1998 brought
about a decline in productivity.
In the construction and service industries,
wages increased during the first half of the 1990s
though no improvement was evident in productivity, causing an increase in ULCs. The
construction industry, in particular, demonstrated
a conspicuous decline in productivity, especiallyduring the early half of the 1990s, and real factor
income during this time dropped by more than
20% to 78.4 in 1995 and 72.0 in 2000 based on
an index of 1990 = 100. Incidentally, a drop in
real factor income during the 1990s was evident
only in the construction and mining industries.
Meanwhile, the transportation and communication industries achieved stable growth during the
1990s and, while there was a strengthening tendency toward a decline in ULCs due toimprovements in productivity, it was not linked
to a drop in labor’s share within the context offalling prices, as seen above.

(1) Contribution decomposition by industry
5(%)
Manufacturing industry
Wholesale/retail industry
Service industry
Total

4
3

Construction industry
Transport/communication industry
Other

2
1
0
-1
-2
-3
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90

91 92 93 94 95 96 97 98 99 00(fiscal year)(2) Contribution decomposition separate from changes in weight5(%)
Manufacturing industry
Wholesale/retail industry
Service industry
Total

4
3

Construction industry
Transport/communication industry
Weight, etc.

2
1
0
-1
-2
-3
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90

91 92 93 94 95 96 97 98 99 00(fiscal year)

Figure 1-5. Contribution Decomposition by Industry of a Change in Labor’s Share
Notes: 1. Calculated the same as in Figure 1-4.
2. Factor decomposition is based on the following formulation.
Suppose W is the compensation of employees (labor’s share numerator) and Y is the denominator factor income,each of which is the sum of Wi and Yi, variables for industry i. Then, labor’s share can be decomposed as indicated below.

æW
Wi
Y ö
W S i Wi=== çç i · i ÷÷Y
Σ i Yi ø
S i Yii Σ i Yii è Yiåå

Therefore, a change in overall labor’s share is the weighted average of the changes in each industry. That is,æ æW ö Yæ Y ööWæW ö
D ç ÷ = ç Dçç i ÷÷ · i + i · Dçç i ÷÷ ÷÷
è Y ø i çè è Yi ø S ι Yi Yi
è S i Yi ø øå

Decomposition in Figure (1) is based on the changes by industry which is the bracket of the right-hand side of theabove equation. In Figure (2), the first term in the bracket is extracted for major industries, and the effect of otherindustries and the entire influence of the weight change are unified under “Other.”
Source: “National Accounts Annual Report,” Cabinet Office.

Development Bank of Japan Research Report/ No. 27

9All industries (excluding agriculture, forestry, and fisheries) (100%) Manufacturing industry (24.9％)
25

90

25

90

20

85

20

85

15

80

15

80

10

75

10

75

5

70

5

70

65

0

65

60

-5

60

55

-10

0
-5
-10
71 73 75 77 79 81 83 85 87 89

55
71 73 75 77 79 81 83 85 87 89

92 94 96 98 00

Non-manufacturing industry (75.1％)

92 94 96 98 00

Wholesale/retail industry (18.2％)

25

90

25

80

20

85

20

75

15

80

15

70

10

75

10

65

5

70

5

60

0

65

0

55

-5

60

-5

50

-10

55

-10

71 73 75 77 79 81 83 85 87 89

45
71 73 75 77 79 81 83 85 87 89

92 94 96 98 00

Construction industry (8.9％)

92 94 96 98 00

Service industry (23.3％)

25

95

25

80

20

90

20

75

15

85

15

70

10

80

10

65

5

75

5

60

0

70

0

55

-5

65

-5

50

-10

60

-10

71 73 75 77 79 81 83 85 87 89

45
71 73 75 77 79 81 83 85 87 89

92 94 96 98 00

Real estate industry (12.2％)

92 94 96 98 00

Transport/communications industry (8.4％)
35

25

110

3

30

20

105

2

25

15

100

1

20

10

95

0

15

5

90

-1

10

0

85

-2

5

-5

80

-3

0

-10

4

71 73 75 77 79 81 83 85 87 89

92 94 96 98 00

Price factors (reverse sign)
Change of labor’s share from the previous year75
71 73 75 77 79 81 83 85 87 89

92 94 96 98 00

ULC factors
Labor’s share (right-hand gradations)Figure 1-6. Factor Decomposition of Labor’s Share Changes by Industry
Notes: 1. Based on calendar year. All units are %.
2. % change in labor’s share from the previous fiscal year is factor decomposed based on thefollowing.

Labors share =wLh wLh 1 unit labor cost (ULC)
=
=
·
YP
Y
P
priceswLh is compensation to employees (domestic concept), YP is domestic factor income and P is product deflator by industry.
3. The share of factor income (real) compared to all industries (excluding agriculture, forestry,
fisheries and aquaculture) in 2000 is shown in parentheses after the industry name.
4. Electricity, natural gas and water supply industries and the financial and insurance industries areomitted from the graphs.
Source:“National Accounts Annual Report,” prepared based on Cabinet Office10

Development Bank of Japan Research Report/ No. 27

All industries (excluding agriculture, forestry and fisheries) (100%) Manufacturing industry (24.9％)
25

90

25

90

20

85

20

85

15

80

15

80

10

75

10

75

5

70

5

70

0

65

0

65

-5

60

-5

60

-10

55

-10

71 73 75 77 79 81 83 85 87 89

55
71 73 75 77 79 81 83 85 87 89

92 94 96 98 00

Non-manufacturing industry (75.1％)

92 94 96 98 00

Wholesale/retail industry (18.2％)

25

90

25

80

20

85

20

75

15

80

15

70

10

75

10

65

5

70

5

60

0

65

0

55

-5

60

-5

50

-10

55

-10

71 73 75 77 79 81 83 85 87 89

92 94 96 98 00

45
71 73 75 77 79 81 83 85 87 89

Construction industry (8.9％)

92 94 96 98 00

Service industry (23.3％)

25

95

25

80

20

90

20

75

15

85

15

70

10

80

10

65

5

75

5

60

0

70

0

55

-5

65

-5

50

-10

60

-10

71 73 75 77 79 81 83 85 87 89

45
71 73 75 77 79 81 83 85 87 89

92 94 96 98 00

Real estate industry (12.2％)

92 94 96 98 00

Transport/communications industry (8.4％)

25

35

25

110

20

30

20

105

15

25

15

100

10

20

10

95

5

15

5

90

0

10

0

85

-5

5

-5

80

-10

0

-10

71 73 75 77 79 81 83 85 87 89

92 94 96 98 00

Wages factors
ULC compared to previous year75
71 73 75 77 79 81 83 85 87 89

92 94 96 98 00

Productivity factors (reverse sign)
Labor’s share (right-hand gradations)Figure 1-7. Factor Decomposition of the ULC Growth Rate
Notes: 1. Based on calendar year. All units are %.
2. % change of ULC from the previous fiscal year is factor decomposed based on the following
equation.
ULC =Nominal hourly wages
wLh
Y
= w/
=
Real productivity
LhY

wLh is compensation of employees (domestic concept), Y is domestic factor income deflated byproduct deflator by industry, L is the number of workers and h is working hours. Working hours
until 1990 are based on Monthly Labor Statistical Surveys (businesses with 30 or more employees).
3. The share of factor income (real) compared to all industries (excluding agriculture, forestry andfisheries) in 2000 is shown in parentheses after the industry name.
4. Mining, electricity, natural gas and water supply industries and the financial and insurance industries are omitted from the graphs.
Source:“National Accounts Annual Report,” prepared based on Cabinet Office; “Monthly Labor Statistical
Surveys,” Ministry of Health, Labor and Welfare.

Development Bank of Japan Research Report/ No. 27

11Thus, in spite of the fact that a rise in labor’s share is evident in a broad range ofindustries, definite disparities are seen between
individual industries. This point is examinedagain in the following section.
4.

Relationship between Cyclical Movementand Long-Term Rise“Labor’s share normally rises during recessionary periods and drops during periods of
economic recovery” (Economic Planning
Agency, 1966). This relationship between labor’s
share and the business cycles was recognized as
early as in the 1966 edition of the Economic
Survey of Japan. One still frequently encounters
this claim regarding the counter-cyclical natureof labor’s share and we would like here to attempt to stereotype the Japanese cycle of labor’s
share by examining prices and URLs based on
the foregoing decompositions.
Figure 1-8 shows the transitions in the inflation rate by business cycle. With the exceptionof the broad surge in the inflation rate following
the first Oil Shock, it can be seen that the movement was pro-cyclical, that is, the inflation rate
moved together with economic recovery, until
the early 1990s. Of course, the price level reflects a combination of non-cyclical factors, suchas monetary policy, the exchange rate, and cyclical factors, thus making it difficult to verify aclearly-defined correlation,9 however, the procyclical movement indicated in Figure 1-8 (8) is
established intuitively. Since the effect of prices
on labor’s share is counter-cyclical (refer toEquation 1-1), such observations indicate thatcyclical price variability makes labor’s sharemove counter-cyclically.
On the other hand, ULCs tend to movecounter-cyclically, as illustrated in Figure 1.3.
Greater fluctuation of labor’s share in Japan canbe accounted for by the fact that both prices and9
Asako et al. (1991), who examined the issue with theexclusion of such non-cyclical factors, assert that there is anasymmetrical correlation between prices and nominal GNP,
that is, inflation rate shows downward rigidity during recessionary periods. Similar results are reported in the U.S. thatprices fluctuate pro-cyclically during growth periods andcounter-cyclically during recessionary periods (Wolf, 1991).
Furthermore, Ariga et al. (1992) deny the correlation itself
between price level and the business climate.

12

Development Bank of Japan Research Report/ No. 27

ULCs cause labor’s share to vary countercyclically. Still, the similar cyclical pattern ofprice movement has also been pointed out in the
U.S.10 and differences can probably be sought inthe movement of ULCs. Furthermore, since thepro-cyclical movement of productivity is virtually the same in both the U.S. and Japan, crucial
differences can be found in nominal labor compensation. This point is examined from thefollowing section.
The counter-cyclical movement of labor’s
share can also be confirmed in statistical precedence relationships between variables in the past.
Estimating the relationship of production andlabor related variables during the past twenty
years or so using a simple VAR model (refer toSupplement 2) shows that, when an exogenous
shock is provided on production, labor’s sharemoves in the opposite direction to the initialshock to production. In addition, as time goes on,
this innovation on labor’s share is not eliminatedand a level shift remains permanently. Therefore,
if there is an alternating series of economic expansions and recessions, labor’s share willremain stable in the long term while it will rise in
the long term if negative shocks on production
are relatively greater, as in the 1990s.
Furthermore, these short-term cycles oflabor’s share became asymmetric due to the dropin the inflation rate in the 1990s. Figure 1-8
shows that the inflation rate dropped after entering the 1990s due to the weakening of its
relationship to business cycles and labor’s share
increased due both to the factors of prices and
ULCs in recessionary periods. Meanwhile,
though ULCs cause a drop in labor’s share during periods of economic recovery, prices tend tocause an increase in labor’s share, offsetting thedrop in labor’s share. It is thought that an asymmetrical correlation develops between labor’s
share and business cycles, boosting labor’s sharewith a ratchet effect.

10

See footnote 9.

