Panel Data Research Center at Keio University
DISCUSSION PAPER SERIES
DP2014-001
August, 2014

The ‘Re-segmentation” of the Japanese labor market. Investigating the impact ofindustrial dynamics

Sébastien Lechevalier＊【Abstract】
The purpose of this paper is to propose a synthesis and an original interpretation ofrecent empirical works dealing with inequalities in Japan. Most of them have been able
to use panel micro data – and sometimes linked employers-employees data – and it has
allowed them disentangling individual and firm effects and linking the evolutions of
productivity dispersion and of wage differentials. The major result is that risinginequalities in Japan from the 1990s correspond to a large extent to an unprecedented
growth in the disparity of wages and employment security between wage earners ofcomparable status, working in firms of similar size and belonging to the same sector.
The second result is that it is possible to link these structural changes on the labormarket to industrial dynamics, namely deindustrialization and increasing corporate
heterogeneity. We interpret this evolution as a ‘resegmentation’ of the Japanese labormarket.

＊EHESS

Panel Data Research Center at Keio University
Keio University

The ‘Re-segmentation” of the Japanese labor market
Investigating the impact of industrial dynamics

Sébastien Lechevalier (EHESS)1

Abstract
The purpose of this paper is to propose a synthesis and an original interpretation of recent empirical
works dealing with inequalities in Japan. Most of them have been able to use panel micro data – andsometimes linked employers-employees data – and it has allowed them disentangling individual andfirm effects and linking the evolutions of productivity dispersion and of wage differentials. The
major result is that rising inequalities in Japan from the 1990s correspond to a large extent to an
unprecedented growth in the disparity of wages and employment security between wage earners ofcomparable status, working in firms of similar size and belonging to the same sector. The second
result is that it is possible to link these structural changes on the labor market to industrial dynamics,
namely deindustrialization and increasing corporate heterogeneity. We interpret this evolution as a‘resegmentation’ of the Japanese labor market.

Keywords: Inequalities, poverty,
Employment System, panel data.

deindustrialization,

corporate

heterogeneity,

Japanese

JEL classification: C23, E24, I32, J31, L16, L60

1

Associate Professor at EHESS, 105 bd Raspail, 75006 Paris France ; sebastien.lechevalier@ehess.fr. The author
wishes to thank Ryo Kambayashi, Toshiaki Tachibanaki and Kazufumi Yugami for their helpful comments. I am also
grateful to Yoshio Higuchi for a very useful reference. Usual caveats apply. This paper has been prepared for the book
Social Inequality in Post-Growth Japan: Structure, Discourse, Agency under Economic and Demographic Stagnation
edited by David Chiavacci and Carola Hommerich. It has been presented at the conference "Inequality in Post-Growth
Japan: Social Transformation During Economic and Demographic Stagnation" organized by the German Associationfor Social Science Research on Japan (Japanese- German Center Berlin, 22-24 November 2013) and I wish to thank theorganizers for their invitation.

1

1. Introduction
Substantial increases in inequalities have been observed for more than two decades in a wide
range of countries, including the US, the UK and many other OECD countries. This has given birth
to a sizable literature, which first reached the consensus that skill-biased-technological change was
the main factor driving inequalities, especially wage inequalities, in the late 1990s and the early
2000s (Katz & Autor, 1999). Another type of explanation, partly complementary to the previous
one, concerns the very high concentration of income among top income earners, which might havebeen caused by the capture by them of an increasing share of value added but also by regressive
fiscal reforms (Krugman, 2007; Atkinson, Piketty & Saez, 2011).
As emphasized by Machin (2008), the topic has seen a recent renewal of interest as a resultof several developments. Among them, the fact that some countries, previously characterized byrelatively stable wage structures, have started to experience rising inequalities certainly deserves a
new generation of research. Japan is one of them. There is indeed a consensus - exemplified by theOECD report of 2006 - that inequalities in Japan, as measured by various indicators such as Gini
coefficient or inter-decile ratio, have substantially increased over the past 30 years to a point thatplaces Japan among the most unequal OECD countries (Mira d’Ercole, 2006).
If the increase of inequalities in Japan is no more a matter of debate, it is worth saying that
there is a need for clarification about the nature of inequalities (e.g. wage vs. other types of income),
the nature of the line of cleavage among different groups, and even more important about theunderlying mechanisms.
After having identified wages as a key component of incomes that have experienced risingdifferentials, this article proposes an explanation that focuses on structural changes on the labormarkets as a consequence of industrial dynamics. In doing so, we put aside a certain number ofother relevant explanations, such as the evolution of the welfare system or of the education system,
which obviously matter but which are studied in depth in the rest of the contributions of the book.
We do not also consider political economy type of explanations – such as the impact of neoliberaltransition in Japan – which we have emphasized in other works (Lechevalier, 2014). Our main
purpose is to put rising inequalities in Japan in historical perspectives in order to highlight theirstructural nature. Rather than conducting an original investigation, we provide a synthesis of recent
empirical works that have been successful in disentangling individual and firm effects and inlinking the evolutions of productivity dispersion and of wage differentials thanks to the access topanel micro data.
22. Rising inequalities in Japan: which stylized facts?
2.1 Income and wage inequalities
Japan has experienced a significant increase of inequalities since the early 1980s. In figure 1,
it is possible to state that, while the Gini coefficient for incomes after taxes had only slightly
increased between 1989 and 2001, from 0.355 and 0.360, it has dramatically risen until 2008 toreach a level of 0.375. This statement, now widely accepted, has first been the subject of an intense
academic debate. On one side, Toshiaki Tachibanaki (2005) claimed that income inequalities
substantially rose during the 1980s and 1990s; on the other side, Ohtake (2005) argued that thisobserved increase in income inequalities was a statistical artifact largely driven by the aging
population.
Before entering into this discussion between two contradictory visions on inequalities inJapan, it is good to put the evolution into comparative perspective. A first contribution has been
made from the OECD. From this viewpoint, it is indisputable that Japan has experience a uniquetrajectory between the mid-1970s and the mid 200s: an OECD report that appeared in 1976
identifyed in Japan a level of inequality comparable with that of Sweden, while emphasising thedifferent mechanisms in play - inclusive wage labour nexus in the case of Japan vs. redistribution in
the Swedish case (OECD, 1976); on the contrary, nowadays, the level of Gini coefficient are closer
to those observed in the UK, thus among the highest within the OECD countries. More precisely,
the 2006 issue of the OECD Study of Japan estimated that income inequalities in Japan had
surpassed the OECD average and had experienced the strongest growth of any developed country(OECD, 2006, Mira d’Ercole, 2006).
A second comparative perspective, which also adopts a much longer historical view, tends torelativize this first conclusion. In a systematic comparison between the US and Japan, which
focuses on top incomes (alternatively top 1% or top 5%) on the basis of fiscal data (more precisely
income tax statistics), Moriguchi & Saez (2008) provides interesting results and interpretations. The
major result is that, by contrast with developments in the United States from the 1970s, the share ofhigh incomes in Japan remained relatively stable over the past forty years. For example, in 1973,
the income of the top 5% richest represented 16% of total income in both countries whereast it
represented 16.5% in 2005 in Japan and 24% in the US (Figure 2). Two further results emerge from3

