GCOE Discussion Paper Series
Global COE Program

Human Behavior and Socioeconomic Dynamics
Discussion Paper No.146

Japano-Sclerosis?

Kenn ARIGA and Ryosuke OKAZAWA

July 2010

GCOE Secretariat
Graduate School of Economics

OSAKA UNIVERSITY

1-7 Machikaneyama, Toyonaka, Osaka, 560-0043, Japan

Japano-Sclerosis?
Kenn Arigay and Ryosuke Okazawaz

Abstract
There exist many symptoms and emerging economic trends
suggesting that the Japanese economy is headed in the direction
where many European economies ended up in much of 1980s and1990s. This paper makes highly speculative long-run ’forecast’,based upon a comparison of two stylized models of the Japaneseand "Euro" labor markets. We argue that Japano-Sclerosis, if
there is one, should look rather di¤erent from Eurosclerosis in
1980s and 1990s.
Our forecasts are the following.
(1) Because of the resilience of the unique recruiting systemof the school leavers, the Japanese economy is unlikely to facechronic high unemployment and joblessness, which plagued theEuro economies for decades, whereas (2) the chronic problem inthe labor market is more likely to manifest itself as extremely low
labor turnovers, and stagnant output growth and earnings. (3)Both circumstantial evidence and model implication suggest thatthe core characteristics of the Japanese labor market will remainunchanged even if the stagnation of the economy continues oreven worsens in the future..
Very preliminary. Do not quote, but comments welcome. The research is a partof G-COE project headed by Fumio Ohtake at Osaka University, entitled Human
Behavior and Socioeconomic Dynamics. We thank Giorgio Brunello for comments
and constructive criticisms. This paper is prepared for CEPR-RIETI joint workshop
held at London Business School, July 6, 2010. We wish to thank Thorben Anderson
and other participants of the workshop for comments and discussions.
yCorresponding author. Institute of Economic Research Kyoto University,
Yoshida Honmachi, Sakyoku, Kyoto 6068501 Japan e-mail: ariga@kier.kyoto-u.ac.jp,
phone:+81-75-753-7123
z
Post doctoral fellow,Osaka School of International Public Policy, Osaka University, 1-31 Machikane Yama, Toyonaka, Osaka 560-0043 Japan1

1

Introduction

After two decades of the stagnation, the Japanese economy appears tofollow the path taken by many European economies in the past. Ageing
population, rising demand for social security that threatens the longrun …scal balance, dwindling productivity growth, declining saving rate,etc, etc, all of which, twenty years ago, the Japanese only heard about
as some malaise reported in distant Europe. There now exists a senseof urgency, and, simultaneously, a sense of helplessness and resignationin Japan — that the economy and society of Japan seem unable tolift itself out of the quagmire. In the backdrop of even more dismal
news on economy, in the last summer, the Democratic Party of Japan
won the general election over the reigning Liberal Democratic Party.
The political platform of Democratic Party mimics many of the popular
policy packages already in place in many European countries1 . Within
less than one year, however, the new government and their new policy
packages su¤ered a few clear defeats, and many important setbacks, andone of the underlying problems is the worsening …scal balance that took
the heavy blow from the global recession started in 2008.
There is little doubt that, in many dimensions, the Japanese economy will inevitably confront issues that Euro area have tackled for the
decades. On the other hand, given the di¤erences in the socioeconomic
legacy of the post war period, the two regions might well respond di¤erently to a similar underlying problem.
The current paper considers one such issue, the structural issues in
the labor market. The unique institutional setting in Japan that we focus
is the market for school graduates. In this paper, we place this particularsegment of the labor market at the centre of the Japanese employment
system and argue that many, if not most, of the characteristics of theJapanese labor market are critically linked to the institutional set upof the market for school leavers. We argue, therefore, that the likely
response to a similar negative shock is going to di¤er from what we haveseen in Europe.
As a matter of fact this paper argues that the practice, — of separating school graduates from the rest in the labor market, — is a key ingre1
To name a few:: higher minimum wage, bee…ng up unemployment compensation,
subsidy programs for the disabled and jobless, new subsidy programs for families
with children under age 15, a proposal to undergo whole sale restructuring of social
security system, means to promote in various manners and in dimension a society
and workplace amenable to parents with kids and full time jobs, bee…ng up thenursery and other support programs for those parents; building facilities for theelderly, etc,etc. These policy packages, at least taken at face values, do resemble theplatform of Euro social democrats’big government.

2dient responsible for the persistence of unique features of the Japaneselabor market. Stepping stone mobility of the youth is a rare exception
in the Japanese labor market, limited to a handful of highly specialized
markets for professionals. Success in the work life is largely synonymouswith the success in the …rst job after school. A corollary of the argument, which is the focus of the paper, is that Japan Sclerosis cannot be
the same as Euroscelorsis.
We argue that the symptom of Japano-sclerosis should di¤er in many
important ways from those familiar from Euroscelorsis. We argue that
the Japanese economy is not likely to experience unemployment rate anything closer to what Euro-sclerosis brought about. Instead, the symptom
appears mostly in reduced output, productivity and income, and lower
labor mobility across jobs, except for temporary and part time jobs.
For the purpose of a broad brush comparison of the two labor markets, we employ a model of job search with two features. We distinguish two (EU and Japan) economies in terms of the market for school
graduates. We model the unique setting in the Japanese case as a submarket provided for school leavers only. We assume that in Euro versionof the model economy, school leavers compete for jobs with other jobs
searchers without proper training. The second feature of the model isthe speci…city of training. To highlight the di¤erence, we assume that
all the trainings are job (…rm) speci…c in Japan, whereas in Europe all
the trainings are completely general. With this setting, our comparisons
are done mainly by numerical examples. We have three main …ndings.
First, we show that indeed the school leavers have much better chanceof getting a job in Japan than in Europe. On the other hand, the job…nding rate is lower in Japan if they do not succeed in the …rst market.
This occurs because the better quali…ed workers are far more likely tobe successful in the …rst job so that in the market for general untrained
workers, the market has much lower job availability per job searchers.
Given the speci…city of training, even workers separated from jobs forexogenous reasons do not do much better than those without past training.
Assuming that …rm speci…c training raises productivity more than
general training, we …nd that the permanent negative productivity shock
brings about di¤erent impacts on the two economies. In Japan, thedi¢ culty of getting a second or third job, coupled with larger gains fromtraining reduces labor mobility. Thus the negative productivity shock
lowers the returns from match, but the impact on unemployment rate
is relatively limited, the precise opposite of the Euro case, wherein theshock brings about a large increase in unemployment but the impact on
wage income is modest.
3

The remainder of this paper is organized as follows. In the next
section, we review the two decades of the Japanese labor market andcompare the experience with Europe in the 1990s. Section 3 develops acompetitive search model in which workers with di¤erent productivity
search for jobs that require training. In the latter half of the section,
we propose a comparison of Europe in 1990s and the current state ofJapan by employing two toy models of labor markets. Section 4 consolidates these models and use numerical examples to characterize two toy
economies in key dimensions. Section 5 concludes.

2

Japanese labor market in the last two decades
versus Eurosclerosis

The dismal performance of the Japanese economy, especially the labormarket, display many symptoms of the European experience earlier,which have been extensively discussed and analyzed. This short section compares the two cases. We start our comparison with the youth
labor market as it is our focus of the subsequent analysis. In the next
subsection, our focus is on the long term employment, a common feature in both regions, at least in comparison with the U.S. In the last
sub-section, we review the major empirical …ndings in the interactions
between labor mobility and productivity growth.