(1) 71Q1〜73Q4〜75Q130(2) 75Q1〜77Q1〜77Q4

(%)

25
20
15
10
5
0
-5
71Q4 72Q2 72Q4 73Q2 73Q4 74Q2 74Q4

(4) 83Q1〜85Q2〜86Q4
4

(%)
20
18
16
14
12
10
8
6
4
2
0
-2
75Q1 75Q3 76Q1 76Q3 77Q1 77Q3

(5) 86Q4〜91Q1〜93Q4

(%)

4

3

3

2

2

-2
83Q1

84Q3

85Q2

86Q1

(7) Present (99Q2 – 00Q3)

86Q4

6
4
2
0
-2
77Q4 78Q4 79Q4 80Q4 81Q4 82Q4

(6) 93Q4〜97Q1〜99Q2
(%)

1
0
-1

-2
83Q4

8

2

-1

-1

10

3

0

0

12 (%)(%)

1

1(3) 77Q4〜80Q1〜83Q1-3
86Q4 88Q1 89Q2 90Q3 91Q4 93Q1

-2
93Q4 94Q4 95Q4 96Q4 97Q4 98Q4

(8) Pattern

(％)
0.5

Overall
Overall (excluding(excluding fresh
freshfoods)
foods)GDP deflator
GDP
deflator

0.0
‑0.5
‑1.0
‑1.5
‑2.0
‑2.5
99Q2

99Q4

00Q2

00Q4

01Q2

Figure 1-8. Price Movement in Business Cycles (trough - peak - trough)Compared to the Previous Year
Notes: 1. Consumer price index excluding fresh foods
2. Since the GDP deflator of cycle (7) only is based on 93SNA, it does not connect to (6).
3. Effect due to consumption tax is excluded; 89Q2 – 90Q1 are complemented linearly and a positive correction of
1.5% is applied to 97Q2 – 98Q1 based on the Economic Planning Agency (1997).
Source: “Monthly Consumer Price Index Report,” Ministry of Public Management, Home Affairs, Posts and Telecommunications; “National Accounts Annual Report,” Cabinet Office.

5. How Should the Current Labor’s Sharebe Assessed?
We have examined the background of the rise inlabor’s share as indicated above; is it possible,
though, to see a rise in labor’s share as essentially vicious? Debates in the past have often
focused on international comparisons, but we candiscuss whether Japan’s labor’s share is at the
optimum level in light of some sort of criteria.
In regard to the low level of labor’s share
during the period of intense growth and thegradual drop in labor’s share during the 1980s,
for example, there has been criticism that Japan’slabor’s share is low in international terms andthat the workers are not gaining appropriate

Development Bank of Japan Research Report/ No. 27

13benefits. In response to this, Koike (1999) states,“that does not mean that workers in Japan are
gaining less than their share; labor’s share drops
in growing economies,” citing Kaldor (1955-56)
as an example. Aside from this, the possibility ofa change in labor’s share in a balanced growth
track can be explained in terms of macro production functions. As pointed out by Hicks(1932),11 Solow (1958) and recently by Nishizaki
and Sugo (2001), even if the macro production
function is constant returns, if based on the CES
model, labor’s share will rise together with theaccumulation of capital when the elasticity of
substitution of labor and capital is less than one.
Based on this, it would be possible to accept along-term rise of labor’s share as a byproduct of
economic growth.
If we take the factor decomposition of labor’s share seen in this section into account,however, it would probably be difficult to support this approach for the following reasons.
First of all, there were significant increases inlabor’s share primarily during two recessionary
periods, not during periods of economic recovery
when the pace of capital accumulation accelerated. Conversely, the fact that labor’s share wasstable during the latter half of the 1980s when
there was an increase in the growth rate could beconsidered contradictory evidence of the same
nature.12 The Economic Planning Agency (1992),
which conducted empirical analyses, Kamata andMasuda (2000) and others obtained results indicating that the elasticity of substitution, acondition for explanations by CES production
functions, does not significantly differ from one.
We argue that, since the rise in labor’s sharehappened not in an expansionary period, and because labor costs are inflexible, the required adjustment is hindered and so labor’s share hovers
at a high level. In such cases, the previously
mentioned Kaldor, for example, pointed out using a Keynesian type of model the possibility
that the rise of labor’s share causes a drop in theeconomic growth rate in mature economies. In
other words, when the company profit rate falls
due to an increase in labor’s share, mounting
investor pessimism and risk occur along withlower investment, and the growth in demanddoes not attain the natural growth rate. It has
been asserted, for example, that there has been along-term decline in ROA in Japan.13 The factors
involved in fluctuations of the company profit
rate (Figure 1-9) indicate that the impact offluctuations on labor’s share is more dominant
than the value added ratio.14 Though the Kaldortype approach will require more specific studies
to be undertaken, taking the existence of gaps indemand as one factor in the current deflation into
account, we cannot exclude the possibility thathigh labor’s share hinders growth due to a vicious cycle involving insufficient demand.
In addition, whether based on the above
supply function or the possibility of disequilibrium due to inadequate adjustment, which is theperspective of this study, it is necessary to explain why labor’s share increased consistently
only in Japan during the 1990s unlike Westernindustrialized countries where capital accumulation advanced at a much higher pace. Below, we
will examine each of the variables that make uplabor costs and look at the characteristics of theJapanese adjustment process based on this perception.

13

14

11
12

14

See Yoshikawa (1994).
Since the explanation based on CES model functions isbased on a long-term model, it basically does not explain short-term fluctuations. However, this study
adopts the approach that short-term factors survive tohave a long term, a fundamentally different mechanism.
Development Bank of Japan Research Report/ No. 27

Nakamura (2000) presents a detailed discussion of ROA
decline and inter-company disparities using company
micro-data.
When labor’s share factors and value added ratio factors
indicate the same direction, we can say that company
profits are more volatile since it is the residual after
subtracting fixed labor compensation. Manufacturing
and non-manufacturing industries show a tendency
similar to that in Figure 1-9; however, the absolute variance is far greater in the case of manufacturingindustries.

(1) Factor decomposition of the return on equity compared to the previous fiscal year
3

(%)

2
1
0
-1
-2

Distribution factors
Distribution
factors
Value added
Value
addedratio
ratiofactors
factors
Profit rate
to theprevious
fiscal fiscal
year year
Profitratecompared
comparedto theprevious

-3
-4
56

58

60

62

66

64

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

(2) Factor decomposition of profit margin on sales compared to the previous year
1.0

98

00

98

00

(fiscal year)

(%)

0.5
0.0
-0.5
Distribution factors
Distribution
factors
Value added
addedratio
ratiofactors
factors
Profitratecompared
comparedto theprevious
Profit rate
to theprevious
fiscalfiscal
year year

-1.0
-1.5
56

58

60

62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

(fiscal year)

Figure 1-9. Impact of Labor’s Share on the Profit Rate
Notes: 1. Covering companies with sales of ¥10 million or more excluding financial and insurance industries.
2. Factor decomposition is implemented with the figures defined as indicated below.
A: Total assets = beginning of term, end of term average (excluding land)
S: SalesY: Value added = ordinary profit + interest payment discount charge – interest dividends + labor costR
: Company revenues = ordinary profit + interest payment discount charge – interest dividends
CS : Capital share = company revenues ¸ value added
Return on equity (ROE):R Y ´ CS Y=
= ´ CSAA
A
Therefore, innovation in Y/A is value added factors and CS variability share factor. Profit margin on sales is decomposed in the same manner with S substituted for A.
3. Since interest dividends are posted beginning in FY1983, changes through that year are not obtainable.
Source: “Corporate Statistics Quarterly Reports,” Ministry of Finance.
ROE =Development Bank of Japan Research Report/ No. 27

15

II Wage Adjustment1.

Nominal Wages and Its Flexibility

Labor costs consist of wages times number ofworkers or hourly wage (wage scale) times per
capita working hours times number of workers.
Of these, we will examine whether or not wages,
in this chapter, and employment, in the next,
have been at an appropriate level and whether or
not there has been adequate flexibility.
It has been thought that, while employment
remains stable in Japan, it has been characterizedby comparative flexibility in working hours andwages. Among the comparative studies on thisissue, Gordon (1982) gauged standard deviationand other measures of variability, and Sachs(1983) examined the speed of wage adjustments
controlling changes in employment. However,Kurosaka (1988), who examined the literatureincluding both of these, reached the conclusionthat wages in Japan were not necessarily flexible.
Taking subsequent circumstances into account, aPhilips curve with the wage increase rate on thevertical axis clearly shifts from the former approximately vertical line to a flat curve,reflecting the one-sided increase in the unemployment rate and deflation in the 1990s. Even if
it were possible to assess wages in Japan in thepast as flexible to mitigate fluctuations in employment, we have to admit that this function has
now weakened.
Here, we first confirm the downward rigidity of wages as a yardstick of wage flexibility inJapan. The downward rigidity of wages was
originally advocated assuming the existence oflabor unions and multi-year labor agreements,
therefore we need to test the wages of individual
workers in continuous service excluding thefactors of industrial structure and changes in
population composition.15 In recent years in Japan, however, prices and productivity, important
indices of springtime wage increases, are addingpressure to reduce wages and, even macro indices are indicating the robustness of downward
rigidity.
The nominal wage index (total cash earn15

Other studies often employ panel data. Akerlof, Dickens
and Perry (1966) showed downward rigidity including
telephone interviews.

16

Development Bank of Japan Research Report/ No. 27ings) of the Monthly Labor Statistical Surveys
fell by 1.6% in 1998 and by another 0.8% thefollowing year, dropping below the previous year
for the first time since 1953 when comparisons
first became possible. By industry, nominal
wages dropped early in the 1990s in transportation and communication, real estate and otherindustries. However, the fluctuations in the total
amount include time adjustments in the construction and transportation industries, which
commonly have daily and monthly wage or piece
rate wage systems, as well as manufacturing withnotable variability in overtime work. In addition,
there is also more variability in the working
hours in the case of part-time workers, who havebeen increasing in number in recent years, than
general workers (Figure 2-1). Accordingly, Figure 2-2 shows the trends in hourly wages, thewage rate of total wage amount divided byworking hours; however, in the process culminating in deflation, the growth of hourly wages
has been restrained to near zero and, as may be
expected, dropped in FY 1998 and 1999. Fromthe perspective of the economy overall, downward rigidity in the sense of “not dropping below
the previous year” is no longer an appropriate
approach.16
2. Substance of Wage Reductions
Next, the factors involved in reducing wages
by earnings category are shown in Figure 2-3.
Here, we look at figures for businesses withfive or more employees, a broader coverage,
for the 1990s only. The total amounts showthat the growth rate gradually dropped, decreasing in 1998, 1999 and then in 2001. In
addition, with hourly wages on the right-handside diagram, although scheduled persistentincreases in the springtime wage offensive(refer to Figure 2-2), bonuses and other special ear ni n gs ar e t he pri mar y f act or i n t he
decline in hourly wages, as in the total amountin the left figure. Though it is said that wages
in Japan have flexibility due to16

Using industry-specific data, Kimura (1999) states that“there seem to be changes in the relationship between prices
and wages bordering on a growth rate of zero”. Here, too,
when data for 1998 is added, it indicates that rigidity is
statistically rejected.

(％)

3

Wages
Hours

2
1
0
-1
-2
-3
1

2

3

4

5

6 7
99

8

9 10 11 12 1

2

3

4

5

6 7

8

9 10 11 12 1

2

3

4

00

5 6

7

8

9 10 1101

Figure 2-1. Divergence in Wages and Hours between Part-Time Workers and General Workers
Note:

The growth rate of general workers compared to the previous fiscal year is subtracted from the same growth rate forpart-time workers and the central 3-month average is used.
Source: “Monthly Labor Statistics Survey,” Ministry of Health, Labor and Welfare.

40

(%)

(%)

30

8
Prices7
Springtime wage increase rate
Average hourly wage
6

25

5

20

4

15

3

10

2

5

1

0

0

35

-5
-10

(right-hand gradations from FY 1981)-1-2
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00(fiscal year)

Figure 2-2. Changes in Nominal Hourly Wage and Price
Notes: 1. Average hourly wage is the growth rate of the wage index (total cash earnings) of the monthly labor statistics
divided by the hour index.
2. Prices are the Consumer Price Index excluding imputed rent.
3. Data of businesses with 30 or more workers through 1990 and with 5 or more workers beginning in 1991 are usedin the calculation of hourly wages.
Source: “Consumer Price Index,” Ministry of Public Management, Home Affairs, Posts and Telecommunications; “Monthly
Labor Statistical Surveys, Spring Wage Increase Rate Conditions,” Ministry of Health, Labor and Welfare.