this comparison between the United States and Japan: Technological change and new fiscal
situations do not explain the differences between Japan and the US. Rather than this, it was
institutional factors, such as internal labour markets and the union structure, that were the mostimportant determinants of the concentration of income from work. It means that our investigation
should focus on wages and mechanisms that directly affect labor market.

2.2 Focusing on wage inequalities: disentangling interfirm and intra firm inequalities by taking
into account individual and firm characteristics
Various contributions have focused on wage inequalities and tried to account for the overallrise of inequalities. However, for some technical reasons, it is not easy to disentangle between
individual and firm effects in the evolution of wage inequality. 2 From this methodological
viewpoint, the contribution by Yamaguchi (2012) is of importance as its multiple subgroupdecomposition method allows getting interesting results. Using the micro-level dataset obtained
from the Employment Status Survey for the years 1992, 1997 and 2002, he decomposes the factors
explaining the evolution of wage inequalities for full-time workers. The first result of importance is
as follows. The decrease of inequalities between 1992 and 1997 and the subsequent increase of
inequalities up to 2002 is explained by the decreasing effects of between age group inequality andbetween education group inequality, whereas an increasing effect of between-firm size groupinequality is observed. This result is in fact a confirmation of what has been found by Kambayashi
et al. (2008), who used an ever richer panel dataset (Basic Survey on Wage Structure) for the years
1989-2003. They are indeed able to reconcile both sides of the debate between Tachibanaki and
Ohtake. More precisely, they show that the distribution of wages remained apparently stable as aresult of two opposing trends: (i) declining between-group (defined by education, experience, tenure,and establishment size) wage inequality; but (ii) increasing within-group inequality among maleworkers. These are important results that deserve several comments.
First of all, it concerns gender issues. In the general context of rising inequalities, we might
think that women, ‘dominated’ in the context of a patriarchal wage labour nexus, would be the first‘victims’ or losers (Houseman & Abraham, 1993). In fact, this has been observed in the 1970s,
2

To summarize, the Oaxaca-Blinder decomposition method (used for example by Fortin et al., 2011) is the mostpopular tool but it suffers from various problems such as endogeneity in the estimation of wage equation. An alternative
method is purely statistical, the subgroup decomposition, but, in its basic form, it does not allow identifying multiple
factors.

4

when women massively left the labor market at the time of growth slowdown. It did not happen
during the lost decade, from the early 1990s. If one considers all workers, the wage gap (ratio
between female and male average wage) has decreased from about 55% in the early 1980s to about
50% in the late 2000s (Basic Survey on Wage Structure and Monthly statistics on employement).
However, this evolution incorporates the increase of non-regular workers and the fact that a large
majority are female. If one considers only regular workers, the wage gap has been reduced over thesame period from about 55% to about 67%. The counterpart of this evolution is a rise in inequalities
between women themselves, depending on their job status. The origin of this phenomenon relates tothe fact that more and more women make a career for themselves, and this is only achieved at theexpense of family life, whereas those who choose to have a family only have more or less access to
non-regular jobs (Arai & Lechevalier, 2004, 2005). To put differently, the contemporary paradox ofJapanese women may be summarized in the fact that on the one hand they benefit from a greater setof choices but on the other they face rising levels of inequality among themselves (Tachibanaki,
2010b).3
Another stylized fact concerns the evolution of inequalities across different age categories.
Both empirical studies show that inequalities across age group have decreased.4. On the contrary,
they both find increasing differentials within age groups from early 2000s. Overall, these results
contradict the argument by Ohtake (2005) and leads us to look at other variables in order to analyze
rising inequalities in Japan. The same apply to groups of individual defined by their education level,
which have been at the center of empirical investigations of wage inequalities among OECD
countries as recalled in the introduction.
Overall, the most important conclusions are the following. Although there are significant
wage differentials between individuals with different sex, education level and age, globally these
individual characteristics do not explain the increase of wage inequalities in Japan: the rising overall
inequality from the late 1990s is related to the increase in within-group inequality for groups ofidentical age, education and firm size. It means that it is necessary to look for other determinants, on
the side of firms’ characteristics, besides the size. This is confirmed by Ito & Lechevalier (2009) intheir investigation of the determinants of increasing productivity differentials (and associated wage

3

Lise et al. (2013) confirm this finding. The authors find in fact a decreasing wage inequality for women over theperiod 1981-2008 (Basic Survey on Wage Structure) but they also observe a sharp rise in hours inequality and thecorrelation between hours and wages, resulting in an overall rise in earlings inequality for women.
4More technically, the slope of age-wage profile is getting more flatter; which implies the wage differentials between
young and elder are decreasing.