2.1

School to work transition

According to an OECD study by Manfredi and Quentini (2009), average
durations of school to work, time after leaving school until the …rst
employment, varies considerably not only across countries, but also vary
widely across di¤erent cohorts (in terms of level of education, gender,
ethnic groups, etc). Yet it is fair to say that the school to work in Europe
takes much longer time than Japan, even than the United States.
It is a customary practice of the Japanese …rms to set aside job openings for school graduates. These openings are distinct from regular job
vacancies posted on ad hoc basis. In the latter case, job openings aremostly for speci…c positions, whereas the openings for school leavers generally do not correspond to any speci…c positions. As such, quali…cations
for school leavers are in more general terms and rarely requires speci…cskills or expertise or work experiences. Most of the entry positions aredesigned primarily for the new school leavers, and only jobs left for the
rest of workers come primarily as ad hoc openings for speci…c positions,or the host of lower pay non-regular jobs.
Even in the year 2009, the worst year for college graduates seeking
jobs since late 1990s, 92% of them had regular full time jobs upon grad-4

uation. The …gure is 95% for high school graduates2 . Even including
non-standard (temporary or part time ) jobs, Manfredi and Quentini
shows that the overall average duration is longer than one year (16.9
months) for the European countries as a whole3 , and this …gure can becontrasted against 5.6 months in the United States. No comparable data
exists for Japan, but, as we explained above, at least for those who …nish schools, dominant majority of school leavers will have secured regularfull time job when they graduate.
Impressive as these records might look, it is important to take noteof the following facts. To begin with, students, schools, local public
employment o¢ ces, and employers spend considerable resource for job
placements of school leavers. Given the dominant role of this market in
the over all labor turnovers, failures in this market leaves the youth withlong lasting negative e¤ects and the stigma4 . The fact that …rms rely
mostly on recruiting school leavers imply that regular job openings for
mid career workers are limited, especially if they had been stigmatizedby the failure of the job search while in school, or separations from the…rst job within a short spell of employment. The employers also haveto pay for this system by committing to long term employment andinvestment in training.
What are the alternatives to the segregated market for school graduates? Stepping stone mobility, i.e., progression of skills and career
through spells of di¤erent (but related) jobs, is considered the majoralternative. For vocational school graduates in central Europe, the major track is through apprenticeship, which comprises the major part ofschooling in their last year. The school to work transition in European
countries are distributed between US type stepping stone mobility andcombination of apprenticeship and a Japan like direct job placement.
Manfredi and Quintini …nds that in spite of many similarities with the
US system, they …nd:
"pathways in the United States tend to be characterized by signi…cantly more dynamism than in Europe.... Pathways identi…ed for the2

These statistics are somewhat misleading, especially for the high school graduates
because those who did not get a job o¤er tend to report themselves as "helping
home chores", "preparing for college", "attending vocational college," etc, rather
than "continue to search for a job" as their plans after graduation.
3
Needless to say, there exists signi…cant variations in Europe even among EU15
members: Manfredi and Quentini estimates the duration is roughly 6 months in
Denmark,Germany, and U.K, whereas the duration is about 2 years or longer in
Italy, Spain and Greece.
4
Kondo (2007), and Genda, Kondo and Ohta (2010) estimate the negative impact
on school graduates of entering the labor market in recession years. They …nd theimpact is large and long lasting in Japan than in the United. States. For Europe,
see Burgess, Propper, Rees and Shearer (2003).

5

United States are also characterized by signi…cantly less unemployment
than European ones."
Roughly speaking, Manfredi and Quintini …nds that the youth inEurope is far more divided (than in the U.S) into two polar groups:
the one more successful group complete transition in relatively shortperiod of time without much experience of unemployment, whereas theunsuccessful group tend to go through prolonged period of transition
with many extended unemployment spells and unstable jobs.
The di¤erence between the US and Europe perhaps re‡ects several
important elements of the rigidity in the European labor market. Firstis a variety of social and legal system that protects the job of permanent
employees, thus making the entry into "insiders" di¢ cult for the youth.
The second is possibility of "trap" for the youth who start out theircareer with a temporary job: they do not o¤er much of training or
pathway towards more permanent higher pay jobs.
Both in Japan and Europe, the youth leaving school to search forjobs face a serious risk of being trapped in temporary jobs and unemployment5 . The di¢ culty in both regions re‡ects relative job security
and protection given to the permanent workers. Stagnant job creations
coupled with limited labor mobility place heavy burden on the new entrants.

2.2

Resilience of the status-quo: long term employment

Even after two decades of low economic growth, the core of the Japaneseemployment system remain largely intact, although the size of the core
employment — employment with long term mutual commitment andrelative job security — have shrank considerably. As Kato and Kambayashi (2011) put it, the prolonged stagnation of the economy hadstrong negative impact on women and lower educated groups, or, "expansion members of lifetime employment" (Kato).
Given the limited scope for downward adjustments of the core employment size, the Japanese …rms relied heavily on adjustments in work
hours, and also on the dismissals of temporary and part time workers.
The single most important change in the overall employment picture in
Japan is the steady increase in the share of non-standard (part time
and/or temporary) employment. As Kato and Kambayashi argues, it
5

In Ariga, Kurosawa, Ohtake and Sasaki (2009), we conducted a survey of youth
with less than college education and …nd that the impact of …rst job after school
persists for a long time. The median probability of having regular full time job atage 26 (8 years after high school) is .61 if they had regular full time job at graduation,compared to .27 otherwise.

6

would be misleading to consider this as a re‡ection of structural changes
in the employment system as the increase of non standard employment
is the other side of the same coin, the stability of the core long term
employment.
The other side of sluggish employment adjustment, especially thecore employment, is the sizable wage adjustments, even nominal wage
cuts. Ariga and Kambayashi (2010) investigate the choice of employment
and base wage adjustment of the …rms under severe distress. Using aunique survey of Japanese …rms, they found that downward adjustments,
even the base wage cut was indeed used if the target reduction of labor
cost is of moderate size. Some …rms under distress, especially when
faced with the need to reduce labor cost by substantial margin (anything
beyond 5%), they did lay o¤ some permanent employees.
Without disputing the fact that indeed in 1990s and onward evenmajor …rms did lay o¤ some of their permanent employees, the balancein comparison at least with U.S. experience indicates that the overallrigidity of the core employment remains as the basic feature in Japaneselabor market.
The stability of core employment resulted in lower level of new hires,
especially from school leavers. Several studies have shown that …rms withcore employees with long tenure and high average age are less likely tohire school graduates6 . Thus some view that the job security of mature
employees are retained at the cost of depriving school leavers to land on
permanent jobs.
The resemblance of the argument with ’insider-outsider’views of therigidity of European labor market is unmistakable. In both regions, thejob security is protected by legal or social barriers against laying o¤ permanent employees. Court precedents e¤ectively rule out discretionary
dismissals of regular employees unless the employer can demonstrate thatsuch an extreme action is indispensable for the survival of the …rm7 .
At the same time, institutional background as well as underlying
mechanism that give rise to the state di¤er substantially. In the caseof Japan, there is little reason or empirical studies suggesting that thejob security is the result of the labor union bargaining power, which isoften perceived as the major culprit for the excessive protection of insiders in European labor market. Moreover, as we have shown above,6

See Genda (2004)
OECD’s EPL is the popular index used as a proxy for the strength of employment
protectionist legislations in each country. The Japan EPL …gures is close to theEU15 average reported in OECD employment Outlook. Boeri and Garibaldi …nds
the relaxation of various protection measures in EU accounts for a signi…cant portionof the total decline in unemployment rate during the last decade.
7

7

the wage concession by the employee side played signi…cant role in moderating the downward pressure on the employment in Japan, whereas
many empirical studies point out that real wage rigidity aggravated theEurosclerosis.

2.3

Limited labor mobility as (at least a part of )the cause of slow productivity growth

The ’lost decade’in Japan was the period also of depressed metabolismof the economy overall, and labor market is no exception. Of special
importance is dwindling rate of start-ups and hence job creations byentry of new …rms. There has been some weak recovery in the last
few years before the onset of the recession in 2008, but, even that isway too small, even after taking account of the weak over all recoveryof the economy. Through several series of important studies to review
and analyze the cause of the long stagnation of productivity growth,a consensus is that at least part of the stagnation is attributable tothe limited labor mobility8 . The weak recovery from 2002 until 2007
brought about some recovery also in TFP growth, but studies indicatethat the recovery was more of an outcome of employment restructuring.
Hence we tend to observe a perverse tendency that sectors with higher
TFP growth have lower or negative growth in labor inputs.
The European experience of the limited labor mobility has been also
analyzed extensively . van Ark, O’Mahony and Timmer (2008) comparesproductivity growth in Europe and the United States and …nd that European growth rate lag behind the US primarily because of the limited
impact of ICT, …nance and newer service sector in Europe, whereas they
do not …nd any visible impact of Sclerosis. I.e., their estimate showsmodest gains from reallocation from labor both in Europe and the US,
which as noted above contrasts sharply with the Japanese experience.
Using industry-level evidence, Arnold, Nicoletti, and Scarpetta (2008)
show that tight regulation in continental EU countries hinder the reallocation of resources toward more e¢ cient …rms and thereby gives anegative impact on productivity growth in ICT using sectors.
The very name ’Eurosclerosis’is invented to describe apparently con‡icting coexistence of (moderately high) GDP growth and high unemployment rate. According to this view, the limited labor mobility is
the cause of high unemployment and (at least partially) responsible forlower productivity growth. Needless to say, di¤erent views also exists.
For example, Hornstein et al (2007) calibrates a search theoretic model
8

See, for example, Fukao,Kim, and Kwon (2006), and Miyagawa, Sakuragawa,Takizawa (2006).