Development Bank of Japan Research Report/ No. 27

17

(1) Total
7(2) Hourly wage conversion(%)

7

SpecialSpecialScheduled
Scheduled
Non-scheduled
Non-scheduled
Total
Total

6
5
4

Non-scheduled
Non-scheduled

4

Total
Total

3
2

1

1

0

0

(fiscal year)
91

92

93

94

95

96

97

98

99

00

01

Scheduled
Scheduled

5

2

-2

SpecialSpecial

6

3

-1

(%)

-1

(fiscal year)

-2
91

first
half

92

93

94

95

96

97

98

99

00

01

first
half

Figure 2-3. Breakdown of Earnings Growth
Note:

Scheduled and non-scheduled hourly wages were prepared based on wage and earnings indices and special earnings
were per total working hours. Factor decomposition was carried out based on the equation below and, since the contribution of changes in the distribution ratio of working hours (scheduled : non-scheduled) is trivial, it was not
specified as a factor.

w w sc hsc wn hn w sp
=
·
+
·
+
h hsc hhn hhwhere w is nominal wage index, h is working hour index, and subscripts sc, n and sp indicate scheduled, nonscheduled and special, respectively. Those without a subscript are their total.
Source: “Monthly Statistical Reports (businesses with 5 or more workers),” Ministry of Health, Labor and Welfare.

overtime pay and bonuses, it has been confirmed that while scheduled earnings havedownward rigidity, bonuses, in particular,
fluctuate flexibly.
Wage adjustments centered on thesebonuses do not affect all workers in the samemanner. The factors in hourly wage variability
by general and part-time workers in Figure 2-4
show that, though the growth in hourly wages ofgeneral workers decreased, it began to increaseagain after reaching zero in 1998 and the existence of downward rigidity cannot be denied. As
the background, changes in the number of yearsof continuous employment in Figure 2-5 indicate
that, employment practices may be changing, theaverage number of years of continuous employment is actually on the increase. In terms of age,the prolongation has reached the upper end particularly among younger workers, while thenumber of years of continuous employment
among middle-aged and elderly workers aged
55-59 continues to increase. As the average ageof the staff increases, it is not difficult to imagine

18

Development Bank of Japan Research Report/ No. 27that there is deeply rooted upward pressure on
average wages due to the seniority wage system.17
Meanwhile, a major factor in the decline ofhourly wages is the increase in the ratio of part-timeworkers (the ratio of part-time workers among all
workers). The average hourly wage of part-timeworkers in 2000 was ¥979, less than 40% of the¥2,495 of general workers, while the ratio of parttime workers is tending to increase, from 14.4% in
1994 to 20.2% in 2000. Since the wages of general
workers are not subject to any sizable adjustment,
there has been a tendency to promote the hiring ofpart-time workers and to cut labor costs. Considering this at the individual level where downward
rigidity should basically be measured, there may be
a decline in wages due to a conversion to part-timestatus since the absolute number of general workers
be gan decli nin g aft er r eac hi ng a p ea k i n
17Tanaka (2000) points out that disparities between wage
profiles by age are also expanding and that together with theemployee composition by age, the burden of labor costs isincreasing in the case of middle-aged and elderly workers.

(％)
5Compositionchanges
Com p osition
ch an ges
Part-time– hourlyPart-tim eworker
w o rker- h ouwage
rly w age
Gen eralworker
w orker- ho uwage
rly w age
General– hourly

4

Note:

The decomposition is based on the equation
below.
w wg ( 1 - q ) + w pq=
h hg ( 1 - q ) + h pq
w : Nominal wage index
h : Total working hour index
q : Part-time worker ratio
Subscript g indicates general worker and subscript p indicates part-time worker.
Source: “Monthly Labor Statistical Survey,” Ministry(c alen d ar y ear)of Health, Labor and Welfare.

3
2
1
0
-1
-2
94

95

96

97

98

99

00

Figure 2-4. Contribution of General and Part-Time Workers to the Wage Changes

14(year)

25(year)
1976
1981

12
20

1986
1991

10

1996

15

8
6

2000

10

4
5

2
0

0
76

81

86

91

96

00

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

Figure 2-5. Years of Continuous employment
Source: “Basic Survey on Wage Structure,” Ministry of Health, Labor and Welfare

1997 (due to reemployment, etc.). It cannot bedenied, however, that there is a downward rigidity in wages when work is continued.
3.

How Should Real Wage Variability
be Considered?

We saw above that the wage increase rate
dropped along with the inflation rate. Figure 2-6
compares the rate of change of nominal wages
and prices in the U.S. and Japan. Positioning on
the left-hand side above the 45 degree line in the
diagram means an increase in real hourly wages,
and a decrease when on the lower right. Figure(1) was produced based on wage statistics.

Wages in Japan tend to slide with prices and it
was only in 1998 that there was a drop (on theright-hand side below the 45 degree line) inhourly wages in real terms, which was again
reversed in 1999 and 2000. There is no particulardifference in this tendency according to Figure(2) which is based on the National Accounts.
On the other hand, though there is a longterm correlation between hourly wages andprices in the U.S., there was a continuous decline
in real hourly wages from the latter half of the
1980s through the early 1990s. In the National
Accounts at the bottom, this tendency is gradual
and, even if the slope of the trend lines is compared, it can be seen that the tendency toward a

Development Bank of Japan Research Report/ No. 27

19

(1) When using wage statistics(hourly wage, %)
Japan
7

7

FY91

6

U.S

(hourly wage, %)

6
FY88

5

FY83

5
FY82

FY98

4

FY00

4
FY86

3

3
45 degree
line

2

FY91
FY86

2

1

1
FY00

0

45 degree line

FY95

0

(prices, %)

FY98

-1
-2

-1

0

1

2

3

Hourly wage growth rate = 1.34 + 1.37 price increase rate
(3.58) (6.01)

4
Adj R2 = 0.679(2) When using the National Accounts
Japan(hourly wage, %)7(prices, %)

-1
0

1

2

3

4

5

Hourly wage growth rate = 2.17 + 0.367 price increase rate
(3.83) (2.34)

7

6
Adj R2 = 0.200

U.S(hourly wage, %)

FY90

6

6

FY81

5

5

FY88

4

4

3

3

2

2

FY98

FY83
FY90

FY93

FY83

FY94

1

FY00

1

FY00

45 degree line

45 degree line

0

0
FY99

(prices, %)-1(prices, %)
-1

-2

-1

0

1

2

3

Hourly wage growth rate = 2.01 + 1.24 price increase rate
(5.85) (5.94)

4
Adj R2 = 0.679

0

1

2

3

4

5

Hourly wage growth rate = 1.61 + 0.922 price increase rate
(2.26) (4.03)

6
Adj R2 = 0.458

Figure 2-6. Percentage Change of Prices and Nominal Hourly Wages
Notes: 1. Data was prepared as indicated below.
1) Wages in Japan: businesses with 30 or more workers through 1990, businesses with 5 or more workers
from 1991
Prices in Japan are based on the Consumer Price Index (excluding imputed rent).
2) Wages and prices (GDP deflator) in Japan are based on 68SNA through 1990 and 93SNA from 1991.
2. The trend line was measured for 1982 - 2000 after a broad drop in the inflation rate in the U.S. FY 1997, which
was impacted by the increase in the consumption tax in Japan, is excluded. Values in parentheses are t values.
Source: “Monthly Labor Statistics,” Ministry of Health, Labor and Welfare; “Consumer Price Index,” Ministry of Public Management, Home Affairs, Posts and Telecommunications; “National Accounts Annual Report,” Cabinet Office; “Survey ofCurrent Business,” U.S. Department of Commerce; “Monthly Labor Review,” U.S. Department of Labor.

20

Development Bank of Japan Research Report/ No. 27

slide in prices is weaker in the U.S. than in 1991
and the stagnation in real hourly wages is interesting as a phenomenon occurring during an
expansionary period.18
Thus, when nominal hourly wages are flexible in their relationship with prices, this suggests
rigidity in real wages.19 This in itself is not necessarily a problem; for example, when inflationand nominal currency unit fluctuations such as
denominations do not have an effect on the real
economy, we can interpret this real rigidity as
natural neutrality.20 However, if real wages are
not able to respond appropriately to real shocks,
it is also possible to judge it to be rigidity. Here,we consider how real hourly wages responded to(real) productivity again based on the decomposition of labor’s share. When expressing labor’s
share using the same symbols as Equation 1-2
with P = price level,nominal labor compensation=
nominal value addedwLh w Y æ real hourly wages ö
ç=
÷
= /
YP
p Lh çè
productivity ÷ø(2-1)

Labors share =That is, labor’s share does not change aslong as real hourly wages vary proportionately
with productivity. When comparing transitions in
18

The coverage of the U.S. wage statistics that were used(average hourly earnings of production workers) is narrower
than Japanese statistics in that they do not include executives or management or overtime pay, social insurance, etc.,
thus precluding a simple comparison. Bosworth and Perry(1994) point out that this index expresses the rate of increase of real wages lower than actual due to sampling
problems. However, the same drop in real wages has also
been verified using other indices (Employer Costs for Employee Compensation, for example) and there isundoubtedly a broad perception of this stagnation in real
wages at present, which has, for example, been taken up ineconomics textbooks.
19
In regard to fixed nominal wages originally indicated byKeynes, the counter-cyclical movement of real wages suggested together with the pro-cyclical movement of prices
was denied by the examination of Dunlop and Tarshis. In
the analyses of this study, upward rigidity is unrealistic in
Japan where wages are revised annually and is not subject
to the hypothesis.
20
Of course, neutrality becomes a problem when we assume a policy effect on prices and the exchange rate
through denominations or when money is expected to havea real effect on fiscal policies.

the growth rate both in the U.S. and Japan basedon this relationship (Figure 2-7), the growth ofboth real hourly wages and productivity in the
U.S. are similar to one another and span the 45
degree line. Meanwhile, in Japan, after dropping
below the 45 degree line continuously during thelatter half of the 1980s, real wages expanded
greatly without regard to productivity during theearly half of the 1990s.21 Though the divergence
between the two narrowed after 1996, the rate ofincrease of real hourly wages continued to outpace productivity.
Figure 2-8 illustrates the same relationshipin Japan but for each industry, by each decade.
Both the numerator and denominator are deflatedby P in Equation 2-1, but for Figure (1), value
added deflators for each industry are used as in
Chapter I, and in Figure (2), GDP deflators (implicit deflator for a total of 9 industries) are used.
The former can be thought of as one for producers and the latter is measured by purchasing
power.
In both figures, there is a shift toward theorigin in more recent years, reflecting stagnationin the growth of both hourly wages and productivity. However, in Figure (1) from theperspective of producers, there is dispersal along
the 45 degree line; however, it is expressed in
more concentrated groupings in each decade ingraph (2). There is no change in either graph in
the effect on labor’s share measured by the distance from the 45 degree line, thoughconsiderable differences are evident.
Considering inter-industry disparities withthe help of dispersion statistics, in Figure (1),disparities in the rate of increase in productivity
were broader in the 1990s with the coefficient ofvariance; however, excluding the constructionindustry (-3.4, 0.7), productivity disparities arerather decreasing. This is also true in Figure (2);with the exception of the construction industry,
disparities in productivity in the 1990s are notgreater than in the 1980s.
Next for real hourly wages, in Figure (2),21

Though pro-cyclical movement is evident in both the
U.S. and Japan, it must be noted that this movement cannot
be explained by a simple production function that assumes
diminishing returns. While many explanations have been
attempted, including labor hoarding and technology shock,it remains a major issue in macroeconomics.