5differentials) for firms of similar size and belonging to the same narrowly defined sectors. It means
it is necessary to identify the endogenous causes of the differenciation of performance such as the
combination of internationalization and innovation strategies that may help defines different
productive models (Ito & Lechevalier, 2010), before trying to connect them to wage inequalities by
opening the black box of firms’ organization (Kalantzis et al., 2012). This point is explained in
section 6. Before this, it is important to further specify the characteristics of rising inequalities byinvestigating the evolution of poverty rates.

2.3 Poverty rates
In the US, the fact that the top incomes represent an increasing share of total income goes
hand in hand with rising poverty rates. We have just seen that, in the Japanese case, we do not
observe in the 1990s and 2000s such a massive enrichment of the richest. What about the evolution
at the bottom of the income distribution? The percentage of persons living in absolute poverty grewby 5% between the middle of the 1980s and 2000, Japan being the only country in the OECD
having experienced such a rise of poverty (OECD, 2006, Mira d’Ercole, 2006). More precisely, thepoverty rate has risen from 12% in the mid 1980s to 16% in 2009 (Higuchi, 2013). This tendency
only became more marked during the course of the 2000s (Figure 3). As a result, in the late 2000s,
Japan is one of the OECD countries with the highest poverty rate (Figure 4).
This evolution is obviously the outcome of a complex set of mechanisms, including welfare
system (explored in chapters by Shirahase, Conrad and Estevez-Abe). In this chapter, one tries to
identify what is related to structural changes on the labor market. It leads us to raise the question ofworking poor (Sekine, 2008). Beyond the dysfunctions of the public assistance system and situationof single-parent households, which are considered in subsequent chapters, what is clear is that rising
unemployment rates (although low for European standards), increasing non regular employment
and more generally employement instability are at the origin of the re-emergence of this category inJapan. More precisely, a specificity of Japan is that households headed by a non-regular worker,
even if employed, are highly likely to fall into poverty and experience long-term poverty. Moreover,the proportion of the long-term poor is slightly higher in Japan than in Europe (Higuchi, 2013).
Identifying their number and their characteristics is not an easy task as there is no agreementon the definition. To our knowledge, the best recent statistical effort to provide an evaluation basedon a clear definition (“Individuals [excluding students] active in the labor market [working or6seeking work] for three months or more, but who still belong to a poor household) is provided by
Murakami (2011). Unfortunately, his data covers only the period 1997-2002 and does not include
more recent trends but what is clear from this study is that the number of working poor in Japan has
drastically increased from 2.2 million in 1997 to 3.4 million in 2002.
Another way to see this link is to study the poverty rates by types of job (Cabinet office,2010): whereas the poverty rate is only of 6% for male regular workers in late 2000s, it is 19% formale part-time workers, almost 21% temporary workers and almost 22% for self-employed. The
figures are relatively similar for female workers in terms of structure but with some higher number
such as a poverty rate of almost 27% for female self-employed workers. An important conclusion tothis is that the evolution of the structure of jobs is a key candidate to explain rising inequalities inJapan. In particular, the origin of the rise of non regular jobs should be carefully examined, while itshould not be forgotten that the highest poverty rates are observed among self-employees, whose
number are dramatically fallen over the last thirty years (Genda & Kambayashi, 2002). In any case,the emergence of this new category – the working poors – is a new stage in the growth in inequality
and the labour crisis in Japan, as employment – together with prospects of social mobility - was thebasic factor of social integration in the postwar social compromise.

3. Explaining rising inequalities: a critical literature review
Based on the stylized facts that have been derived from the former section, the aim of thissection is to examine a certain number of explanations that have been given to explain risinginequalities in OECD countries in general and in Japan in particular, before introducing our own
explanation that focuses on industrial dynamics and its impact on labor market outcomes, fromstructural and historical perspectives. Among these explanations, we particularly focus on skillbiased technical change, which has been the dominant explanation until recently in the economic
literature, and on aging, which has been more specifically introduced in the debate on the extent ofrising inequlaties in Japan. We also introduce labor market related explanations. However, we do
not discuss explanations such as the evolution of the welfare system or family structures, two
aspects that are considered in the rest of the book.
In the 1990s, increasing inequalities were considered an important problem in almost all
developed societies. Skill-biased technical change, especially, seemed then to have affected many7