8

of job destruction and show that high productivity growth is the causeof higher structural unemployment for Europe when it is combined withgenerous unemployment bene…t and expensive …ring cost. On the other
hand, Pissarides and Vallanti (2007) and Cahuc and Zylberberg (2004)
dispute the claim made in Hornstein et al (2007) that creative job destruction is responsible for high unemployment in the presence of decent
economic growth. Pissarides and Vallanti use their estimate to argue
that GDP growth and unemployment are negatively correlated even after
taking account of the short run adjustment in the unemployment. Important, yet controversial, contributions by and Ljunqvist and Sargent(1998) calibrate a search model that features the loss of human capitalby laid o¤ workers. They conclude that their calibrated model identi…es
the generous unemployment bene…t combined with increased microeconomic turbulence are jointly responsible for high unemployment.
Boeri and Garibaldi (2008) draw a di¤erent picture: they found thatthe escape from sclerosis was made possible in Europe primarily becauseof the increased labor turnover, higher hazard from unemployment backto job. On the other hand, the decline in in‡ows into unemployment hascontributed relatively little to the overall decline of EU unemployment
rate for the last decade or so. They estimated in‡ows and out‡ows
of unemployment for EU-15 spanning two decades from mid 1990s to
mid 200s shows clearly that the high unemployment is associated withdeclined labor mobility, and vice versa.
Thus two di¤erent views seem to coexist: ’creative job destruction’view asserts that the high unemployment is an outcome of increased mobility, i.e., high unemployment of Eurosclerosis is primarily attributable
to higher rate of job destruction, whereas ’stagnation’ view considers
the lower job creations and lower rate of unemployment escape rate is
responsible.
Our own contribution (Ariga and Okazawa 2011) employing a somewhat similar search model calibrated for the lost decade of Japan …nds
that the increased turbulence in Japan during the lost decade resulted
in lower, not higher, labor mobility and lower productivity. The results
are largely in line with many empirical studies on the cause of TFP
growth slowdown in Japan. We also …nd that the long run impact of’turbulence’on unemployment is modest, primarily because of the two
factors.
First, Japanese economy now has a large segment of secondary labormarket for low paying jobs. Given the limited scope of unemployment
bene…t and relatively low minimum wage, these low pay jobs are easy
to …nd. As a result, those without regular full time jobs take up these
peripheral jobs, rather than being unemployed. Second, relatively heavy
9

investment in training which is largely speci…c to jobs reduces the labormobility and enhance the job security. Hence the negative productivity
shock results not so much on increased job destructions, but primarily
on lower output9 .
In conclusion, it seems fair to say that both Europe in 1990s andJapan now have (had) low labor mobility and likely to su¤er from theresulting ine¢ ciency. On the other hand, the underlying factors responsible for low mobility seem rather di¤erent: in Japan, it is primarily
the re‡ection of the internal labor market that rewards long term employment and heavy investment in training, whereas in Europe, strict
industry regulations and protection of the permanent employees are considered as the prime suspects10 .

2.4

The impasse

Between 1998 and 2008, real GDP of Japan grew at 1.1% per year. The
number will look even more dismal if we include the year 2009 and 2010.
EU-15 is much better in the GDP growth at 2.3% per year for the sameten year period ending 2008. It is di¢ cult to expect signi…cant departureof the economy from the stagnation which is now two decades in length.
Even in comparison with Europe during the 1990s, the situation seems
bleaker for Japan now than Europe in the midst of Eurosclerosis.
Just as many policy makers and economists in Europe during the
EuroSclerosis found the labor market riddled with institutional rigidities
and con‡icts, many Japanese policy makers and (some) economists viewthe current state of the Japanese labor market at the impasse. There islittle doubt that the lack of labor mobility hinders or at least greatly slow
down the pace of the much needed shifts: shifts from declining to growing industries, and also from lower productivity to higher productivity
sectors. On the other hand, given the extremely low job creation rates(which is also highly stable around 3.5% for the last two decades or so),there does not seem any miracle cure to increase labor mobility. Afterall, at least some part of the seniority related wage structure does re‡ect
the productivity enhancement due to training and experience which arelargely speci…c to the …rms.
9

One important concern on high unemployment in Europe is the deterioration ofhuman capital due to extremely long unemployment duration. A related concern for
the Japanese labor market is that the recent increase of temporary and part timejobs among the youth may have strong negative impact in the long run as most ofthese low pay jobs do not provide training and considered dead end,
10
As we already noted above, one common factor found in both Europe and Japanmight be social and judicial protections against dismissals of permanent employees.
On the other hand,Ariga and Okazawa [2011] …nds the impact of …ring regulations
to be rather insigni…cant in curtailing labor mobility in Japan.

10

We believe that at the root of the impasse is the system of recruiting
school leavers. In a sense, the current Japanese employment is an outcome of the recruiting decision made in the last three or four decades.
As such, the system has enormous built-in inertia. If there is any brightside of the two decades of the stagnant economy, the system has shown
surprising resilience: the fact still remains that the unemployment rateis still barely over 5%.

3

A labor market model with heterogenous workers
and training

The main objective of the model analysis in this and the next section isto provide a coherent framework in which we can identify the interactions
between di¤erent segments of the labor market, focusing on the trade-o¤
between worker quality and experience.
In this section, we lay out base model and then build two model
economies, which is meant to capture the key di¤erences in Europe inEurosclerosis and current Japan after two decades of stagnation.

3.1

Building blocks

The economy is populated by a unit mass of workers. At each point in
time, d of workers retire and replaced by the new entrants of the same
size. Although extremely simpli…ed, constant in‡ows of school leavers
and retirement out‡ows are represented by this assumption. The workers
are composed of two types, H and L: They di¤er only in their innate
productivity, ej witheH > eL
We denote by 0j the constant population share of type j(= H; L) workers.
We assume that the output of a job slot employing a type j worker
is given by
y = q i (ej + x);
i = S; Gwith x being a random draw from a known probability distribution,
F (x); and, q i is the job productivity which depends upon the type oftraining given to the worker.
We consider two types of training, general and …rm speci…c. The
latter training is tailored for idiosyncrasy of individual jobs so the impact
11

on productivity is larger than general training.
qS > qG
We assume both types of training incurs c. The advantage of generaltraining is just that, it is general and the e¤ect of training applies equally
to other …rms adopting general training. On the other hand, speci…ctraining is assumed useless once a worker is separated from the trained
job. Thus, a worker needs to be re-trained when he is matched to a
new job, irrespective of the training type at the new job. Moreover, we
assume that no output is produced if a worker is not trained.
We assume that posting a vacancy costs k per unit of time. The
matching process is standard. Denote by m the size of the match perunit of time. Assuming linear homogeneity of the matching function, wehave
m = m(u; v)= u ( ) = v ( );v;u0( ) > 0; 0 ( ) < 0
wherein u;and v are number of job searchers and posted vacancies, andis the ratio of the two, known as the labor market tightness. We assume
that the employed workers do not search so that job searchers and unemployed workers are synonymous. Crucially, we assume that matchingis random in the sense that job slots cannot restrict the matching to aparticular type of workers.
On the other hand, we assume that worker types can be observed
once a worker is matched to a job slot. Hence the employment contract
can be made contingent upon the worker type .Finally, the analysis that
follows is limited to the steady state.

3.2

Wage posting and competition in search market

We assume that each job searcher can choose the job slot that they apply.
Each job slot posts its wage and other payo¤ relevant information. Firms
posting o¤ers are able to fully commit to the posted o¤ers. One twist of
our model is that worker types are unobservable in the search market.
Thus unless workers self select into di¤erent types of jobs, employers
cannot exclude particular types of workers11 . On the other hand, we
assume that the past work experience of individual workers is publicly
11

When we allow heterogenous job slots to be posted, di¤erent types of workers
may self select and the worker type may be revealed. See our discussion in Appendix.