Development Bank of Japan Research Report/ No. 27

21

(1) Japan(2) U.S.

3.77812 3.50558(real hourly wages, %)4.33119
4.0917153.23052 3.93218
2.03308 3.24370
40.009193.01610FY92-0.37898 2.27413
FY93
0.78422
2.113603
1.53384 1.72384
1.44500 1.84987 FY952
FY94
0.91002
1.73600
0.86238 1.52030
FY00
1.24027
1.47108
1

4(real hourly wages, %)

80

FY91

3

FY90

87

2

92
84

1
FY80

97

0
95

FY85

-1

0
-1

0

1

2

3

4

5

(productivity, %)

-1

0

1

2

3

4

(productivity, %)Figure 2-7. Real Wages and Productivity (three-year moving average)
Notes: 1. Here, labor’s share of Figure 1-1 is decomposed into real hourly wages and productivity and the ratio for theprevious fiscal year was calculated after determining the average movement during the past three quarters.
2. Due to data limitations and average movement, the figures for Japan are based on 68SNA through 1992 and on
93SNA beginning in 1993.
Source:“National Accounts Annual Report,” Cabinet Office; “Survey of Current Business,” U.S. Department of Commerce.

from the standpoint of the workers, there is astrong tendency toward uniformity between industries but disparities in real hourly wages
expanded instead from the 1980s through the
1990s, a tendency which has strengthened further
except in the construction industry. In addition,
the coefficient of variance of Figure (1) indicates
that, within the context of a decreasing growthrate, disparities in the wage rate are not smaller
than in the 1980s.
The two figures are based on different decompositions, and it would be inappropriate to
extract the characteristics of different parts ofthese to draw an overall image. However, we cansee the common features of the two figures: disparities in productivity decrease while disparities
in real hourly wages gradually broaden in thevertical direction. This tendency becomes moreevident in the 1990s, especially if the mining andconstruction industries, which have extreme values, are excluded.
4.

Wage and Employment Conditions in theFirst Half of the 1990s

We shall now proceed to confirm the expansion
in wage disparities using other materials. View22

Development Bank of Japan Research Report/ No. 27

ing the conditions of dispersal of the springtime
wage increases of large corporations (Figure 2-9)
using the quartile dispersion coefficient, the coefficient conventionally usually rises in troughs.
Entering the 1990s, as springtime wage increases
recorded the lowest rate ever, the dispersion demonstrated a trend toward expansion.
As the background of this movement, Figure 2-10 shows the results of direct interviews
with company managers regarding the factors
involved in wage revisions. While the ratio of the“price” factor decreased in the mid-1980s, the“securing and establishment of the labor force”
and “size of wage hikes at other companies”
increased during the first half of the 1990s, reflecting, as seen in the next chapter, the strong
concerns at the time of possible labor shortages.
Meanwhile, the heightened importance of “company performance” can be pointed out as achange evident throughout the 1990s. Taken
together with the previous Figure 2-9, the expansion of wage disparities between companies
virtually coincides with the time when company
performance was more reflected in the recessionary period and, rather than a factor of businesscycles, changes are occurring structurally(1) Deflating by industry-specific deflator(2) Deflating by GDP deflator
10

1970s

10

1970s
1980s

1990s

8

(real hourly wage, %)(real hourly wage, %)

1980s

6
4
2

1990s

8
6
4
2
0

0

-2

-2
-4

-2

0

2

4

(productivity, %)

6

8

-4

10

-2

0

2

4

6

8

10

(productivity, %)Dispersion statistics

Dispersion statistics

1970s
1980s
1990s
1970s
1980s
1990s

Productivity

Real hourly wages

Standard Coefficient ofvariance
deviation
3.23
0.76
1.90
0.78
1.66
1.44
2.41
0.38
1.87
0.68
1.16
0.50

Productivity

Real hourly wages

1970s
1980s
1990s
1970s
1980s
1990s

Standard Coefficient ofvariance
deviation
2.92
0.73
0.56
0.25
1.29
1.26
0.91
0.13
0.45
0.17
0.48
0.21

Graph (1) data
MiningProductivity

Realhourlywages

Manufacturing

Electricity,
Construction natural gas andwater supply

Wholesale/ Financial/insu
Transport/
Real estate*communications
retailrance*

Service

9-industry
average

1970s

8.22

4.93

1.01

6.44

6.75

7.87

-1.11

3.60

1.72

3.87

1980s
1990s
1970s
1980s
1990s

1.88
-3.16
6.42
3.46
3.87

3.37
2.56
7.63
3.67
3.97

2.83
-3.37
2.16
1.75
0.65

0.17
1.97
5.77
1.99
1.52

3.17
2.38
8.82
4.51
2.59

6.79
3.87
10.50
6.62
1.47

-1.42
2.10
4.06
0.16
0.53

2.70
2.04
4.27
1.55
2.16

-0.83
0.24
4.47
-0.12
1.54

2.14
0.96
6.07
2.42
2.01

Graph (2) data
MiningProductivity
Realhourlywages

Manufacturing

Electricity,
Construction natural gas andwater supply

Wholesale/ Financial/insu
Transport/
Real estate*communications
retailrance*

Service

9-industry
average

1970s

6.69

3.27

5.17

8.84

3.84

4.42

-0.66

5.13

4.00

1980s

0.30

2.18

4.23

0.42

1.50

3.85

0.15

3.14

1.29

3.87
2.14

1990s

-4.28

0.97

-1.84

2.14

1.89

3.48

3.71

0.90

1.32

0.96

1970s

4.03

6.41

6.82

6.81

6.30

7.29

4.58

5.99

8.72

6.56

1980s

1.81

2.53

3.17

2.01

2.85

3.57

1.79

2.04

2.02

2.46

1990s

2.49

2.39

2.26

1.72

2.12

1.04

2.12

1.04

2.65

2.02

Figure 2-8. Real Hourly Wages and Productivity: Variance by Industry
Notes: 1. Calculated for 9 private-sector industries excluding agriculture, forestry and fisheries. 1990s based on 93SNA.
2. Productivity and hourly wages were calculated by dividing factor income and hourly wages by labor input (number of employees x working hours). Deflated by the industry-specific product deflator. The 10-year average
growth rate was used after calculating based on calendar year.
3. The dispersion of the real hourly wage growth rate was obtained by weighting the values calculated above bylabor input. The averages differ from the values in the table below due to the calculation.
4. The large symbols for the decades are averages of all industries.
5. It is not possible to compare the financial/insurance and real estate industries, the majority of the value added ofwhich consists of the imputed portion, with other industries.
Source: “National Accounts,” Cabinet Office; “Monthly Labor Statistical Surveys,” Ministry of Health, Labor and Welfare.

Development Bank of Japan Research Report/ No. 27

23

in the factors involved in wage determination.
Even though there was a relatively large
drop in productivity in the construction industry
in the 1990s, the polarization in productivity is
not confirmed. Rather, in a relatively long-term
comparison by decade, there was an overall decrease in the disparities in labor’s sharevariability by industry. These results are consistent with the across-the-industry rise in labor’s
share as seen in Chapter I. It can be said, however, that, in spite of the increased initiatives toreflect performance, the relatively uniform rise inlabor’s share suggests that the problems, if they
exist, are common among the industries.

(%)

35

(% )

30

WWage
age increase
increase rate

25

QQuartileu artile ddispersion
isp ersio ncoefficient
co efficien(right-handt (right-handgrad atio ns)
gradations)

0.3

20

0.2

15
10

0.1

5
0

0.0
70

75

80

85

90

95

00

Figure 2-9. Gaps between Companies in Springtime Wage Increase Rates
Notes: 1. Targets were about 250 companies listed in the first section of the Tokyo and Osaka Stock Exchanges with capital of ¥2.0 billion or more and 1,000 or more employees (with a labor union).
2. The quartile dispersion coefficient is calculated according to the following equation on a company basis: (3rdquartile – 1st quartile) ¸ 2 ¸ median.
Source: Prepared based on “Conditions of Major Private-Sector Company Springtime Wage Hike Demands and Collective
Bargaining Settlements,” Ministry of Health, Labor and Welfare.

(%)

100
90
80
70
60
50
40
30
20
10
0

Companyperformance
performance
Company
Pricetrends
trends
Price
Other
Other

70

75

80

Labor
forcesecuring
securing
andestablishment
Labor
force
and
establishment
Stabilizationof labor-management
relations
Stabilizationof labor-management
relations
Wage
hikes
at othercompanies
in samethe sameindustry
Wage
hikes
at othercompanies
in theindustry

85

90

95

00

Figure 2-10. Factors with the Highest Priority in Wage Determination
Note:

Targets were companies employing 100 or more regular workers. The service industry is based on criteria prior to
expansion in 1998.
Source: “Survey of the Actual Situation of Wage Hikes,” Ministry of Health, Labor and Welfare.

24

Development Bank of Japan Research Report/ No. 27

100
90
80
70
60
50
40
30
20
10
0

III

Adjustment in Employment

1.

From Labor Shortage to Labor Surplus

when labor’s share increased. That is because
there was a considerable drop in both scheduled
and overtime working hours even though employment increased about 2% through FY 1993.
Historical changes in working hours in Figure 32 show that there was no great change in overtime hours, which serves as a short-term
adjustor; however, there was a drop in scheduledworking hours over a thirty-year periodamounting to 15.3% (25.8 hours). One possible
factor involved is the increase in part-time workers; however, the notable decline since the latter
half of the 1980s is due to the adoption of the
five-day work week and reduced working hours

The increase in labor’s share and the imbalance
in productivity and hourly wages in the background are phenomena that are shared by a wide
range of industries. Returning again to the allindustry basis, we will consider employment
trends as one factor in the sluggish growth inproductivity in the 1990s. First of all, the labor
input calculated as the product of the number ofworkers and per capita working hours (Figure 31), remained virtually flat in the early 1990s
4(%)
Employment
factor
Employment factors
Non-scheduled
timefactor
factorNon-scheduled time
Scheduled
factorScheduled time
time factor

3
2
1
0
-1
-2
-3
91

92

93

94

95

96

97

98

99 00
(fiscal(fiscal year)
year)

Figure 3-1. Percentage Change of Labor Input from the Previous Year
Note:
Labor input is based on employment multiplied by time, man-hours.
Source: “Monthly Labor Statistical Survey (for businesses with 5 or more employees),”
Ministry of Health, Labor and Welfare.
190(time)
Non-scheduled
Non-scheduled

180

Scheduled
Scheduled

170
160
150
140
130
120
110
100
70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

(fiscal year)

Figure 3-2. Transitions in Monthly Working Hours
Note:

Retrogressing from the actual figures for 2000 using the hour index taking sample
changes into accountSource: “Monthly Labor Statistical Survey (for businesses with 5 or more employees),”
Ministry of Health, Labor and Welfare.
Development Bank of Japan Research Report/ No. 27

25

stipulated by the Labor Standards Act of 1993.
This increased the concern about possible labor
shortages, thus accelerating the attempt to secure
employees by improving benefits.
Toward the end of the expansionary period
in 1996, however, there was a complete change
in the perception of employment from a shortage
to a surplus. Again, according to Figure 3-1, it ispossible to see that both employment and nonscheduled working hours began to decrease at
this time and all means were employed to decrease labor input.
Indices relating to the labor market aresummarized in Figure 3-3. As companies became
more aware of overstaffing, the unemployment
rate rose steadily. An increase in structural unemployment has been pointed out in recent years
resulting from mismatches in geographical, occupational and other attributes as well as
frictional factors. When calculated using thecurrent popular method, the structural part can
explain a large part of the increase in unemployment since 1992. However, if that portion
excluded from the total unemployment rate isdefined as the demand shortage unemployment
rate, it also has increased in accordance with a“sense of overstaffing” in the company as well asa trend toward increase.22
This synchronous rise of the demand shortage unemployment rate and “sense ofoverstaffing” can be understood as follows.23
When there is a stronger sense of overstaffing in
a company, the unemployment rate, a surplus
outside of the company, increases as the result of
hiring restrictions, early retirement incentives,
the reduction of contract workers and so forth. It
is thought, however, that the company promotes
employment adjustments in a way that maintains
22