economies and to be a good candidate to explain growing inequalities in OECD countries, of course
to varying degrees. According to this explanation (see for example Katz & Autor, 1999), the major
driver of wage inequalities was the new wave of technological change, which beneficiated to someworkers, the most skilled in improving their productivity, but not to others. To put it simply, the key
differential was concerning workers with different skills. The consensus among economists at theend of the 1990s and early 2000s was hence that skill-biased technical change was the main driverof rising wage inequalities, more than any other explanations, being globalization or institutions of
the labour market (unions, minimum wage). The problem with this explanation in the case of Japanis that one did not observe a significant rise in inequality related to the level of qualification(Kambayashi et al., 2008; Yamaguchi, 2012). It explains why it has never been popular among
Japanese labor economists.
Rather, following the contribution by Ohtake (2005), the debate has focused on theassessment of the impact of aging on the growth in inequality during that period. The basic
argument is the following. Although the rise of Gini coefficient seems to indicate a substantial
increase in wage inequalities, this is only a statistical artifact. In the Japanese institutional context,
at a given point of time, the wage inequalities increase with the age categories. Therefore, thecurrent aging of the population mechanically produces an apparent increase of the inequalities when
one considers the whole population. However, from the 2000s, we observe a rise in inequality
within given age groups, notably among the young, which this kind of analysis does not allow us toexplain. Even, more importantly, in the course of the 2000s, wage inequality began to rise strongly
without aging, globalisation and technical progress actually accelerating (see Figure 1). This meansthat have to turn to other types of explanation. Given the above stylized facts, and in particular theevolution of wage differentials, it is natural to focus on labor market mechanisms.
The first candidate to explain this increasing wage gap is the introduction of individual
performance-based systems, but it does not seem to have played an important role in Japan eventhough such systems have been experimented with.5 The second candidate is related to the wage
differential between regular and non-regular workers. The rising share of non-regular workers,
which has more than doubled in 20 years to reach more than a third of the workforce, has been

5First, not all firms have tried to introduce such systems. Second, among those who have tried, many have abandoned
them after a while because of negative externalities. This is for example the case of Fujitsu. The current attempts atreforming the wage system focus less on setting individual performance-based wage schemes than on modifying
deferred compensation schemes to allow employees to get short term reward for their engagement in the firm, in acontext of rising risks and uncertainty (Fujimura, 2003).

8

indeed a popular explanation of rising inequalities in Japan, especially within firms (Ota, 2005). A
peculiarity of the Japanese labor market is that non-regular workers are mostly female while regular
workers are mostly male. For example, according to 2007 Employment Status Survey, female
workers represented 74.3% of non-regular workers aged 15 to 59 and 30.3% of regular workers.
We have here a powerful mechanism that may explain rising inequalities. However, this
explanation is limited since it does not take account of the rise in inequalities among male regular
workers themselves (Kambayashi et al., 2008; Kalantzis et al., 2012). To explain these rising“within-group” inequalities, it is natural to turn to firms’ characteristics. The higher share of nonregular workers does not indeed explain why wage inequalities have also increased between firms(Tachibanaki, 2005; Ito & Lechevalier, 2009). This has first gone unnoticed since the literature has
first focused on firms of different size and found that firm-size differential does not explain theincreasing wage gap (e.g. Kambayashi et al., 2008; Yamaguchi, 2012). Rising wage inequalities are
not often connected to a second stylized fact that has characterized the lost decade, increasing
productivity differentials at the firm level, and a purpose of the rest of this chapter is to investigate
this point.
Both explanations – rising intra-firm inequalities (rising wage gap between regular and non
regular worker) and rising inter-firm inequalities – are not exclusive from each other. Moreover, at
this stage, we do not know of any systematic comparison between these two types of inequalities,
which makes impossible to reach a conclusion regarding the relative importance of each type of
inequalities.6 Our argument is that these two trends are connected to industrial dynamics, which will
be explored in sections 5 and 6. Before this, it is essential to define our framework of analysis in
adopting a historical and structural perspective that focus on the segmentation of the labor market,
in order to show how what are the conditions for industrial dynamics to affect labor market
outcomes in the case of Japan.

4. The re-segmentation of the Japanese labor market
4.1 Introducing the concept of segmentation and its use in the Japanese context

6

The only exception is maybe Yamaguchi (2012) but it does not consider other firms‘ characteristics than their size.

9

Our thesis is that the segmentation of the Japanese labor market is the underlying structuralcharacteristic that conditions the evolution of inequalities. This concept of segmentation has been
widely used in the related literature. A labour market is considered ‘segmented’ when it is divided
by a cleavage between two or several segments between which there is very little mobility, andcharacterised by differentials in wages, in employment security and more generally in conditions ofwork and career possibilities. This segmentation concerns both jobs and workers. The problem is
not so much that the jobs are different, but that a part of the workforce is confined to a certain typeof work. The key for the segmentation hypothesis is the discontinuity between the different
segments (Berger & Piore, 1980; Lechevalier, 2003).
In the Japanese context, what is remarkable is that the term dualism (niju kozo 二重 構造)
has been preferred to the one of segmentation, whose translation into Japanese (bundanka 分断化)
did not have the same “success” than niju kozo.7 Moreover, in most of the contributions on the
dualism/segmentation of the Japanese labor market, issues of wages and labor stability have beentreated separately. We argue that it is a mistake and that they should be jointly studied andarticulated. It requires a clarification of the concept of employment security. It is not only a rightacquired as a result of social struggles and compromise between employees and employers (Gordon,
1988) but it corresponds also to a certain mode of production in which labor is quasi-fix input andtherefore should be considered as a part of the firm (Berger & Piore, 1980). This is sustainable only
if there is a joint investment from the workers and the employers, which make the skills specific to
the firm. It is also conditioned by the temporal horizon of the firm, which itself depends on theinstitutional (e.g. financial) environment. This theoretical perspective is essential to understand how
employment security can be affected by changes in the industrial structure (e.g. throughdesindustrialization) but is also one key component of the heterogeneity of firms, complementary toothers, such as their employment structure. From an empirical viewpoint, there are various possible

7

The term dualism is used for the first time officially in a report of 1957, Keizai Hakusho 経済白書 (Economic White
Paper), and refers most exclusively to the industrial structure, the divide between SMEs and large firms. Moreover, thekey variable characterizing the gap is the wage (chingin no niju kozo 賃金の二重構造). To this form of dualism, asecond one shoud be added that correspond to a cleavage within the firms, especially the larger ones, between the core
and the periphery of the workforce (chûshin/enpen rôdô ryoku 中心/縁辺労働力). This distinction corresponds to status
differentials, regular and non regular workers (seishain/hiseishain 正社員/非正社員), and among them, temporary
workers, part-time workers, contracts workers (haken-rôdôsha 派遣労働者, pâtotaimâ パートタイマー or more
simply pâto パート, rinji-hiyatoi 臨時日雇, keiyaku-tôrokushain 契約登録社員). This is this approach that has been
adopted in another report in 1989, which has been also important in the study of the segmentation in Japan, Rôdô
hakusho 労働白書 (White Paper on Labour).See also the chapter by Karen Shire on discourses on inequalities in Japan.