12

available information. Hence, the search market is divided only in termsof the past work experience. Thus workers with di¤erent types are mixed
in both markets. We assume, however, upon matching, the worker typeis revealed. Therefore the posted contract between the employer and theworker can be made contingent upon the worker type.
Given these assumptions, a wage o¤er is given as
w = wjs (x)wherein j is worker type, s(= U; T ) denotes the work experience, and x
is the match speci…c productivity, drawn randomly from F (x) for eachmatch. In the model of competitive search, posted vacancies compete
against each other to attract job searchers to apply. At equilibrium,vacancies can expect to attract strictly positive (expected number of)job applicants if and only if their o¤er has the highest returns fromsearch. Therefore, the expected returns from search [!] for each typeof workers are equated across vacancies in each sub-market. At such anequilibrium, each vacancy treats this market ’price’of job applicants asgiven and maximize the pro…t by choosing the expected number of job
applicants, i.e., the market tightness ratio, : In what follows, we show
how and ! are determined in each sub-market (U; T ) for each type ofworkers (H; L).
3.2.1

Workers

The procedure we use for solving the equilibrium is standard. We build
Bellman equations that determine asset values of workers and job slots
with or without partners. We start with workers. There are two submarkets, depending upon the work experience. We denote by superscript
U for sub-market for workers without past work experience, and by T
for those with past work experience. If the training is general (type G),
workers with past work experience do not need re-training. We haverUjU =(U)

rEj (x) = wjU (x)j = H; LZ

Ej (x)xUj

dEj (x)

UjU

f (x)dx

Ej (x)UjT ;dUjU ;

(1)
(2)
(3)

wherein UjU denotes the asset value of an unemployed worker of typej without training, and UjT for the trained workers12 . Similarly, Ej (x)is the asset value of an employed worker of type j with match speci…c12

We ignore the unemployment bene…t in the model analysis that follows. In model
calibrations in the next section, we incorporate unemployment bene…ts.

13

productivity draw x: is the probability of exogenous separation. The…rst Bellman equation states that the required rate of return, rUjU ; equals
the expected ‡ow bene…ts on the right hand side of the equation. Its…rst term is the expected capital gain from the match given by theprobability of match ( ( U )) times the expected gain from employment.
Notice two types of workers are pooled in the market so they face thesame matching probability. The match is formed if and only if the drawof the match speci…c productivity is not smaller than the threshold, xUj
which we will determine later on. The second term is the capital loss
due to retirement which occurs with probability d: The second equation
is for the asset value of the employed workers. The expected returnis equal to the wage minus capital loss which occurs due to retirement
or exogenous separation, which occurs with probability . Note that aworker separated from the job becomes unemployed, but with the pastwork experience, hence his asset value becomes UjT :Similarly for the trained workers, we haverUjT =(T)

Z

Ej (x)xTjrEj (x) = wjT (x)dEj (x)UjT

dUjT ;dF

Ej (x)

UjT ;

(4)
(5)

We can rewrite asset equations for the unemployed and obtain(r + d)UjU! Uj =(r + d)UjT! Tj =

(
(

U
j )
T
j)

Z

Z

Ej (x)

UjU

dF;

Ej (x)

UjT

dF

xU
j

xT
j

The expected returns from search ! sj plays the role of market price asworkers compare ! sj and choose the vacancy with the highest expected
return. We have
Z
T
T
(6)
R! j = ( )wjT (x) ! tj dF
xtj

Similarly, for the untrained workers, we obtain
#
Z "
T
U
(!
!
)
j
j
dF
wjU (x) ! Uj +R! Uj = ( U )
t
r
+
d
xj

14

(7)

3.2.2

Job vacancies

The job vacancies side are also standard. We start with the job slot for
the untrained workers.
ZUU
rVj = ( )JjU (x) VjU c dF k
(8)
xU
j

wherein we assume (without the loss of generality) that the training costis incurred upon the employer13 . Similarly for job slots for the trained
workers, we haveZ
T
T
JjT (x) VjT Di c dF k;(9)rVj = ( )xUj

DG = 0; DS = 1

wherein re-training cost depends upon the type of training. On the other
hand the value of a …lled job (Jjs ) is given byrJjs (x) = q(s)(ej + x)
s = U; T
3.2.3

wjs (x)(d + )(Jjs (x)Vjs );

Competitive search equilibrium (Euro model)

The expected returns from search for unemployed workers are reproduced below.
Zt
T
R! j = ( )wjT (x) ! Tj dF
R! Uj = ( U )

Z "
xtj

xtj

wjU (x)

#
T
U
(!
!
)
j
j
! Uj +dF
r+d

Suppose that sj of the job searchers are type j in market s(= T; U ):The returns from creating a vacancy and the value of a …lled job jointly
satisfy the following.

rV s = ( s )

s
H

Z

xsH

[JHs (x)c(U ) = c; c(T ) = Di c;rJjs (x) = q(ej + x) wjs (x)Vjc(s))] dF +(d + ) Jjs (x)

13

s
L

Z

xsL

[JLs (x)Vsc(s))] dF

Vs

Posted wage rate can be freely adjusted to re-allocate (if necessary) training costto the employee. See Moen and Rosen (2004).

15

!

k;

We havewjs (x)V )=R
We use the value functions for the workers to gets(JLs (x)

(

T

)

( U)

Z

Z

xtj

xn
j

q(ej + x)t

wjT (x)dF = R! Tj +

( )

Z

xtj

wjU (x)dF = R! Uj + ( U )

Z

rV s

! Tj dF;

xn
j

"

! Uj

#
(! Tj ! Uj )dF
r+dInserting these expressions into (8) and (9), we haveZ(! TH ! UH )q(eH + x) ! UH rV U
U
U
U U
rV
= ( ) H
c+
dF
R
r+d
xsH
Z
(! TL ! UL )q(eL + x) ! UL rV U
U
U
c+
dF
+ ( ) L
R
r+d
xsL
U U
H !H

rV T T = ( T ) TH
+ (

T

)

Z

U U
L !L

k U;
q(eH + x)

xsH

T
L

DG = 0; DS = 1

Z

xsL

! TH

rV T

! TL

rV T

R
q(eL + x)
R

Di c dF

T T
H !HDi c dF

T T
L !L

k T;

As we stated above, at the competitive search equilibrium, each job
slot takes ! sj as given. The model is closed by imposing two equilibrium
conditions. First, at equilibrium, creating vacancy cannot generate positive pro…t. Thus, the zero pro…t condition implies
V s = 0;s = U; T
The second condition is that each vacancy optimally choose the market
tightness ( s ) to maximize the asset value of vacancy, treating as given
the expected returns from search for each type of worker in each submarket14 . The optimal choice of the tightness is obtained by
@V s
=0
@ s
14

The gist of the underlying idea is the following. In competitive search equilibrium, each worker can select the vacancy to apply. Each vacancy post all the payo¤
relevant information as the employment contract, to which employers are assumed

16

Thus we have
0

U =

T =

U
H

Z

+

U
L

T
H

Z

q(eH + x)
R

xU
H

Z

(! TL ! UL )
dF;
r+d
Z
q(eL + x)Ti
D c dF + L
R
xT
L
c+

q(eH + x)
R

xT
H

s = k

(! TH ! UH )
dF
r+d

c+

q(eL + x)
R

xU
L

( s)

Di c dF

and
( s)

s = k

s

+

s s
H !H +s s
L!L

Putting these to together, we havek ( s) =0( s ) ( sH ! sH + (1
s 0 s
( s)
( )
s
( )

s
s
H )! L ) ;(FOCP)

Notice that the equation above determines the equation. value ofin market s as an increasing function of sH ; the share of the type H
workers. Putting this condition back to (6) and (7), we have

! Uj =! Tj =

(
(

U

T

)
)

Z

! Uj

xU
j

q(ej + x)
R

! Tj

xU
j

q(ej + x)RZ(! Tj ! Uj )
c+
r+d
!

Di c dF

!

dF;

(10)
(11)

Thus the worker receives of the surplus generated from the match, aresult known as Hosio’s law15 .
Note that the shares of type H workers in two markers [ sH ] areendogenous variables. To solve for these shares, we compute the steadystate employment and unemployment shares . The results are:able to commit. Thus, in order to induce workers to apply for a vacancy, the …rm
must o¤er the maximum expected returns from search (! sj ) in each sub-market foreach type of workers. Hence all the active vacancies in each sub-market must guarantee this market return. As far as a job slot o¤ers this market value, it can attract
as many expected number of job applicants as they choose.
15
If you prefer, the identical equilibrium can be obtained by employing conventional
Nash bargaining solution for wage determination using as the surplus share given
to workers.