The structural unemployment rate does not extract
purely structural factors. The actual unemployment rate wasless than the structural unemployment rate during the firsthalf of the 1990s and employment is realized during
economic booms despite likely mismatches and other frictional factors. Conversely, during recessionary periods,
structural factors emerge due to heightening selection andunemployment due to demand shortages may be underexpressed.
23
The Bank of Japan's quarterly short-term economic
survey DI (diffusion index) used here is based on the officially published one and no significant differences were
found when the all-industry DI is weight-averaged by the
number of employees by industry.
26

Development Bank of Japan Research Report/ No. 27

a balance between the pressure of the external
labor market and the internal surplus without
fully resolving the overstaffing. In addition to thefact that layoffs are in fact restricted,24 one of thereasons why this adjustment is not complete is
the possible effect of labor hoarding that is being
implemented due to the costs involved in personnel adjustments. If employment fluctuates inline with fluctuations in the scale of production,in addition to personnel costs, there are also costs
involved in having employees learn the company’s unique expertise and experience. Rather,from a long-term perspective, implementing
training, providing experience and securing astable supply of skilled labor will ultimately belinked to the realization of high productivity(refer to Otaki (1994) for example). In addition,a stable employment system, along with a stablesystem of wages, also plays the role of insurance
for workers which benefits both management
and labor.
2.

Is Employment Adjustment Picking Up
Speed?

There are thus explanations for partial employment adjustments to be reasonable both for
management and labor. Have there been any
changes, though, in the pace of adjustment inrecent years? That is, does the rising unemployment rate in the 1990s reflect a change in theconventional employment structure? Here, weestimate the speed of adjustment, which is a reaction of employment to economic activities(GDP) and other economic variables.
Denote L t* as the optimal employment
level given production, wages and working hours
at the present time (time t), and L t -1 as the previous employment volume, then L t* - L t -1 is the
optimal amount of adjustment. It is assumed that
only g (0≦g ≦1) of this will actually be adjusted,
where g is the speed of employment adjustment.
Specifically, optimal employment volume isobtained by.25
24

The debate regarding the significance and effectivenessof the case law of abuse of right of dismissal, including the
economic analyses of Nakauma (1998), is now popular, andthere is also some relaxation in judicial interpretations.
25
This formulation is obtained as a solution to the profit
maximization problem for a given production level.

(%)
6

120

5

100

4

80

3

Surplus60 Surplus

2

40

1

20

0

0

-1

-20

-2

(calendar(calendaryear
yearquarters)
quarters)

-3
90

91
92
93
94
Demand shortage
shortage unemployment
unemployment rate
rate
Total unemployment
unemployment rate
rate

95

96

-40
-60

Shortfall
Shortfall

97
98
99
00
01
Employment judgment DI (right-hand(right-hand gradations)gradations)
Structural unemployment
unemployment

Figure 3-3. Demand Shortage Unemployment Rate and Overstaffing
Notes: 1. The structural unemployment rate was calculated based on a UV model. The demand shortage unemployment
rate is the difference between the total employment rate and structural unemployment rate.
We generally see a downward shift toward the right (UV curve) between the unemployment rate (U) to vacancy
rate (V). If the two are equal, labor demand is balanced in total and the unemployment rate at this point is due tostructural factors. Below, after estimating the UV curve, the structural unemployment rate is given by the value atthe point of intersection with the 45 degree line and this is considered to be structural unemployment with conversion based on all workers.
The variables are determined as below. All are seasonally adjusted values.
Ut : Unemployment rate (= total unemployment rate ¸ (total unemployed + employed workers))
Vt : Vacancy rate (= (effective labor demand – number of hirings) ¸ (numerator + number of employedworkers))
At : Variable expressing structural change in the labor market (can be multiple)
The relationship of the downward slope to the right is modeled based on the following equation and estimated by
the method of least squares:
ln = U t = β0 + β1lnVt + β2 At + εt

Structural unemployment U* = V* at the point of intersection with the 45 degree line. Substituting this gives thefollowing:lnU* = β0 + β1lnU * + β2 At + e t

Taking the difference between the two, it becomes as indicated below and the structural unemployment rate is
obtained (incidentally, the numerator of the right-hand member contains a residual):lnU * =

lnU t - b1lnVt
1 - b1

Continuing, if the number of employed workers is EDt, the number of unemployed workers UEt is determinedby:
UE t =

U t · EDt
1 - UtIf the number of working persons is Et, the total unemployment rate, which is based on working persons, is:UEt
Et + U t

The following estimate results were obtained using female worker ratio (At ) and tertiary industry worker ratio(Bt) as variables expressing structural change.
ln Ut =
-6.643 - 0.217 ln Vt - 0.0356At + 0.1539Bt adj.R2 = 0.981(8.873)(4.980) (0.929)(11.16)
D.W ratio = 1.047
2. Employment judgment DI (diffusion index) is nationwide, all industries.
Source: “Labor Force Survey,” Ministry of Health, Labor and Welfare, “National Accounts,” Cabinet Office; “Quarterly
Short-Term Economic Survey,” Bank of Japan.

Development Bank of Japan Research Report/ No. 27

27

ln L t* = a 0 + a 1 lnGDPt + a 2 ln

wt
+ ut
Rt

(3-1)
wt
is earnings per
Rtworker deflated by prices, a is constant and u iserror term. Now, suppose the next partial adjustment:

where, GDPt is real GDP,lnL t - lnL t -1 = g ( lnL *t - lnL t -1 )(3-2)

The observed rate of increase on the lefthand side is g times the optimal rate of increase.
Based on both equations, we have,lnLt = g a 0 + (1 - g )lnLt -1 + g a1lnGDPt + g a 2 ln

wt
+ gut
Rt

(3-3)
Substituting the parameters for simplification, we havelnLt = b 0 + b 1 lnLt -1 + b 2 lnGDPt + b 3 ln

wt
+ eu t (3Rt

3’)
Sign conditions assuming general production functions are b0 > 0, b1 > 0, b2 > 0 and b3 < 0.
Below, Equation (3-3’) is estimated and the estimated value of the employment adjustment
speed gˆ = 1 - b 1 is compared. In addition, an
estimate based on labor input was also carriedout in which the number of workers Lt is substituted by Lht, and real wages by real hourly
wages.
The estimation period is based on year taking company’s employment and wage decisionunits into consideration and, in order to capturechanges in recent years while securing a certain
sample size, the estimate was repeated by sliding
the sample period of 15 years, by year. The employment adjustment speed obtained is shown in
Figure 3-4 for both Japan and the U.S.
It has been reported in a similar estimatethat the speed of employment adjustment accelerated after entering the 1990s26 and an increase
26

28

In recent similar analyses, the Economic Planning
Development Bank of Japan Research Report/ No. 27

in the adjustment speed was also seen here in
estimates terminating in 1997 and 1998. The
acceleration of the adjustment speed is more
conspicuous when based on labor input and,following a temporary drop at the end of the
1980s, rose rapidly through the latter half of the
1990s. However, whether based on the numberof workers or labor input, the adjustment speed
dropped again in periods including FY 1999 and
2000, hence we cannot confirm any evidence ofa structural change around this period.
Meanwhile, in a comparison of the U.S. andJapan, the speed of adjustment is consistently
higher in the U.S. than in Japan on a worker basis
and there is also a tendency toward greater expansion of the gap. Based on labor input, the disparity
between the U.S. and Japan is smaller, reflecting
flexibility in the adjustment of working hours inJapan. In addition, the speed of the adjustment
itself in Japan is also exhibiting considerable
change and, based on labor input, it increased inexcess of the U.S. until about 1998, which isthought to reflect the rapid decline in working
hours.
The estimated value of parameters (Appendix Table) shows that, in the U.S., for both thenumber of workers and labor input, the labor
volume of the previous term is not significant,though the real GDP coefficient is significant
and, moreover, greater than the coefficient forJapan in all estimates. This enabled us to reconfirm that labor is more responsive to productionin the U.S.
On the other hand, the coefficient on wage
is significant and greater in Japan, showing that anegative relationship between wages and employment exists in Japan. If real wages rise
excessively, the range of employment increase isrestrained, while, if the reduction of labor costs
is promoted, constraints on real wages probably
have the effect of reducing employment cuts to asmaller scale. We will examine this tradeoff
between employment and wages, including
working hours and production, in Appendix 2.
Agency (1992, 1994) showed that adjustment became slower in the period of stable growth since 1974, while theEconomic Planning Agency (1999), the Ministry of Labor(1999), the Japan Center for Economic Research (2001) and
Higuchi (2001) used more recent data to show that the
speed accelerated beginning in the latter half of the 1980s.

(1) Number of workers
1 .0(2) Labor input
1 .2

0 .9
1 .0

0 .8
0 .7

0 .8

0 .6
0 .5

0 .6

0 .4
0 .4

0 .3
0 .2

0 .2

0 .1
0 .0

0 .0
8 5 8 6 8 7 8 8 8 9 9 0 91 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 0 0
Jap an (6 8 SNA)

8 5 8 6 8 7 8 8 8 9 9 0 9 1 9 2 9 3 9 4 95 9 6 9 7 9 8 9 9 0 0(end of estimate)

Jap an (6 8 SNA)
Jap an (9 3 SNA)U.S.

Jap an (9 3 SNA)U.S.

Figure 3-4. Employment Adjustment Speed
Notes: 1. Refer to the main text for the estimation equation.
2. Fiscal year for Japan and calendar year for the U.S. The graphs were produced by determining the employment
adjustment speed starting from (fiscal) 1971 – 1985, staggered one year at a time to the estimation period (fiscal)
1986 - 2000.
Source: “National Accounts Annual Report,” Cabinet Office; “Monthly Labor Statistics Survey,” Ministry of Health, Laborand Welfare; “Labor Force Survey,” Ministry of Public Management, Home Affairs, Posts and Telecommunications;“Monthly Commodity Price Index,” Bank of Japan; “Survey of Current Business,” U.S. Department of Commerce;“Monthly Labor Review,” U.S. Department of Labor.

Finally, we calculate optimal value L* using
the estimated values of Equation (3-3) to examine
adjustment on a familiar scale (Figure 3-5). First, inJapan, there is a larger difference between the realized and the optimal number of workers, but on a
man-hour basis, labor input is better adjusted to the
optimal value reflecting the sizeable adjustment inworking hours. In the U.S., the divergence between
performance and the optimal value is small
whether in terms of the number of workers or labor
input, reflecting the faster adjustment speed.
Furthermore, in both the U.S. and Japan, theoptimal labor volume in virtually all periods
exceeds performance and the adjustment speed
was measured in the direction of “increase;”
however, in Japan during the 1990s, the optimallabor volume leveled off. When viewed by the
number of workers which is more costly to adjust, the shortfall in optimal employment that had
existed in Japan was lost and there was an in-crease in the pressure to adjust employment“downward.” In the same manner as in the caseof wages, it is possible that inadequate speed in
the downward adjustment of employment is expressed as the recent decline in the speed ofadjustment. Meantime, in the U.S., a decrease ofabout 5% was observed on at least three occasions in the past and one can see that adjustments
are flexible also in the downward direction.27
This result therefore confirms the general viewthat employment adjustment in the U.S. is more
rapid.