10measures such as job status, separation rate or speed of adjustment of employment to the production,
which is calculated through the estimation of a labor function demand (Lechevalier et al., 2014).
If the labour market is the matrix of inequalities in Japan, at the same time, the issue is to
identify mechanisms at work outside the labor market and that plays in interaction with labormarket dynamics. Industrial dynamics is one of them. Our hypothesis is that not only the intensityof segmentation but also lines of cleavages and underlying mechanisms evolve over time. It meansthat a historical perspective is required to analyze the current re-segmentation of the Japanese labormarket.

4.2 The segmentation of the Japanese labor market in historical perspective
As recalled in the previous subsection, the structure of inequalities in Japan in the 1950s was
essentially explained by the dualism of the Japanese economy. In many respects, the 1950s can beconsidered as the « Golden Age » of segmentation in Japan (Lechevalier, 2003). What is called atthat time the dualism of labor market mainly corresponds to a dual industrial structure,
characterized by a cleavage between small firms and large firms, often linked to each other by asubcontracting relationship. In the mid-1950s, the productivity level of manufacturing firms
between 10 and 100 employees was around one third of the productivity of those with more than
1000 employees, whereas such level is 90% in the US or in the UK. At that time, the wage gap issimilar to this productivity gap, as shown in the Economic White paper of 1957. To this wage
differential, one should add a tenure differential: in 1955, the annual separation rate for firms
between 30 and 99 employees is 2.5% while it is only 1.1% for the firms of more than 500
employees. Besides this inter-firm dualism, there is also an intra-firm dualism, characterized by a wage
and employment security gap between regular workers and non-regular (at that time, still mainly male)workers. However, professional trajectories reveal an implicit hierarchy between the two types ofsecondary jobs: many regular workers in small firms do not hesitate to try to get hired as non-regular
workers in large firms (Nakamura, 1981): the most unequal dimension of the Japanese wage labor nexus
at that time is therefore linked to the inter-firm dualism at that time.
When one turns to the explanations of this situation, the major one is the existence of a labor
surplus, from which derives a bargaining power that is favorable to firms (Minami, 1994). However,this is not enough to explain the dualism of the industrial structure. The key explanation refers to thedifferentiated introduction of foreign technology in the Interwar period, which has been the basis of a
gap in terms of capital intensity and productivity after the WWII (Shinohara, 1970). This point isessential to our own interpretation of what happened from the 1990s.
11

A turning point occurs in the early 1960s with the end of the labor surplus, which can bemeasured through the imperfect indicator of ratio of job seekers to job offers that decreased from1.04 in 1955 to 0.6 in 1960 and to 0.28 in 1965 (Shokugyô Antei Gyômu Tôkei, various years). It
introduces deep changes from the viewpoints of cleavages on the Japanese labor market. One firstobserves an increasing mobility on the Japanese labor market between 1958 and 1964 (especially inthe early career). Then, smaller firms were forced to increase their wages to keep their workers,
which leads to a quick contraction of the wage differentials between SMEs and LEs. Finally, a
substantial portion of non-regular workers were promoted to regular jobs status.
The end of the high growth period and the beginning of an era of turbulences in the 1970s
does not fundamentally change the process of homogenization of labor conditions. More precisely,
the gap between large firms and small firms keeps decreasing as shown by the evolution of theseparation rate differential between them. 8 However, in the context of growth slowdown, theJapanese economy enters a period of intense restructuration, especially in some sectors such as
textile and steel industry, which downsize, while other competitive sectors such as the automotive
industry and electronics are developing very quickly: the most important line of cleavage at thattime is therefore sectoral. Finally, in this period of uncertainty, one observes a new increase of nonregular workers, who will be nonetheless integrated to the regular workforce during the bubble
period (Kambayashi & Kato, 2010).
The relative homogenization of labor conditions comes to an end with the collapse of the
bubble and the subsequent stagnation of the 1990s. It corresponds to the beginning of a new era oflabor surplus as symbolized by the rise of unemployment that reached historical levels up to 6%.
The sign that firms are trying to reduce labor costs can be also interpretated as a sign of labor
surplus at the firm level. As well shown by Kambayashi & Kato (2010), one observes a rise of
involuntary separation for the newly integrated workforce (who had changed their status from nonregular to regular during the bubble period). At the same time, the background is a decrease of theoverall mobility on the Japanese labor market (due to the collapse of voluntary quits), which entersin an ice-age (Genda, 2005). This is a key precondition for the segmentation as seen above. Anotherremarkable stylized fact is the increase of non-regular workforce and the re-emergence of the intrafirm divide between regular and non-regular workforce. However, as emphasized in section 2,
although this intra-firm dualism is particularly dramatic and may partly explain the rise of poverty
rate, it is important to note that the use of non-regular workers is concentrated on some firms
8

The separation rate was around 1% for the firms with more than 500 employees and 1.7% for firms between 30 and 99
employees in 1975, whereast these figures were respectively 1.5% and 3% in 1965 according to Monthly Labour
Statistics published by the Ministry of labour.