17

uUj =
uTj =
mj =

d 0j
d + ( U )(1

F (xUj ))0
j(d + + ( T )(10j( U )(1(12);( U )(1F (xUj ))F (xTj ))) d + ( U )(1
F (xUj )) d + ( T )(1(d + + ( T )(1

F (xUj ));F (xTj ))F (xTj ))) d + ( U )(1

F (xUj ))

(13)
(14)

Thus we have
U
H

1

=
U
H

d + ( U )(1 F (xUL ))
uUH
=
uUL
d + ( U )(1 F (xUH )) (1

0
H
0
H)

<

0
H

(1

0
H)

(15)

the inequality follows from the fact thatxsH < xsL
Similarly, we have
T
H

1

uTH
uUH
=
=
T
uTL
uUL
H

(1
(1

F (xUH ))(d + + ( T )(1
F (xUL ))(d + + ( T )(1

F (xTL )))F (xTH )))(16)

Under the assumption16(1(1

F (xUH ))(d + + ( T )(1
F (xUL ))(d + + ( T )(1

F (xTL )))>1
F (xTH )))(17)

The share of type H workers are smaller than population share at themarket for the trained, and even smaller at the market for the untrained.
Thus we have
0T
H> H >! Tj > ! Uj

U
HTherefore, (focp) implies
T

>

U

16
In the calibrations reported in the next section, this condition is always satis…ed.
We suspect that this always holds at equilibrium, but, have not been able to provethe claim.

18Lemma 1 The competitive search equilibrium with pooling of worker
types is given by the following set of equations.
ssk ( s ) = 0 ( s ) ( sH ! sH + (1H )! L ) ;s = U; T
#
Z "
U
U
T
q(e
+
x)
!
)
!
(!
j
j
j
j
! Uj = ( U )
c+
dF;
U
R
r
+
d
xj
#
Z "
T
q(e
+
x)
!
j
j
! Tj = ( T )Di c dF;
T
R
xj
U
H
U
H

1
T
H

1

=

=
T
H

xUj =

d + ( U )(1d + ( U )(1
uUH
uUL

(1
(1

! Uj + Rc

F (xUL ))F (xUH )) (1

0
H

0
H)

;

F (xUH ))(d + + ( T )(1
F (xUL ))(d + + ( T )(1
(! T
!U
j
j )
r+d

q
T
! j + RDi c(s)xTj =q

F (xTL )));F (xTH )))

ej

ej ;

j = L; H

If (17) is satis…ed, the solution satis…es:T> U;! sH > ! sL ;! Tj > ! Uj ;
0
H>

T
H >

U
H

The pooling equilibrium is comprised of two markets which di¤er inworker quality and training. In both dimensions, unemployed workers
with the past training are better. Not only their past work experiencesave training cost, but they are on average higher quality. This is inre‡ection of the simple fact that they have been employed and received
training elsewhere, as a result of (noisy) selection re‡ecting both match
speci…c productivity (luck) and the worker quality. Thus in this highly
stylized model of the European labor market, school leavers face uphillbattle. Not only they are statistically discriminated due to the fact thatthey have never been employed, but also the lack of the past training
place them at added disadvantage.

19

3.3

Labor market for the school graduates (Japanmodel)

Consider now what happens if the institutional set up insulates a partof market participants from the rest: a market accessible only to those
who have never been matched to an employer before. This is our model
equivalent of the market for school graduates. There will be three submarkets, E, U and T. E is the marker for school leavers: workers who
have never been matched to a job before. We assume that school leavers
have only one chance: as soon as they are matched to a vacancy, he isdisquali…ed from being a new graduate. Thus if they are not successful
in the …rst match, they need to search for the job in U market, thesub-market for those without training but have been matched to a …rmin the past. T is the market for the trained workers. We continue toassume that each sub market is pooled in the sense that both types ofworkers are mixed.
We skip the lengthy derivations of the competitive search equilibriumin this setting as they are analogues to the preceding cases. The optimal
condition for the tightness ratio for each sub-market is given by( l) = 0( l)l = E; U; T

k

!E
j =

! Uj =! Tj =

( E)

xE
j

"

(q(ej + x)R

! Uj );( E )(! Ej"Zq(ej + x)
U
( )
R
xU
j
"
Z
q(ej + x)
T
( )
R
xT
j

U
xE
j = xj =

xTj =

Z

l
l
H ! H + (1

(! T
!U
j
j )
r+d

! Uj + Rc! Tj + RDi c(s)q##(! Tj ! Uj )dF;
r+d

Di c dF;

(18)
(19)
(20)

ej ;

(21)

j = L; H

(22)

q
ej ;

c+

! Tj

(FOCE);#(! Tj ! Uj )
c+
dF
r+d

! Uj

! Uj

l
l
H )! L

wherein the ratio of two types of workers in each sub market is given by

20

E
H

1

=
E
H

U
H
U
H

1

=

<
T
H

1

=
T
H

0
H

0 ;
H
E
H
E
H)
U

1

(23)
F (xUH ))F (xUL ))(1(d + ( )(1(d + ( U )(1
E
H
E
H)

(1
U
H

1
(1
(1

F (xUL )))F (xUH )))(24);
F (xUL ))F (xUH ))U
H

F (xUH ))F (xUL ))F (xTL ))F (xTH ))](25)

F (xTL ))>1
F (xTH ))](26)

d + + ( T )(1[d + + ( T )(1

Again, if we assume17
F (xUL ))(1
F (xUH ))(1

F (xUH ))F (xUL ))We haveUH

1

d + + ( T )(1[d + + ( T )(1

<
U
H

T
H

1

<
T
H

E
H

1

E
H

(27)

and we get
E

>

T

>

U

(28)

Intuitively, the results are easy to understand: in market E, twotypes of school leavers face exactly the same matching probability. The
outcome of the match di¤ers, however, so that type H workers are more
likely to succeed in the …rst match. Since they leave the market anyway
once they are matched, the mix of two types remain unaltered at the
population average, 0j . Since U market is populated with workers who
did not succeed in the previous matches, the average quality is the lowest.
It is interesting to note that once matched to a job slot, the thresholdlevel of x is exactly the same in E and U sub-markets. This is due to theonce-and-for-all nature of the E market. Once matched, school leavers
expect that they have to move to U market in the event of the failure.
Hence their default option is ! Uj ; not ! E
j :17

Similar to (17) above, we …nd that this condition is always satis…ed in calibrations. This restriction always holds if (17) holds. Again, we suspect, but have notproven that this inequality always hold.

21Naturally, sub-market U has the lowest average quality and lowest
ratio of vacancy per job searchers ( U ): The job searchers with the pasttraining experience is in between these two sub-market.
It is interesting to note that in this equilibrium, the quality and work
experience do not match. If we place the emphasis on the worker quality,
it is the E market that you should search, whereas the work experienceis more valued, then T market is the best choice. In both accounts,
workers in U market are adversely selected: they tend to be low quality
and without past work experience. As a matter of fact, the fear thatyou end up searching for job in U market that drives the job searchersin E market to be as accommodative as possible.
Assuming that the training is totally speci…c, then, the overall picture of the toy Japan economy di¤ers sharply from the toy European
economy.
In toy Japanese economy, the past work experience is not valued per
se because the past training is useless at a new job. It only signals theaverage quality of workers. Because of the market segmentation andtraining speci…city, this toy labor market cares only about the worker
quality. Naturally, the workers have the best chance when they leave theschool. The fear that they will be adversely selected in the untrained
market lowers their reservation level of match speci…c productivity. This
makes workers in E market doubly attractive for potential employers.

3.4

Interactions between market for school leavers
and choice of training

Before we get into comparisons of the two toy labor markets, we consider
the interactions between training types and the labor market settings.
We assume that in toy European economy all the jobs adopt generaltraining, and in the toy Japanese economy, all the jobs adopt speci…ctraining. In Appendix, we consider explicitly the choice of training types
when each job slot is free to choose between the …rm speci…c and generaltraining.
Without getting into technicalities, we make three observations. Firstof all, the presence of the market for school graduates favors …rm speci…ctraining. This is the case as far as the …rm speci…c training improves
job productivity more than general training. The reason is simple: theimpact of training is larger on type H workers than type L. Hence thereturns from quality is higher if training is speci…c. Since the market
for school leavers is the best in terms of quality, this feature places anadvantage on the …rm speci…c training.
Second, if we allow each job slot to choose from two types of training,
there are two additional types of equilibria, on top of the two which we
22

focused: all …rms adopting …rm speci…c training (Japan), and all …rms
adopting general training (Europe). Two other types of equilibrium ispossible, depending upon con…gurations of parameters. First, a separating equilibrium in which type H workers choose …rm speci…c training,
and type L workers choose general training. In this equilibrium, training types perfectly sort out two types of workers. There exists anothertype of equilibrium, a mixed equilibrium in which some of type L workers apply to general training, yet, other type L workers choose speci…ctraining. Thus, in general training jobs, we have only type L workers,
whereas in speci…c training jobs, both types are mixed.
The last point is the interaction between the market for school leavers
and types of training. In Appendix, we show that the market for schoolleavers lose its signi…cance in two other types of market equilibrium. To
see why, recall that the only meaningful distinction between market E
and U are in the mixtures of worker types. E market has higher share oftype H workers. In two other equilibrium, this di¤erence disappears andthe school leavers do not …nd it advantageous to search in E. The role ofthe market for school leavers is essentially a (noisy) screening device. If
worker types are revealed in the types of jobs they apply, the market forschool leavers lose its substance. The presence (or the absence) of themarket for school leavers has substantive in‡uence on the labor market
outcome only in two leading cases we consider in the main text: EU typeeconomy with all general training, and Japan with all speci…c training,as two types of workers are mixed in all sub markets.