27

A tendency is apparent in the U.S. that the optimal levelof employment demanded by production does not increase
to any great extent immediately following economic recovery. While pointing this out, Gordon (1993) claimed that
employment constraints during the early half of the 1990s
do not indicate productivity-led growth and later moved thedebate on to the issue of IT and productivity.

Development Bank of Japan Research Report/ No. 27

29

(1) Number of workers (10,000)
Japan

U.S.
13500

6000

12500

5500

11500

5000

10500
4500

9500

4000
3500

8500
Actual performance
Actualperformance
OptimalOptimalActualperformance
Actual performance
OptimalOptimal

7500
6500

3000

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99(2) Labor input (indexed, 1971 = 100)
Japan

U.S.

140

180

135

170

130

160

125

150

120

140

115

130

110
105

ActualActualperformance
performance

100

OptimalOptimal120

Actualperformance
performance
Actual

110

OptimalOptimal

100

95
71 73 75 77 79 81 83 85 87 89 91 93 95 97 99

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99(end of estimate)

Figure 3-5. Optimal Employment Volume and Performance Values
Notes: 1. Coefficients of (3-1) were calculated based on the estimated value of Equation (3-3’) and, from there, the averages of the values obtained for each period were set as the optimal values.
2. Fiscal year for Japan and calendar year for the U.S.

30

Development Bank of Japan Research Report/ No. 27

IV Growth Expectations andDownward Pressure on Labor’s
Share
1.

Corporate Growth Prospects andLabor’s Share Targets

Among the institutional factors behind thegradual adjustment of wages and employment isthat an approximate level has to be decided before the relevant fiscal year begins, through thespringtime wage negotiations and hiring activities. Here, prospects for production activities
may be important in deciding the labor input andexpenses in advance. Figure 4-1 compares theoutlook for economic growth based on company
surveys with realized performance. Expected
growth rates are modest compared to the realized
growth, i.e. less volatile, and there tends to be adelay in revising the business climate. Particularly, through 1994, the expected growth rates
were higher than the actual growth rates, in expectation of recovery. This drop in production
below the higher expectation is another reason
for the hike of labor’s share, in addition to anincrease in labor costs in the midst of concerns
about a possible labor shortfall. Such divergence
between forecasts and actual performance led toinadequate adjustments of the employment level,
and the trend of decline in the economic growthrate throughout the 1990s eliminated the chance
to correct labor’s share with the rise in the production level.
In order to ascertain the effect of this divergence between expectations and performance inlabor’s share, we estimated a simple target value
for labor’s share. While labor costs are adjusted
throughout the fiscal year due to bonuses andovertime work, we assume here that the numerator of labor’s share is determined in advance.
This is because the general framework of company employment and wage levels is determinedby the blanket hiring of new graduates, determination of wage increases in springtime wage
negotiations and other factors. For the denominator, national income (excluding personalentrepreneurial income) (denominator) is assumed to be expected to rise to the same extent
as in the growth rate. This hypothesized ex antetarget value of labor’s share is then comparedwith actual performance.
Figure 4-2 (1) shows that the target labor’s
share values themselves exceeded those of theprevious year from 1990 to 1995, which is being
accelerated by the decline in the growth rate.
Hence we can consider the rise in labor’s share(% )7

Performance

6
5

Expected growth rate

4
3
2
1
0
-1
-2
-3
86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

(fiscal year)

Figure 4-1. Corporate Expected Economic Growth Rate
Notes: 1. Real 68SNA basis was used for the performance growth rate. Besides corrections after the end of the fiscal year,
GDP actually differs somewhat from the growth rate at the time of the forecast.
2. The dotted lines connect the current fiscal year to the following fiscal year being forecast. The growth rate for theyear is not ascertained precisely at the time of the forecast.
Source: “National Accounts, Survey of Corporate Behavior,” Cabinet Office.
Development Bank of Japan Research Report/ No. 27

31

(1) Labor’s share target andperformance values(2) Decomposition of labor’s sharecompared to the previous fiscal year

(%)

4

86
Performance
Performance
Target84(%)
Unintended
UnintendedchangechangeIntended
Intendedchangechange

3

82

2

80

1

78

Unintentional
Unintentionalchangechange76

Intentionalchange74
72

Difference
thetheprevious
yearyearDifferencecompared
comparedtoto
previous

0
-1
-2
-3

90

91

92

93

94

95

96

97

98

99
00
(fiscal year)(fiscal
year)

91

92

93

94

95

96

97

98

99
00
(fiscal year)(fiscalyear)

Figure 4-2. Labor’s Share Target and Performance Values
Notes: 1. It is hypothesized that companies forecast the economic growth rate at the beginning of the fiscal year and set up
yearly plans for wages and employment and that actual worker compensation performance reflects that. Forecast
national income was used as the denominator with the addition of the post facto divergence of the real GDP
forecast.
2. Specifically, based on the equation below. National income (previous fiscal year) excludes personal entrepreneurial income. The rise portion of expectations based on 68SNA was used for “economic growth rate (expected) –same (actual performance).”Labors share target value =worker compensation (current fiscal year)
national income (previous FY) ´ (1 + performance growth rate + economic growth rate (expected) same (actual)

Source: “National Accounts, Survey of Corporate Behavior,” Cabinet Office.

by dividing it into the “intentional rise” portionof the target value, and the “unintentional rise,”
the rest being the unanticipated result of production level. In Figure 4-2 (2), the difference inlabor’s share compared to the previous fiscal
year is decomposed into these two factors. In FY
1991-94, labor’s share increased due to both ofthese two factors and, in spite of the fact that thisrise in labor’s share was already treated as animportant issue in labor-management negotiations, labor cost constraints were not adequately
promoted. However, since FY 1994, labor’s
share stopped changing in one direction since
two factors worked to offset each other. Furthermore, a decline in labor’s share was targetedin FY 1997-98, the next recessionary period,
showing a stronger awareness of labor’s sharecorrections. However, since production once

32

Development Bank of Japan Research Report/ No. 27

again dropped below the forecast, labor’s share
increased further and the rise in the first half ofthe 1990s was thus not corrected. In addition,
progress in the adjustment pointed out in 1998
also became obscured when the short recovery
beginning in 1999 arrived, which corresponds tothe wage and employment analyses above, whichhardly indicate the occurrence of structuralchanges at this time.
2.

Conclusion and Outlook for the Future

The one-sided rise of labor’s share during the
1990s and its current high level are indicative of
the unique nature of labor’s share in Japan compared to other industrialized countries. The
increase during the early half of the 1990s was
especially rapid, due primarily to a slowdown ineconomic growth that exceeded expectations,coupled with firm growth in wages and employment with an underlying sense of a labor
shortage and heightened growth expectations
during the latter half of the 1980s. The inflation
rate dropped throughout the 1990s, culminating
in deflation; however, this trend in prices also
exacerbated the increase in labor’s share, weakening the effect of the wage and employment
adjustments seen in the latter half of the 1990s.
The relationship between variables in thepast indicates that shocks to production have asustained effect on labor’s share. Though labor’s
share is not affected in the medium to long termwhen economic recoveries and recessions occur
alternately, one-sided increases do occur in labor’s share in phases of persistent economic
stagnation as in the 1990s. Furthermore, the dropin prices weakens the downward swing of labor’s
share previously seen in periods of economic
recovery and a medium- to long-term effectreadily persists in labor’s share even when subjected to alternating business cycle shocks.
When looking at the contribution by industry to the rise of labor’s share in the 1990s, theconstruction industry had a larger influence, andthe increase in the weight of the service industry
was another important factor. However, the rise
was observed in a broad range of industries andis not necessarily attributable only to specificindustries. In the long run, inter-industry disparities in productivity are narrowing and there is atendency for company performance to be also
reflected in wages decisions. The economy-widerise in labor’s share in this situation is, hence,
considered a problem underlying the entire
economy.
In the meantime, the plunge of the economy
through 1998 triggered some serious changes,
including a drop in nominal wages and constraints on the number of employees. However,besides the downward rigidity that continued to
be seen in the wages of general workers, themove toward adjustment has weakened in thephase of economic recovery through 2000. It
thus cannot be said that structural wage and employment adjustments observed around 1998 areprogressing.
The business climate again entered a recessionary phase, which peaked in October 2000.

The pressure to adjust wages and employment
continues and is intensifying during this recessionary phase due to the heightened sense ofcompany overstaffing and an increase in company bankruptcies. If the inadequate adjustmentsof the past accumulate, there will be a need formore far-reaching adjustments.
The hiring of part-time workers to holddown labor costs is increasing and the ratio ofpart-time workers in Japan has already reached ahigh level by international comparison.28 In addition, the reduction of bonuses and overtime
working hours is also progressing rapidly andthere is limited room for adjustment in conventional fringe benefits. When resolving deflation,
there are hopes for an improvement in real wage
adjustment capabilities; however, there is no
guarantee that such improvements in the environment will be realized in the near term. In
addition, the time is also approaching for a reexamination of the wage disparities of part-timeworkers and, in future adjustments, the need willprobably arise for a fundamental review of employment practices.
When reducing labor costs, it is necessary to
reduce one or more of the factors of hourly
wages, number of workers and working hours.
The debate surrounding the issue of worksharing, a reduction in working hours rather than
the number of workers, has become more intense
lately. It is also possible to see the prolonged
reduction in working hours in the past as worksharing. The fundamental difference now, however, is that the reduction of the absolute labor
input is being called into question. It is not possible to explore the effect of work sharing only
by experience in the past29 and it is probably
necessary to look further for a structural mechanism in which the various adjustments exert aneffect on production. Taking into account thefact that skills and motivation increase as workers gain experience, earn more and are accorded28

See the part-time rate of the OECD (2001) Employment
Outlook (Statistical Annex, p. 225).

29

In Appendix II, we look at the precedent relationships inthe past between production and labor-related variables.
Labor-related variables have a strong tendency to lag behindproduction, rendering the difficulty of comprehending theeffects on production when manipulating labor-related
variables.

Development Bank of Japan Research Report/ No. 2733higher social status, the mere redistribution ofjobs does not solve the real issue, and a competitive environment is needed to enhance
production.
There is also an imperative need for thedevelopment of a safety net in response to thegrowing pressure for adjustment. However, in
addition to the redistribution of income, we needto pursue sources of future growth. Reducing

34

Development Bank of Japan Research Report/ No. 27

labor costs in the short term may halt the vicious
cycle of low growth and rising labor’s sharethrough the improvement of company profits, butmore important is the creation of a labor environment that is linked to the growth process
through the utilization of human resources in the
future. Thus, there is a need for a means to optimize labor’s share in the long term while
minimizing labor compensation sacrifices.