12(Survey on diversification of employement forms and Kalantzis et al., 2012). It can be therefore
partly explained by the increasing differentiation of the firms, both in terms of performance andHRM practices (Lechevalier et al., 2014), including the use of non-regular workers. This is the basisof the re-segmentation (再分断化) of the Japanese labor market.
To put it briefly, the hypothesis of a resegmentation of the Japanese labor market
emphasizes both a continuity in the structural evolution of the Japanese labor market conditioned bychanges in the labor surplus/scarcity and ruptures in the industrial structure that define the line ofcleavages and the different segment. Two key evolutions have affected the industrial structure in
Japan, deindustrialization and the increasing heterogeneity of firms, and will be analyzed in the two
following sections.

5. The Direct impact of industrial dynamics: deindustrialization and globalization
Labor markets of most OECD countries, including Japan, have been characterized bydeindustrialization, that is, the decrease of the share of manufacturing industries in total
employment. This is a powerful structural mechanism, which is a candidate to explain the decay of“good jobs” and the rise of non regular positions, mainly in the service sector (Schmitt & Jones,
2012). However, as far as inequalities are concerned, the impact of deindustrialization is notstraightforward and it is necessary to disentangle its underlying causes in order to produce a clear
assessment. The following two subsections are successively dealing with these two sides of the
problem.

5.1 Deindustrialization as a major source of the rise of non regular positions
According to the OECD (STAN database), the share of manufacturing industries in total
employment in Japan has fallen down from about 27% in 1970 to about 16% in the late 2000s. In
terms of absolute numbers, it corresponds to a loss of 3.4 millions jobs (from 13.8 millions to 10.4
millions), which correspond to 25% of total manufacturing employment in 1970. Even if one takes
into account the fact that manufacturing has changed over time during this period and that thisdeindustrialization is over-estimated because it does not take into account properly the process ofservice outsourcing, it means that Japan, as other OECD countries, experienced an important
structural change. Moreover, it is important to notice that this trend has been less pronounced in the
1980s than in the 1970s and the 1990s and onward, which correspond to periods of respectively
13

growth slowdown and of stagnation, both characterized by intense restructuration. It means thatmacroeconomic context mattered in the process of deindustrialization.
The complementary side of this evolution is the increase of service jobs over the same
period, from 24.4 million to about 44 million, which corresponds to an evolution of the share ofservices in total employment from 44.8% in 1970 to about 68.5% in the late 2000s.
This is a classical shift of the industrial structure of employment and is not a problem per se.
However, the process has been accompanied by an increase of non regular jobs. For example,
according to the Employment Status Survey of 2007, the share of regular workers in manufacturing
was 72.8% against 58.3% on average in miscelleanous services and 41.2% in retail. To summarize,
deindustrialization does not correspond only to a decrease of the share of manufacturing in total
employment but it is biased and leads to a changing structure of labor markets. Moreover, in thecase of Japan, the underlying mechanisms have changed over time (Uemura & Tahara, 2013),
which has aggravated the situation on the labor market. These points are developed in the next
subsection.
If the results obtained here are clear, there are not enough, for a least two reasons. First, it isimportant to take into account the evolution of labor supply especially in terms of sex, age, andeducation. Second, there have been some evolutions that are intra-sectorial, which require (possibly
panel) micro-data to be analyzed. It will be done in section 6. Before this, in the following
subsection, we specify the causes of deindustrialization in order to discuss the possible links withrising inequalities.

5.2 Deindustrialization and rising inequalities on the labor market
The impact of deindustrialization in terms of inequalities depends fundamentally on its
underlying causes. If one puts aside the process of outsourcing from manufacturing to services,
there are two major mechanisms that explain deindustrialization. One is domestic and corresponds
to the changing structure of demand (from manufacturing goods to services) as income per capita isrising, coupled with a differential of productivity between the two sectors: as manufacturingindustries are characterized on average by higher productivity, it leads, everything being kept equal,
to a decrease of the number of workers needed to produce the same amount of goods. Given thisproductivity differential, deindustrialization leads to less workers in the manufacturing industry butwith higher wages, which is confirms by data but is not enough to explain the rising inequalities.
14

The second mechanism incorporates the dynamics of globalization and includes two submechanisms. The first one concerns the impact of outward foreign direct investment (FDI) on
domestic employment; the second one exists without any mobility of capital and is the result oftrade: if one country is losing competitiveness, its market share on the world market will be reduced
and therefore, domestic manufacturing jobs will be destroyed. Then, the issue at stake to evaluate
the impact of deindustrialization on labor market dynamics and inequalities is to distinguishbetween these different mechanisms and their respective impact, which is not an easy task.
Here, we put aside, the technical issue of disentangling the causes of deindustrialization andwe summarize some of the results of Lechevalier (2015) on the impact of globalization as one of thecauses of deindustrialization on labor markets. In fact, the study of deindustrialization has moved its
focus from the impact in terms of volume of employment to more qualitative indicators such as job
security or wage inequalities. The idea behind this evolution is that deindustrialization is a powerfultrend that affects not only the sectoral composition of the economy (see 5.1) but also the very
structure of the labor market in terms of wages, job status, among others. It leads to a revival of thedebate on the determinants of inequalities - introduced in section 3 – which concluded until the mid
2000s to the unsignificant impact of globalization on inequalities. Empirical papers on Germany or
Korea find indeed a negative and significant impact on some types of workers of outward FDI and
trade (see for example Görg & Görlich, Lee and Lee in Lechevalier, 2015; Baumgarten, 2013).
Japan is no exception. For example, Sato et al. (2011) successfully explains the rise of temporary
workers by the rising international exposure of Japanese firms: trade liberalization encourages firms
to reduce their variety of products, which in turn raises the demand for temporary workers since
freely adjustable temporary workers function as a buffer against increasing revenue fluctuations.
Moreover, Kiyota and Kambayashi (in Lechevalier, 2015) shows that not only outward FDI has anegative impact on the volume of employment but also explain a significant portion of the rising
wage inequalities.
One mechanism should be of particular focus. It has been found that exporters have a higher
productivity than non exporters. It corresponds partly to a selection effect (the most productive
firms are going to the international market) but also to a learning effect (firms increase theirproductivity when they start exporting). The combination of these two effects leads to increasing
productivity differentials and therefore to increasing wage differentials. This mechanism, whichapplies also to the fact to invest abroad (outward FDI), goes beyond what we characterized as“deindustrialization” and correspond to a more general mechanism, namely the increasing15