4
4.1

Comparing two toy economies
Base calibration results

In this section, we compare two hypothetical economies representing
key features of Europe and Japan. The major features of two model
economies are shown in Table 1. As we discussed above, we have threesub-markets in Japan labor market, E for the school leavers, U for theuntrained workers (school leavers who failed in the past matches), andT is the sub-market for the trained, i.e., those who worked at di¤erent…rms in the past but separated. In the European labor market, only U
and T markets exist and school leavers start their job search in U .
The jobs in Japan adopt …rm speci…c training. Thus, the past work
experience is not valued per se as they need to incur the full cost of speci…c training at each new job. Nevertheless, the fact that they have work
experience in the past distinguish themselves from those in sub market
U , where those who failed in the past matches continue to search forthe job. The di¤erence in training types results in di¤erent job produc23

tivity and we assume that speci…c training enhances job productivity
more than general training (otherwise, there should not be any reason
to adopt speci…c training which is useless at other …rms). In line withthe fact that school leavers search for jobs before they …nish schools, we
assume that they are not eligible for unemployment bene…t. The sameshould apply for workers in U markets in both regions if the bene…t represented by b covers only the unemployment insurance. On the other
hand, in many countries other types of assistance to the unemployedworkers are available even to workers without past work experience18 .
Thus we consider two sub-cases below depending upon the availabilityof b to untrained workers.
Table 2 summarize the bench mark parameter speci…cations. On
top of the selection of training types and sub market compositions, we
distinguish two economies in the two details of speci…cations. First,
the unemployment bene…ts. We use 2.25 for the Europe and 1.5 forJapan. As we will see below, these …gures give the unemployment
bene…t replacement ratios roughly in line with empirical estimates forthe two regions19 .
We also exclude school leavers from the unemployment insurance inJapan as they are modeled as searching for jobs while in school. We
also distinguish two economies in terms of exogenous separation rate,
4% in Europe20 and 2% for Japan. Finally, in line with the di¤erencein training type, we set q (job productivity) to be higher in Japan than
Europe by 10%.
Table 3 compares two model economies at baseline speci…cations.
Our base line results assume that all workers except those in E market in
Japan receive unemployment bene…ts. The …gures in the square brackets
show the results when we exclude those workers in U markets fromunemployment bene…ts.
Although we should not read too much into these …gures, the over all
characterizations of two model economies are supposed to capture thekey di¤erences in Europe during the 1990s and Japan now. By far themost outstanding di¤erence is in unemployment rate, about 11% for Europe model economy, and 5.6% for Japan model economy. If we exclude
job searchers in E market (as they are representing students searchingfor jobs), the …gure is close to 4%, about the average unemployment rate
18

See Tatsiramos (2006) for Europe. For unemployment insurance and other bene…ts in Japan, see ** for details. The most important point about UI bene…ts inJapan is its length: the maximum coverage is one year. This places Japan as thecountry with one of the lowest replacement ratio.
19
See, for example, Blanchard (2004).
20
See Boeri and Garibardi (2009) for Europe, and Genda, Ohta and Teruyama(2008) for Japan.

24

in the last two decades. Three major factors account for the di¤erence.
First, the di¤erence in exogenous separation rates. Second, unemployment bene…t is more generous in Europe than Japan. At the bench markvalues, the replacement for Europe relative to average wage income is.28-.48, whereas the ratio is .17-.26 for Japan.
The presence of the market for school leavers help reduce the unemployment rate as the market attract more vacancies per job searcher
than in any other market, re‡ecting the premium attached to the averagehigh quality of workers in the market.
The job …nding rate, or the hazard rate out of unemployment toemployment are shown in second to fourth rows. The di¤erence acrossworker types and across two economies are easy to interpret. Naturally
type H workers are more likely to …nd a job, irrespective of the market
they search. Yet, it is by far the market E that o¤ers the highest probability. If you lose the chance in E market, the situation deteriorates
dramatically. In Japan case, the prospects for the trained workers fall inbetween two sub markets. In Europe model, trained workers fare betteras expected. These di¤erences across sub markets re‡ect the di¤erencesin the type mixtures. The U market in Japan has the lowest share oftype H market, followed by the European counterpart. The di¤erence isthat school leavers enter E market …rst, whereas in Europe, they haveto compete with past school leavers who did not succeed in the previous
matches.
The last three rows of the table reports returns from search in respective sub-market and worker types. Returns are uniformly higher inJapan than in Europe. Indeed, with lower separation rate and unemployment bene…ts, speci…c training o¤er higher returns for every worker.
When we compare the base results with those in square brackets, theresults are qualitatively the same for Europe. As the untrained workers
are excluded from the bene…ts, unemployment rate is lower in Europe
model. The di¤erence between untrained and trained now re‡ects also
the di¤erence due to the eligibility for unemployment bene…ts. Since
the exclusion lowers the reservation values, untrained workers are more
willing to accept employment with lower match speci…c productivity.
Hence the di¤erence in job …nding rates between U and T shrinks. In
Japan model, however,the job …nding rate for school leavers declines.
In the baseline case, the reservation productivity for school leavers islower than those in U because of the di¤erence in the eligibility forthe bene…ts. If those in U markets are also excluded, then, this wedge
disappears. In the base line case, school leavers looked doubly attractive
for employers: they are of highest average quality, yet lower reservation
wage because they are not covered by unemployment bene…t. When25

U market is excluded from the bene…ts, this second wedge disappears.
Hence lower job …nding rate for the school leavers. As a matter of fact,
as far as we include school leavers as a part of unemployment, thenthe unemployment rate is somewhat higher when U market is excluded
from bene…ts. This re‡ects the increase in job searchers in E. Whenthey are excluded, unemployment rate decreases from 3.97 to 3.66%, as
we expect.
All in all, we believe that results summarized in Table 4 capture
the main characteristics of two model economies: the school leavers inJapan clearly bene…t from having E market for themselves, avoiding
mix up with workers who failed in the past matches. The e¤ect of E
market, together with lower unemployment bene…t and lower separation
rate generates a much lower unemployment in Japan model.

4.2

Long run impact of negative productivity shock

Figures 1 and 2 show the two key di¤erences between Europe and Japan.
We plot the job productivity (q) on horizontal axis and unemployment
rate in Figure 1. Both are normalized by the bench mark values shownin Table 2. The same proportional change in long run productivity
induces rather di¤erent impacts on unemployment. The impact on unemployment rate is much larger in Europe than in Japan. As we vary
productivity from 1.62 to 1.98, the unemployment rate varies from 11.9
to 10.5%, the elasticity is about .6. In Japan model, as we vary q from
1.8 to 2.2, the unemployment rate varies from 5.3% to 5.7%: the elasticity is about .26. On the other hand, Figure 2 compares the impact
on average wage income. It is signi…cantly larger in Japan. Calibration
results also show that the impact of changes in unemployment bene…tis larger in Europe than in Japan. This re‡ects the fact that those in
E market are not covered by unemployment bene…t. As the E market
plays key role in the labor turnovers in Japan, it is not surprising thatthe impact of unemployment bene…ts is limited in Japan. [Recall thecounter-intuitive results in E market between two cases in Table ].
The di¤erence appears also in the job …nding rate, an annual probability of unemployment to employment transition. Figure 3 shows clearly
that the market for school leavers in Japan is far less responsive to the
productivity change than the market for untrained workers in European
model economy.
One of the reasons is the di¤erence in unemployment bene…ts as thethey raise the ‡oor of earnings so that the variations in the surplus froma match become proportionately larger. But it is not the whole story.
Because of the speci…city of training, the labor mobility in Japan is muchless responsive to changes in productivity, thus the impact is heavier on
26