Appendix I
ShareDefinition of Labor’s

National income generated through production
activities is distributed entirely as compensation
to production factors in one form or another.
This includes compensation to capital that resultsin dividends, interest, rental income and otherpayments, while it is embodied in corporate value in the form of internal reserves.30 Meanwhile,labor’s share is that portion which is distributed
to workers through wages and earnings.
A number of different calculation methods
are used depending on the purpose or the ability
to acquire statistical data. The advantages anddisadvantages of each have been already pointed
out31 and we will look over some points that
relate to this study. First of all, the following
definition for labor’s share of an entire economy
using the National Accounts is in wide use and it
was calculated to be 73.6% in FY 2000:
Labor’s share =worker compensation ¸ national income.
(A1-1)
It differs from GDP in three points: a) the
denominator, national income, is a national concept, b) fixed capital depletion is deducted (netconcept) and c) taxes and subsidies are excluded.
Meanwhile, in terms of domestic industries, thefollowing is calculated using figures based on thedomestic concept of Supporting Table 2, By
Economic Activities, of the National Accounts:
Labor’s share =compensation of employees(excluding net income earned overseas) ¸domestic factor income(A1-2)Net worker compensation earned overseas issmall enough to be neglected, but the numeratorof (A1-2) becomes smaller, around 2%. As aresult, labor’s share was 74.9% in FY 2000,
more than 1% greater than in the calculation
based on (A1-1).
The treatment of self-employed businesses

and other private companies is a more important
problem. In the two definitions above, labor’s
share is under-expressed because labor compensation of private companies is not included in theworker compensation used as the numerators
while personal entrepreneurial income (including
imputed home rent) is included in the denominators. To avoid this issue, labor’s share limited
to corporate sector workers (including officers’
salaries) excluding personal entrepreneurial income is defined as indicated below and was
calculated as 83.0% in 2000:
Labor’s share = compensation of employees¸ (domestic factor income - personal entrepreneurial income)(A1-3)
In international comparisons, however, there
is also the possibility that Equation (A1-3) would
give rise to new bias since the acquisition of
corporate status by private companies depends
on institutional factors. In this regard, the ratio of
personal entrepreneurial income in national income (Fig. A1-1) was stable after dropping
through about 1980 and the disparity with the
U.S. is narrowing. There is probably no particular problem with comparing the values of recent
years based on the definition of Equation (A1-3).
Labor’s share calculated by the National
Accounts indicated above has the disadvantageof the inability to acquire data for the most recent
term. In addition, industry-specific calculations
must also be in accordance with Equation (A1-2).
Multiple definitions are also used in this case:
Labor’s share = labor costs ¸ (labor costs +ordinary profit + net interest payments)(A1-4)
andLabor’s share = labor costs ¸ (labor costs +operating profit + depreciation expenses)(A1-5)

30

Though land can be another distinctive production factor because it does not depreciate, we included it in capital
assets here.
31
See Yoshikawa (1994), for example.

Labor costs here are the sum total of offi-

Development Bank of Japan Research Report/ No. 27

35

45

(%)

40
35
30
25

Japan

20
15

U.S.

10
5
0
55

57

59

61

63

65

67

69

71

73

75

77

79

81

83

85

87

89

91

93

95

97

99

Figure A1-1. Ratio of Personal Entrepreneurial Income to National Income
Note: Fiscal year for Japan and calendar year for the U.S. Based on 68SNA in Japan until 1990.
Source: “National Accounts,” Cabinet Office; “Survey of Current Business,” U.S. Department of Commerce.
90(%)

Corporate statistics
85

80

68SNA
93SNA

75

70

65

60

55

50
54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00(fiscal year)

Figure A1-2. Labor’s Share Based on Corporate Statistics
Notes: 1. SNA basis is the same as Figure 1-1.
2. The corporate statistics basis includes corporations with ¥10 million or more in capital excluding the financial
and insurance industries. The calculation is based on Equation (Supplement - 4).
However, since interest received was added beginning in 1983, there is no connection between 1982 and earlier
years.
Source: “Corporate Statistics Quarterly Reports,” Ministry of Financecers’ and employees’ salaries and benefit costs.32
Nishizaki and Sugou (2001) use Equation
32

The Annual Report of Corporate Statistics calculates
value added combining labor and other costs and labor’s
share derived as the percentage of this going to labor costs
indicates similar movement. However, rent on movable
property and real estate, which is an interim payment to thereal estate industry, is included in value added and the levelof labor’s share is also expressed somewhat low.

36

Development Bank of Japan Research Report/ No. 27(A1-5) including depreciation for the reason that
depreciation expenses are applied to new investments as free cash flow.
Labor’s share obtained from these two indices differs in the following manner. First, (a)Corporate Statistical Survey annual reports target
all profit corporations while the quarterly reports,
which require figures for the most recent term,

do not include companies with less than ¥10
million in capital or the financial and insurance
industries. (b) General government and private
sector (share 100%, 9% of the national factor
income) are included in the National Accounts.
(c) Worker compensation and national income
are expressed as factor prices in the National
Accounts which are a “net” concept excluding
fixed asset depletion, and indirect taxes as well.
It is also possible to include depreciation whenusing the Corporate Statistical Surveys. In addition, statistics such as these are not common
overseas and unsuitability for international comparisons is a disadvantage.
Values that are somewhat small are derived
when calculating labor’s share using Corporate
Statistics Annual Reports primarily due to factors(a) and (b). Fig. A1-2 was prepared based on
the Corporate Statistics Annual Reports in ac-

cordance with Equation (A1-4); however, thelevel in the 1960s and ’70s is low compared tocoefficients based on the National Accounts thesame as Fig. 1-1, followed subsequently by abroad increase. It can be seen, though, that it is
not greatly different in the 1990s, the main focusof this study.
In this study, Equation (A1-3) is considered
to be the primary index of labor’s share and it isused in Figure 1-1 and elsewhere. Calculations
are also based on the same criteria in international comparisons unless noted otherwise. On theother hand, Equation (A1-2) is used in industryspecific analyses due to data limitations and it
should be noted that simple comparisons of thetwo are not possible. In addition, though fiscal
year has priority in Japan as the unit of corporate
activities, it should also be noted that calendar
year figures are used in industry-specific calculations using Equation (A1-2) due to data
limitations.

Development Bank of Japan Research Report/ No. 27

37

Appendix II Relationship of Production and the Adjustment ofHourly Wages, Employment andWorking Hours
In Chapter I, we extracted a tendency for labor’s
share to move counter-cyclically based on factor
decomposition. Is it possible to comprehend thisquantitatively? Moreover, if wage and employment adjustments are promoted hereafter, we
would expect long-term growth through the correction of labor’s share and increased capital
investments. But at the same time, it is also possible that the slowdown in consumption, boost insocial insurance and other fiscal costs would
have a negative impact on growth. When weneed to choose which of the labor cost components from wages, employment, and working
hours are actually modified, more specific analysis on the interconnection with production isessential, and we are interested in the effect onlabor’s share in that process.
Here, in order to quantitatively explore thestatistical relationship with macro indices in thepast, we measured the long-term precedence
relationship with production (GDP), employment,
wages and working hours using a VAR model.
Then, we simulated the repercussions when eachof the variables was subjected to a shock bymeans of an impulse response function. Fig. A2(1) shows the effect with a 1% drop in production. As long as there are no new shocks,
production gradually recovers over a period of
about two years and, during that time, working
hours initially shift to a decline and a sustained
decline in real wages continues after six quarters.
Meanwhile, employment tends to increase in thesecond to third year due in part to the decrease inworking hours. Fig. A2 (5) illustrates the effecton labor’s share as a cumulative rate of change
from the initial level. The effect, however, wassustained, with an initial 1% increase which accumulated up to 6% in the tenth quarter and,even after 20 quarters, it is still higher than theinitial level by almost 4%. Though it would difficult, given the current circumstances, toconsider a scenario in which employment begins
increasing due to a decline in production orhours, trends during the first half of the 1990s
are illustrated comparatively well.

38

Development Bank of Japan Research Report/ No. 27

Thus, even if the shocks to GDP have apermanent effect on labor’s share, there is thepossibility of prolonged stability in labor’s share
while moving with high frequency variability if
there are alternating positive and negative shocks.
However, if negative shocks were exerted continuously during the 1990s, that would naturally
result in a one-sided increase in labor’s share.
Analyses based on VAR would lead to a symmetrical outcome with either a positive or anegative shock. But if the real effect of shocks
on labor’s share is asymmetrical within the context of deflation as seen in Section 4 of Chapter I,
the trend of an increase in labor’s share may bestronger.
We next calculate the three variables that
determine labor compensation, with each reduced by 1% assuming that labor costs will
decline in the future. The decrease in real hourly
wages and in employment both cause a maximum reduction in the GDP of 0.3%; however,the decline in the GDP by a short-term reduction
would be no more than about 0.1% with a shift topositive growth after five quarters. If the effecton labor’s share were due to a reduction inhourly wages and employment, labor’s share
would ultimately begin to increase; however, if
working hours were curtailed, this would ultimately bring about a decline in labor’s share ofalmost 5%. Though labor compensation (numerator) would also ultimately drop at the sametime about 2% below the initial level, an increase
in interest income would also be expected which
may compensate overall household income. A
reduction in labor cost through a cut in working
hours would appear to be the most desirable scenario here.
However, besides the dependence of theresults of this calculation on the relationshipbetween past variables, there is also a need to beaware of whether this precedence relationshipactually existed. An examination of the Granger
causality (test for determining whether lagged
explanatory variables have the ability to explain
significantly; lower table of Fig. A2) between
these variables shows that it is not possible tosignificantly detect the effect of working hours
on other variables. Results were obtained in thistest showing that the three labor-related variables
lag behind production, and the outcome of thesimulation above of reducing labor costs was
obtained by using a precedence relationship thatcan only be recognized weakly in the past. Whenchoosing an actual method, we need to examine
more structured causality between variables.
(1) Shocks to GDP(2) Shocks to real hourly wages

（%）

0.6

Especially, the effect on production that explains
the majority of the movement in labor’s share in
the calculations above will be an important issue.

0.6

0.4

0.4

0.2

0.2

0.0

0.0

-0.2

-0.2

-0.4

-0.4

-0.6

GDP
Real hourly wages
Number of workers
Working hours

-0.8
-1.0

（%）

-0.6
-0.8
-1.0
-1.2

-1.2
1 2 3 45 6 7 8(3) Shocks to number of workers
0.6

1

9 10 11 12 13 14 15 16 17 18 19 20(quarter)(quarter)

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20(quarter)(quarter)(4) Shocks to working hours

（%）

0.6

0.4

0.4

0.2

0.2

0.0

0.0

-0.2

-0.2

-0.4

-0.4

-0.6

-0.6

-0.8

-0.8

-1.0

-1.0

（%）

-1.2

-1.2
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20(quarter)(quarter)(quarter)(quarter)(5) Impact of each shock on labor’s share
8

（％）

6
4
2

Shocksto GDPGDP
Shocks to0

Shocksto employment
Shocks to-2

Shocks to
Shocksto realreal hourly
hourly wages
wages

-4

Shocks to
Shocksto working
working hours
hours

-6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20(quarter)(quarter)Figure A2. Effect of Adjustment Shocks

Development Bank of Japan Research Report/ No. 27

39

Granger causality test between variables

Independent
variables

GDP
GDP
Real hourly wages
Number of workers
Working hours

Significance levels:

−
0.851
3.646
2.949

Explanatory variables
Real hourly wages Number of workers
1.012
1.935
4.005
−
0.093
−
0.264
2.888

1% level

5% levelWorking hours
1.659
0.885
0.431
−
20% level

Notes: 1. The VAR model with a lag of 4 periods is estimated with constants and time trend. and used the impulse response
function when each variable was subjected to a 1% negative shock. The estimate period was the first quarter of1982 through the third quarter of 2001.
GDP: GDP based on 93SNA
Real hourly wages: Total cash earnings index / total working hours index deflated by the domestic wholesale priceindex
Number of workers: Number of workers
Working hours: Total working hours
2. The vertical axis is the growth rate compared to the previous year. The impact on labor’s share is the rate ofchange with respect to the initial labor’s share.
Source: “National Accounts Annual Report,” Cabinet Office; “Monthly Labor Statistics Survey,” Ministry of Health, Laborand Welfare; “Monthly Commodity Price Index,” Bank of Japan; “Labor Force Survey,” Ministry of Public Management, Home Affairs, Posts and Telecommunications.