productivity dispersion of firms and its impact on wage differential. This is the object of the next
section.
6. The indirect impact of industrial dynamics: increasing heterogeneity of firms
What has been said about the impact of differentials between exporters and non-exporters
can be generalized and connected to the increasing heterogeneity among Japanese firms as a major
driver for rising wage inequalities. We argue that this is the basis of the current re-segmentation of
the Japanese labor market (Lechevalier, 2011).
Recent studies on Japan have found an increasing productivity dispersion among Japanesefirms during the ‘‘Lost Decade’’ (Ito & Lechevalier, 2009, 2010). Moreover, whereas Japan has
been characterized by size and sector productivity differentials that were relatively higher than inother developed countries (see section 3. and Yoshikawa, 2008), these recent studies haveemphasized productivity differentials for firms of similar size and belonging to the same narrowly
defined sectors. This trend has been also observed in other countries (Dosi et al., 2010) but this isparticularly marked in Japan from a comparative perspective (Lechevalier, 2014).
Surprisingly, there has been no recent investigation of between-firms wage dispersion inconnection with productivity differentials. This is all the more surprising that various authors - suchas Mortensen (2003), Dunne & al. (2004) or Faggio et al. (2010) - have investigated this link forother countries, which is now a well established stylized fact. One reason for the absence of thistype of study might be the dominant concern for within-firm wage differential between regular andnon-regular workers described above, or the fact that studies which have looked at between-firm
inequality have focused on firms with different sizes, which failed to explain the increasing wage
gap (Kambayashi et al., 2008; Yamaguchi, 2012). One condition for this type of investigation to be
successful is not to consider categories of firms that are defined ex ante (e.g. by their sector or sizeclass) but to leave the possibility open of an evolution of the lines of cleavage. It corresponds to the
hypothesis of re-segmentation.
How can we describe the mechanisms at work in Japan that link increasing productivity
differentials and rising wage inequalities? Kalantzis et al. (2012) propose a stylized model thatprovides a plausible explanation. This is a simple efficiency wage model with one sector but two
types of firms of similar size, in which firms can choose between two types of work organizations, acomplex structure with workers’ involvement and job security where the productivity of workers
depend on their effort (type-I firms), and a simple competitive structure where workers have an
16

exogenous productivity (type-II firms). The prediction of the model is that a negative aggregate
productivity shock (as the one that has been observed in Japan during the lost decade) produces
increasing productivity and wage differentials, as well as a falling share of type-I firms. To put it
differently, in this model, wage inequalities are the flip side of productivity differentials whichthemselves originated from choosing different models of work organization as a reaction to the
productivity slowdown. 9 It means that recent rising wage inequalities are not only the mechanicaleffect for increasing productivity dispersion but that there is a structural dimension on the side offirms’ organization, something very similar to the logic that has been described for the dualism of
the 1950s-1960s, as shown above in reference to the debate between Nakamura and Shinohara(section 3.2).
The basic predictions of the model are empirically confirmed. In merging the Basic Survey
on Wage Structure and the Employment Trend Survey at the micro level for the first time, theauthors are first able to distinguish between the two groups of firms.10 More precisely, the authors
use a technique, the unknown regime switching regression à la Dickens and Lang, that allows themdistinguishing endogeneously (without setting pre-conditions such as the size or the sector) between
one group of establishments that can be characterized by efficiency wages and another one thatcannot. Finally, a simulation shows a decrease of the share of type-I firms in case of growth
slowdown, which implies a joint rise in productivity and wage differentials in Japan in recent years.
What is missing in this story is the origin of the increasing heterogeneity of firms. Section 5
has indicated one possible mechanism, the internationalization of the Japanese economy. Ito &Lechevalier (2009) and Lechevalier (2014) successfully test this hypothesis but propose at the sametime a more general discussion that includes the impact of the introduction of new technology, theevolution of the competitive environment and the role of neoliberal policies. From this discussion, it
is possible to draw a parallel between the contemporary period and the 1910s-1930s, when the
differentiated introduction of foreign technologies at the firms level has been the basis of the dual
structure of the Japanese economy decades later, in the 1950s (Shinohara, 1970). In the context ofthe 1990s, it was less the impact of the differentiated introduction of information and
9

The increased diversity of human resources and management practices and its impact on effort and productivity
differentials has been documented by Bloom & Van Reenen (2007) for the US and Europe and by Miyagawa et al.
(2008) in the case of Japan. Lechevalier et al. (2014) also show an increased dispersion of speed of downsizing for apanel of Japanese manufacturing firms between the 1990s and the 2000s.
10More precisely, in merging the BSWS and the ETS for the years 2005–9, they build a rich employer–employee panel
data set that allows them to disentangle individual and firm determinants of wage inequalities.