income than on unemployment rate.
The impact is strongest for the trained workers (not shown), thenuntrained workers is the second, and the school leavers is the least affected. This applies also to Europe model as well: the impact is stronger
for the trained, than the untrained. The underlying reasoning is easy
to see. The impact of productivity on job …nding rate for the trained
workers are sum of the direct impact on the returns from search andcomposition e¤ects through the impact on the share of type H workers.
The share of type H workers is higher if productivity is higher. Both favorable impacts of productivity increase reinforce each other and inducea major change in the composition of employment. Thus the favorable
impact of productivity improvement on job …nding rate is more on typeL, than type H. To put it di¤erently, the model predicts that the negative productivity shock hits harder for type L, and also for the trained
workers.
The e¤ect of training cost and the speci…city plays an important rolein labor turnover. Although we do not model microscopic turbulence,
we show the calibrations results in our companion paper [ Ariga andOkazawa forthcoming] reproduced here as Table 4. Table 4 shows theimpact of increased permanent negative productivity shocks which occur
with some probability to individual jobs. Filled jobs hit by the shock
now has permanently lower productivity. Since it is idiosyncractic shock,workers can quit the job and search for the job which has not been
hit by the shock. The results in Table 4 show that the speci…city of
training substantially reduces the worker mobility. Hence the impact
on unemployment is modest but the impact on income and output arelarger. The second column shows the impact of the same change when
the re-training cost is reduced to a half of the bench mark case. The
unemployment rate increases, and, at the same time, the turnover rateincreases and the negative impact on output is reduced.
In a nutshell, these numerical examples show more or less what we
expected. Most importantly, we have shown that the long run impact of
productivity change on unemployment is far more pronounced in Europe
than in Japan, whereas the opposite holds for the impact on income. The
job …nding rate, or the hazard rate from unemployment, is also shown
to be far more sensitive to productivity change in Europe, especially soamong the lower productivity types.
Thus the message is clear. In Japan, the model predicts no dramaticincrease in unemployment or sharp increase in unemployment duration in
the event of negative productivity shock. The shock is absorbed mostly
by the decline in wage. This is largely the same …nding in the calibration
exercises in Ariga and Okazawa (forthcoming). In a manner of speaking,27

the great recession in Japan had devastating impacts on many dimensions of the economy, but they are not nearly as visible in the labormarket compared to what Europe experienced in 1980s to 1990s. No explosion of unemployment. The shock instead imploded inside the …rms
as major wage concessions. Our calibrated model here reproduce theunderlying mechanism of implosion. The negative productivity shock
results in a large reduction in output and wage, but not in massive unemployment21 .

4.3

Japanese labor market with EU characteristics

What would happen to the Japanese labor market if Japan repeats theexperience of Europe in 1990s? One very crude way to answer this question is to re-calibrate the Japanese labor market model using parametersthat we used for Europe in the baseline case. We retain the two key features: E market and speci…c training in Japan. To put this experimentdi¤erently, the results below is also our crude prediction on what will
happen to Europe if they set up the market for school leavers and adopt…rm speci…c training.
The results are in Table 5. Not surprisingly, the unemployment rateincreases by 1.6% to 7.1%, which is still almost 4% lower the European…gure. Other indicators show that the di¤erence between two regions
shown in baseline results are largely driven by two key features: themarket for school leavers and …rm speci…c training. This is most clearlyseen in the job …nding rates. In this hypothetical economy, the job…nding rates in E market are even higher than corresponding Japanese…gures in the base line model. This somewhat paradoxical result is dueto two factors. Higher unemployment bene…ts widens the gap between
E and U markets. Because of larger unemployment bene…ts applicable
to workers in U; school leavers have threshold productivity level evenlower than the comparable workers in U market. This makes schoolleavers to accept o¤ers that even workers in U market reject. Because ofhigher level of output, wage incomes are largely the same as in baseline
results for Japan. The substantial increase in unemployment is due tothe increase in separation rate. In terms of the returns from searchfor unemployed workers, the di¤erence between Europe and Japan are
narrowed, but the di¤erence still remains and higher for Japan in everycase. The biggest changes are in the returns from search. Both in U
21

Note, however, that wage rigidity, nominal or real, plays no role in our model.
Our calibrations results should not be treated as the one re‡ecting the di¤erence inrelative wage ‡exibility in the two regions. As a matter of fact, several empiricalstudies suggest that nominal wage rigidity aggravated the deep recession in Japan
during the late 1990s. See, for example, Kimura and Ueda (2001).

28

and T markets, returns from the search are higher for European markets
than in Japan with European parameters. At least in this aspect, higher
separation rate and unemployment bene…ts shift the balance in favor ofgeneral training.
Nevertheless, this hypothetical model economy looks more like Japan
than Europe. Figure 4 shows the permanent e¤ect of productivity change
on unemployment rate. It can be con…rmed that the unemployment rateis still less responsive than Europe.

5

Concluding Remarks

Changing recruiting and employment system in Japan is a bit like social
security reform. Even if a majority agree that in principle (say) pensions
must be funded and each generation should live on their own accumulated wealth for retirement, this type of arguments does not make muchof a headway towards a fundamental reform of the pension system, if
the current retirees live on the status quo (say, pay-as-you-go) pension
scheme.
Even if, in principle, the majority of workers agree that the current
recruiting system is too rigid and leave little room for comeback to those
who fail in the …rst job, those already with secure employment are
unlikely to give up their current status. Where and how to stop thecurrent system and move decisively towards the one more ‡uid and morerisky school to work transition? — no one knows.
Besides, getting out of the current system looks very much like a textbook prisoner’s dilemma. A majority of employers perhaps agree thatthe current recruiting system is geared too much towards the schoolleavers. If they can be assured of the quality of job applicants as comparable to those in the market for school leavers, they probably have no
objection to make at least signi…cant portion of vacancies available forgeneral job searchers. Our model shows, however, that, as far as themarket for school leavers are institutionally isolated from the other job
vacancies, it is inevitable that those with previous work experiences face
adverse selection. It is a simple fact that after (albeit noisy) screening,those who do not make it in their …rst job tend to be of lower quality, on
average. To undo this stigmatizing mechanism, it is imperative that thebarrier between the current and the past school graduates be lifted. We
all know that every employer can bene…t from the availability of skilledworkers in the external labor market, yet, they have no strong incentive
to initiate a change in the current recruiting method, until the change
happens.
Is it possible that the current employment system, — particularly theunique arrangements for school leavers — , has become the hindrance to29restore the labor mobility? Perhaps so, but undoing the E market comesat a large and immediate cost, at least for new school leavers facing aradically di¤erent job market. Most importantly, there is no way oftelling if the reform will bene…t the economy over all, even in the longrun.
Our simple numerical examples have shown that prototype Japaneselabor market exhibits several key characteristics, some shared with Europe but di¤er in many other important dimensions.
We have shown that the choice of …rm speci…c training reinforces
the advantage of the current system because the impact of training islikely to be more important for workers with higher productivity. The
market for school leavers is the best place to search for quality. If theexperience (past training) is important, general training is bene…cial
to the economy as a whole. In such a case, advantage from searchingin market with higher quality workers is relatively limited. Hence aninstitutional complementarity between the choice of training and themarket for school graduates.
We compared long run impacts of productivity change on unemployment in two regions. We have shown that the impact on unemployment
is more pronounced in European system whereas the impact is stronger
on wages in the Japanese system. Although very crude, this characterization seems to be supported by the data: in Japan, the impact of longterm stagnation on unemployment is rather limited but the impact onearnings seem much larger than in Europe. If so, Japan is not likely tosu¤er from high unemployment that plagued Europe in 1980s and 1990s.
Are we going to see Japano Sclerosis? Our conclusion is No, at least
not the kind that Europe had to su¤er.

30

6

Appendix Choice over training types

In the main text, we assumed speci…c choices of training type for thetwo model economies. In this Appendix, we show that these model
economies are both supported by the equilibrium strategies over the
choice of training types, given a set of conditions on parameters. At thesame time, we show that there are other types of equilibrium, depending
upon the parameter con…gurations. To simplify the analysis, we continue
to assume away unemployment bene…ts.