40

Development Bank of Japan Research Report/ No. 27

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List of Back Numbers (Including JDB Research Report)
No. 27 Labor’s Share and the Adjustment of Wages and Employment (this issue)
No. 26 Survey on Planned Capital Spending for Fiscal Years 2001 and 2002, May 2002
No. 25 Environmental Information Policy and Utilization of Information Technology: Toward a Shift inEnvironmental Policy Paradigm, March 2002
No. 24 The Changing Structure of Trade in Japan and Its Impact: With the Focus on Trade in Information Technology (IT) Goods, March 2002
No. 23 Microstructure of persistent ROA decline in the Japanese corporate sector: Inter-company disparties and investment strategies, March 2002
No. 22 Recent Trends in the Japanese Economy: The Japanese Economy under Deflation and Prospects
of Evolution, February 2002
No. 21 Survey on Planned Capital Spending for Fiscal Years 2000, 2001 and 2002
No. 20 Current Situation and Challenges for Cable Television in the Broadband Era, October 2001
No. 19 Recent Trends in the Japanese Economy: The Japanese Economy under Deflation, August 2001
No. 18 Introduction of a Home Appliance Recycling System: Effects & Prospects: Progress towards
Utilisation of Recycling Infrastructure, June 2001
No. 17 Survey on Planned Capital Spending for Fiscal Years 2000 and 2001, June 2001
No. 16 Revitalization of Middle-aged and Elderly Workers in Japan’s Labor Markets: Requiring the
Expansion of the Vocational Training Functions, March 2001
No. 15 Risk-Averting Portfolio Trends of Japanese Households, March 2001
No. 14 Consumption Demand Trends and the Structure of Supply: Focus on Retail Industry Supply
Behavior, March 2001
No. 13 Recent Trends in the Japanese Economy: Weakness of Current Economic Recovery and Its
Background, March 2001
No. 12 Empirical Reassessment of Japanese Corporate Investment Behavior: Features and Changes
since the 1980s, based on Micro-level Panel Data, March 2001
No. 11 Survey on Planned Capital Spending for Fiscal Years 1999, 2000 and 2001, October 2000
No. 10 Job Creation and Job Destruction in Japan, 1978-1998: An Empirical Analysis Based on Enterprise Data, September 2000
No. 9

Recent Trends in the Japanese Economy: Information Technology and the Economy, September
2000

No. 8

Trend of International Reorganization Affecting the Japanese Automobile and Auto Parts Industries, June 2000

No. 7

Survey on Planned Capital Spending for Fiscal Years 1999 and 2000, June 2000

No. 6

Current Status and Future Perspective of the Japanese Remediation Industry: Technology andMarket for Underground Remediation, May 2000

No. 5

Recent Trends in the Japanese Economy: The 1990s in Retrospect, March 2000

No. 4

Destabilized Consumption and the Post-bubble Consumer Environment, February 2000

No. 3

The Slump in Plant and Equipment Investment in the 1990s: Focusing on Lowered Expectations,the Debt Burden and Other Structural Factors, January 2000

No. 2

Survey on Planned Capital Spending for Fiscal Years 1998, 1999 and 2000, November 1999

No. 1

Corporate Strategies in Japan’s Semiconductor Industry: Implications of Development in Other
Asian Countries, November 1999

JDB Research Report

No. 96 Recent Trends in the Japanese Economy: Focused on Fixed Investment and Capital Stock,
August 1999
No. 95 Efforts to Protect the Natural Environment in the United States and Germany: Environmental
Mitigation and Biotope Conservation, July 1999
No. 94 Survey on Planned Capital Spending for Fiscal Years 1998 and 1999, June 1999
No. 93 Towards the realization of ‘environmental partnership’: A survey of Japan’s environmental NPO
sector through comparison with Germany, June 1999
No. 92 The Impact of Demographic Changes on Consumption and Savings, March 1999
No. 91 Recent Research and Development Trends in Japanese Enterprises: Technology Fusion, March
1999
No. 90 Recent Trends in the Japanese Economy: Prolonged Balance Sheet Adjustment, January 1999
No. 89 Impact of Asset Price Fluctuations on Household and Corporate Behavior: A Comparison between Japan and the U.S., December 1998
No. 88 Survey on Planned Capital Spending for Fiscal Years 1997, 1998, and 1999, December 1998
No. 87 Foreign Exchange Rate Fluctuations and Changes in the Input-Output Structure, November 1998
No. 86 Structural Changes in Unemployment of Japan: An Approach from Labor Flow, November 1998
No. 85 Recent Trends in the Japanese Economy: Characteristics of the Current Recession, August 1998
No. 84 R&D Stock and Trade Structure in Japan, August 1998
No. 83 Survey on Planned Capital Spending for Fiscal Years 1997 and 1998, August 1998
No. 82 The Significance, Potential, and Problems of DNA Analysis Research: Establishing Public Acceptance is Essential, May 1998
No. 81 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996, 1997
and 1998 Conducted in August 1997, March 1998
No. 80 Recent Trends in the Japanese Economy: Growth Base of the Japanese Economy, January 1998
No. 79 Information Appliances: The Strength of Japanese Companies and Tasks for the Future, January
1998
No. 78 Challenges and Outlook for the Japanese Machinery Industries: Impact of ISO14000 Series andEnvironmental Cost, January 1998
No. 77 Current Conditions and Issues of Computerization in the Health Care Industry: For the Construction of a Health Care Information Network, January 1998
No. 76 Household Consumption and Saving in Japan, December 1997
No. 75 The Direction of Japanese Distribution System Reforms: Strengthening the Infrastructure to
Support Diverse Consumer Choices, November 1997
No. 74 Foreign Direct Investments by Japanese Manufacturing Industries and Their Effects on International Trade, October 1997
No. 73 The Impact of the Changing Trade Structure on the Japanese Economy: With Special Focus on
the Effects on Productivity and Employment, October 1997
No. 72 An Analysis of Foreign Direct Investment and Foreign Affiliates in Japan, August 1997
No. 71 Recent Trends in the Japanese Economy: Stock Replacement and New Demand as Aspects of
Economic Recovery, August 1997
No. 70 Corporate Fundraising: An International Comparison, June 1997

No. 69 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and1997 Conducted in February 1997, May 1997
No. 68 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and1997 Conducted in August 1996, August 1997
No. 67 An International Comparison of Corporate Investment Behavior: Empirical Analysis Using Firm
Data from Japan, France and the US, April 1997
No. 66 Housing in the National Capital: Analysis of the Market for Housing using Micro Data, March
1997
No. 65 The Environment for Locating Business Operations in Major East Asian Cities, January 1997
No. 64 Direction of Reconstruction of Business Strategy in the Chemical Industry, January 1997
No. 63 Reflection on Discussions Concerning Regulation of the Electric Power Industry: Deregulationof the Electric Power Industry in Japan and Implication of Experiences in the United States, December 1996
No. 62 Current Status and Future Perspective of the Japanese Semiconductor Industry, November 1996
No. 61 A Breakthrough for the Japanese Software Industry?: Responsiveness to Users’ Needs is the key,
October 1996
No. 60 Recent Trends in the Japanese Economy Focusing on the Characteristics and Sustainability of
the Current Economic Recovery, September 1996
No. 59 Analysis of the Primary Causes and Economic Effects of Information: Related investment in the
United States and Trends in Japan, August 1996
No. 58 Selected Summaries of Research Reports: Published in FY1995, June 1996
No. 57 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1995 and1996 Conducted in February 1996, May 1996
No. 56 Recent Trends in the Japanese Economy, May 1996
No. 55 Issues Concerning the Competitiveness of the Japanese Steel Industry, February 1996
No. 54 Changes in the Financial Environment and the Real Economy, January 1996
No. 53 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994, 1995
and 1996 Conducted in August 1995, October 1995
No. 52 Current Economic Trends: Focusing on the Appreciation of the Yen and its Effects, October
1995
No. 51 Problems Concerning the International Competitiveness of the Petrochemical Industry, October
1995
No. 50 An Economic Approach to International Competitiveness, October 1995
No. 49 Selected Summaries of Research Reports Published in FY1994, July 1995
No. 48 Strategies for Improving the Efficiency of the Japanese Physical Distribution System: Part 2,
July 1995
No. 47 Issues on International Competitive Strength of the Auto Industry, June 1995
No. 46 Problems Concerning the International Competitiveness of the Electronics and Electric Machinery Industry, June 1995
No. 45 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994 and1995 Conducted in March 1995, June 1995
No. 44 Strategies for Improving the Efficiency of the Japanese Physical Distribution System, March
1995

No. 43 Capital Spending Recovery Scenario Cycle and Structure, August 1994
No. 42 Progress of International Joint Development between Industrialized Countries on the Private
Level, May 1994
No. 41 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993, 1994
and 1995 Conducted in August 1994 , November 1994
No. 40 Selected Summaries of Research Reports Published in FY1993, June 1994
No. 39 Recent Trends in Japan’s Foreign Accounts, April 1994
No. 38 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993 and1994 Conducted in March 1994, April 1994
No. 37 Economic Zones and East Asia Prospect for Economic Activity Oriented Market Integration,
December 1993
No. 36 Japanese Corporate Responses to Global Environmental Issues, December 1993
No. 35 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992, 1993
and 1994 Conducted in August 1993, September 1993
No. 34 Structure of Profit to Capital in the Manufacturing Industry, September 1993
No. 33 Comparison of the Japanese and The U.S. Labor Markets, October 1992
No. 32 The Relative Competitiveness of U.S., German, and Japanese Manufacturing, March 1993
No. 31 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992 and1993 Conducted in March 1993, April 1993
No. 30 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991, 1992
and 1993 Conducted in August 1992, December 1992
No. 29 Flow of Funds in the 80s and Future Corporate Finance in Japan, November 1992
No. 28 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991 and1992 Conducted in February 1992, April 1992
No. 27 An Analysis of Foreign Direct Investment in Japan, March 1992
No. 26 Projection of Japan's Trade Surplus in 1995: Analysis of Japan's Trade Structure in the 80s, February 1992
No. 25 Intra-Industry Trade and Dynamic Development of The World Economy, November 1991
No. 24 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990, 1991
and 1992 Conducted in August 1991, September 1991
No. 23 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990 and1991 Conducted in February 1991, March 1991
No. 22 Trends of the Petrochemical Industry and its Marketplace in East Asia, March 1991
No. 21 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989, 1990
and 1991 Conducted in August 1990, September 1990
No. 20 Deepening Economic Linkages in The Pacific Basin Region: Trade, Foreign Direct Investment
and Technology, September 1990
No. 19 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989 and1990 Conducted in February 1990, March 1990
No. 18 Petrochemicals In Japan, The US, and Korea an Assessment of Economic Efficiency, February
1990
No. 17 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1988, 1989
and 1990 Conducted in August 1989, October 1989

No. 16 Impact of the EC Unification on Japan’s Automobile and Electronics Industries, August 1989
No. 15 Industrial and Trade Structures and the International Competitiveness of Asia’s Newly Industrializing Economies, August 1989
No. 14 The Japan Development Bank Reports on Capital Investment Spending: Survey for Fiscal Years
1988 and 1989 Conducted in February 1989, March 1989
No. 13 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1987, 1988
and 1989 Conducted in August 1988, September 1988
No. 12 Growing Foreign Investors’ Activities and the Future of Internationalization, September 1988
No. 11 Futures Tasks and Prospects for the Japanese Machine-Tool Industry, July 1988
No. 10 International Division of Labor in the Machine Industries Among Japan, Asia’s NICs and ASEAN Countries, June 1988
No. 9

Trends of the Petrochemical Industry and its Marketplace in East Asia around Japan, May 1988

No. 8

The International Competitiveness of Japan and U.S. in High Technology Industries, April 1988

No. 7

The Japan Development Bank Reports on Private Fixed Investment in Japan, March 1988

No. 6

Economic Projections of the Japan’s Economy to the Year 2000, February 1988

No. 5

The Japan Development Bank Reports on Private Fixed Investment in Japan, September 1987

No. 4

Current Trends in the Japanese Auto Parts Industry in Overseas Production, July 1987

No. 3

Current Moves for Foreign Direct Investment into Japan, May 1987

No. 2

Overseas Direct Investments by Japanese Corporations, May 1987

No. 1

Current U.S. Consumption Trends, May 1987