17

communication technologies (as shown by Ito & Lechevalier, 2009) than that of financial
innovations and of international accounting norms. To summarize the argument developed in
Lechevalier (2014), the major finding is that the mechanism at the origin of the current resegmentation of the Japanese economy lies on the differentiated introduction by firms ofopportunities created by the newly deregulated financial environment in the 1980s-1990s (newfinancial products such as corporate bonds for example) that condition the corporate behavior
thereafter because of complementarities between financial structure and employment practices (seefor example, Aoki, 1989 on this point). This discussion goes beyond the scope of the present
chapter.

7. Conclusion
In this chapter, we have shown that rising inequalities in Japan correspond to a large extent
to an unprecedented growth in the disparity of wages and employment security between wage
earners of comparable status, working in firms of similar size and belonging to the same sector. De
facto, a part of the population that had been included in the post-war social compromise finds itself
in an unaccustomed situation of insecurity, in which work is no longer associated with a guaranteeof social integration. It is to take account of this form of social change that we have proposed theconcept of re-segmentation of the Japanese labour market in order to understand the structuraltransformations that are occurring.
Although the lack of space did not allow conducting them systematically, a first dimensionof our interpretation is the emphasis on international comparisons. Few examples in this chapter
have shown that Japan is not unique from the viewpoint of the impact of the evolving industrial
structure on inequalities, especially what concerns deindustrialization and rising heterogeneity offirms. Nonetheless, its impact is particularly important in the case of Japan, because of both themechanisms at work but also the absence of compensating mechanisms. It may explain why the
exceptional trajectory of Japan from the viewpoint of rising inequalities since the early 1980s.
A second dimension of this interpretation is its historical nature. It leads us to reject the idea that theJapanese wage labour nexus is unequal by nature (see also Mira d’Ercole, 2006). The historicalperspective we adopted allowed us to show, on the contrary, that, if the segmentation of the labour
market is a structural given, it has deeply evolved in its intensity and its lines of cleavage. In other18

words, the contemporary debate on inequalities in Japan was not born in the 1990s, but has roots
going back to another debate, much older, on the nature of the employment system established after
the Second World War and the structure of inequalities that was associated with it. Our own view isthat segmentation was central to the post-war social compromise. Its impact on inequalities has
evolved, depending on the industrial dynamics – which has been the focus of this chapter – but also
on other factors (such as the welfare and the education systems that have been deliberately put
aside).
In this chapter, we have shown the impact of the industrial dynamics on the Japanese labormarket as a major source of rising wage inequalities. It explains why, as a labor economist, we havealmost exclusively focused on industrial dynamics. At the same time, it is clear that it is not the
only one as it will be shown in other chapters of this book. In this conclusion, we would like toargue that only a political economy dealing with diversity of capitalism and institutional change
may give a comprehensive understanding of this evolution, in both comparative and historicalperspectives (Boyer, 2013). According to this approach, inequalities are neither one of the outcomesof a given form of capitalism, in the same way as growth, nor a fact that goes beyond the diversityof capitalism, because determined by the impact of globalisation or of technological progress. In ourview inequalities (their intensity, their form), reveal something profound about the very nature ofeach kind of capitalism, in that they allow us to comprehend the nature of the underlying social
compromise, notably concerning the division of value added and of risks. Although Japanese
capitalism was segmented in the classic form of Japanese capitalism, it was fundamentallyegalitarian in outcome, and even in intention. This is shown by the low level of inequalities reachedduring the 1970s. In this process, economic stagnation has certainly played a role. However,industrial dynamics alone cannot produce such a rupture, which takes place at the level of the social
compromise. If mechanisms on the sides of the industrial dynamis and of the labor market were at
the origin towards the rise of inequalities, there were aggravating mechanisms in other spheres (e.g.
education) and an absence of correcting mechanisms in other spheres (e.g. welfare). It means that,
overall, the significant rise of inequalities is the indisputable sign that Japanese capitalism has
experienced a great transformation since the early 1980s (Lechevalier, 2014).
To put it differently, arguing that labor market is the matrix of inequalities in Japan andexplaining their structure by industrial dynamics does not mean that rising inequalities aremechanical (as in an explication based on aging for example) and that politics does not matter.
More precisely, it is possible to define the Japanese employment system as the articulation ofdifferent segments of the labour market and by equilibrium between stability and instability. It is
19this equilibrium and this compromise that has been questioned, directly or indirectly, by neo-liberalpolicies as a whole. It is these policies that are at the origin of a real rupture, even more than thecrisis. Their impact is apparent in the financialisation - which has been itself a major source of theincreasing diversity of firms -, in the evolution of the welfare or the educations systems, which are
the objects of specific chapters in the rest of this book.

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24

Figures & tables

Figure 1: Evolution of the Gini coefficient for income after tax(1989-2009)
0.385
0.380
0.375
0.370
0.365
0.360
0.355
0.350
0.345
0.340
2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

0.335

Source: MHLW, Shotoku saibunpai chôsa (Survey on the Redistribution of Income)Figure 2: Evolution of Top Income share (Top 5 %)Source: Moriguchi & Saez (2008)25

Figure 3: Evolution of the poverty rate in Japan between themid 1980s and the late 2000s

17
16
15
14
13

Total

12
11
10
1985

1988

1991

1994

1997

2000

2003

2006

2009

Source: MHLW

Figure 4: Poverty rates in OECD countries
at the end of the 2000s
25
20
15
10
5
0

Source: OECD
Note: The poverty rate is the ratio of the number of people who fall below the poverty line and thetotal population; the poverty line is here taken as half the median household income.

26