6.1

Choice of the training speci…city

Suppose that each job slot can choose either general or …rm speci…ctraining. If the former type is chosen, trained workers do not require
further training if in the future he is matched to another …rm employing
the general training method. If, on the other hand, the …rm chooses
training speci…c to the …rm, the productivity of the trained worker at
the job is improved more than the general training. The cost of training
speci…city is that they are not valued outside the current …rm (including…rms who also employ their own …rm speci…c or general training).
RecallqS > qG
wherein q S q G is the productivity when a worker receives speci…c (general) training. Crucial to the choice of training speci…city is which typeof workers prefer speci…c training.
s! sj =kwe have( s) =
Z

@! sj
=
@q

( )

@! sj

R
( s ) xs

@q

=

s

xsj

j

( )

Z

q(ej + x)
R

xsj

0

( s ) ( H ! H + (1(ej + x)R
(ej +x)
R

@! sj
@q

dF +

1+

0

( s )(1c(s) dF;

H )! L )0dF +( s )! sj
( s)

! sj

( s )! sj
( s)

@! sH
+ (1
@q

@! sH
+ (1
@q

)

@! sL
@q

@! s

) @qL

F (xsj ))which is clearly increasing in ej : Thus, if some workers choose for generaltraining, the …rst one will be type L.

6.2

Strategic interdependence

Not surprisingly, whenever the equilibrium involves simultaneous choices
over job types and sub-markets, individual choice depends upon the31expectation of the choices made by other workers and job slots.
Consider a sub market wherein two types of workers are mixed. Our
analysis of the equilibrium shows that the tightness of the market isgiven by
k

( )=

0

( ) ( H ! H + (1H )! L )Hence both types of workers expect higher return if more type H workers
are expected to participate in this market. Thus the choice over markets
for job search is complementary for type H, but it is strategic substitutes
for type L workers.

6.3

Four types of equilibrium

Four types of equilibria are possible. Two of them are already analyzed in
the main text: (1) all the existing jobs adopt general training (Gall), and(2) all the existing jobs adopt speci…c training (Sall). In the two otherequilibria, both types of training coexist in the economy. In separating
equilibrium (Separating), training choices are di¤erent depending upon
the worker type: type H workers choose type S training, and type G
chosen by type L workers. In the last type of equilibrium (Mixed), type
L workers are divided into type S and type G training, whereas all thetype H workers choose type S training.
For each case, we can obtain the equilibrium conditions in a manner
similar to the ones we had in the main text. We only show the results
below
6.3.1

Separating Equilibrium

For type H workers, they all choose speci…c training. Since all the workers in this market are type H and the fact that training are all speci…c
imply that market does not distinguish worker with or without the pasttraining. It simply does not matter because all the workers are homogenous in quality and the past training experience does not reduce thetraining cost at a new match. Hence we have(1

)k S = ! SH
! SH =

S

( )

Z

xsH

q S (eH + x)
R

! SH

c dF

At type G training market, all the workers are type L. We have

32

(1

)k U = ! UL ;! UL =(1(

Z

q G (eL + x)
R

! UL

c+

Z

q G (eL + x)
R

! TL

dF

)

xU
L

)k T = ! TL ;! TL =

6.3.2

U

(

T

)

xT
L

(! TL ! UL )
r+d

dF;

Mixed equilibrium

For general training market, the equilibrium conditions are the same asshown above for the separating equilibrium. Note that
! UL < ! TL
so that if type L workers are indi¤erent between type G and type S training when they are untrained, they should choose type G training if they
are trained in type G job in the past. The market for speci…c training
jobs now have both types of workers searching for the job. Equilibrium
is given by the following equations.
(1)k US =

(1

T
S =

(1

)k

! Uj S =( US )! Tj S =TS)()k UG = ! UL G ;! UL G =(1

US US
H ! H + (1TS TS
H ! H + (1

(

U
G)

)k TG = ! TLG ;! TLG =

(

T
G)

Z

US
US
H )! LTSTSH )! L;! Uj Sxnjq S (ej + x)R

! Tj S

xtj

q S (ej + x)RZ

q G (eL + x)
R

! UL GZ

q G (eL + x)
R

! TLG

Z

xN
L

xT
L

!

dF;

(! TLG ! UL G )
c+
r+d

dF;

(! Tj S ! Uj S )c+(r + d)!

c dF; j = L; H

dF

Since the decision on the choice of training is made when they are
not trained, we need that type L workers are indi¤erent between the two
choices. Hence we require! UL S = ! UL G
33

6.4

Local stability of equilibria (1) Case without E
marketWe will show that these four types of equilibrium appears in the following
order: if we start from (Gall) and change the parameter con…gurations infavor of type S training, the next equilibrium that appears is Separating,then, Mixed, and …nally Sall.
Recall that we have two sub markets, one for the trained and theother for untrained. Since the analysis is easier when there is no separate
market for school leavers (E market), we start with this case.
Let us start from (Gall) equilibrium. Their equilibrium conditions
are given in Lemma 1 of the main text. Given the comparative advantageof type G training for type L workers, we only need to consider deviations
by type H workers. Suppose a single type H worker deviates from theequilibrium choice of training and choose type S training (we assume
zero pro…t condition ensures that imminent pro…t making opportunities
immediately induce employers to set up type S jobs which does not exist
in Gall equilibrium). Since type L workers have no incentive to deviate,
the share of type H workers in type S training market is unity (no type L
workers apply for type S). The expected pay o¤ from deviation is equal
to UH given by(1)k US = ! UH ;
U
H=

(

U
S)

Z

N
yH

U
H

q S (eH + x)
R

c dF;

Whereas his payo¤ in U market for general training is given by(1)k UG =! UH =(1)k TG =! TH =UG U
H ! H + (1( UG )

Z

xU
H

TG T
H ! H + (1

( T)

Z

xT
H

U
U
H )! L;Gq (eH + x)
RTGTH )! Lq G (eH + x)
R

! UH

c+

! TH

dF

(! TH ! UH )
r+d

dF;

;

And the deviation is not pro…table and hence Gall equilibrium is viable
if
U
! UH
H
Notice that this is the stability condition for Gall equilibrium. The
stability condition of Separating relative to Gall is not the same. In
34this case, we need to consider the deviation by type H worker to choose
G training when all the other type H workers choose type S training.
The expected return from type S training for type H worker is the sameas the value of deviation given above, UH ; because in both cases, only
type H workers choose type S so that the equilibrium payo¤s are thesame. (Because of constant returns to scale, equilibrium in the markets
for speci…c training does not depend upon the size of type H workers
in the market). The di¤erence arises in the expected return for type H
workers in G training: In this case, only type L workers choose type G(except for the deviating type H worker) so that the return !
e UH is given
by(1)k UG = ! UL ;!
e Uj =( UG )Z

q G (ej + x)RxN
j)k TG = ! TL ;(1!
e Tj =

Hence we need

( TG )Z

Hence whenever!
e UH <(e! Tj !
e Uj )c+r+dq G (ej + x)
R

xT
j

!
e UH

!
e Uj

!
e Tj

!

!

dF;

dF;

U
H
U
U
H < !H

both types of equilibria are possible.
Next, we consider the choice between Separating and Mixed. Starting from the Separating equilibrium, we need to consider deviations bytype L workers. The expected return from applying to type G training
job is(1)k UG = ! UL G ;! UL G =

(1

(

U
G)

)k TG = ! TLG ;! TLG =

(

T
G)

Z

q G (eL + x)
R

! UL Gc+Z

q G (eL + x)
R

! TLG

dF

xU
L

xT
L

(! TLG ! UL G )
r+d

dF;

as we have shown above. At Separating equilibrium, only type H workers
apply for type S jobs. Hence a single worker of type L deviating to apply
for S job expects to earn UL S given by
35

(1
(1

)k US = ! UHS ;)k TS = ! THS ;
US
L =

TS
L =

(
(

U
S)

T
S)

Z

S
xU
L

Z

S
xT
L

q S (eL + x)
RUSL

q S (eL + x)
R

TS
L

c+

US
( TLS
L )
R(r + d)

dF;

c dF;

Hence the non-deviation condition in Separating equilibrium is
USL! UL GAs we have noted earlier, Mixed equilibrium is locally stable. The
stability condition of Sall equilibrium is easy to …nd. We need thattype L workers have no incentive to deviate to type G training, whose
expected return is ! UL G above. Denoting the expected return from thedeviation by UL S ; we have(1

)k US =

(1

T
S =

)k

US US
H ! H + (1TS TS
H ! H + (1US
L =( US )

TS
L =

T
S)

(

Z

Z

S
xN
L

T
xN
L

US US
H ) L
TS TS
H ) L

;
;

q (eL + x)
RUSL

q S (eL + x)
R

TS
L

S

c+

US
( TLS
L )
R(r + d)

dF;

c dF

and we needUSL

! UL G

Notice that the size of the type L workers in G training market does notmatter in the determination of equilibrium returns because of the linear
homogenous matching function. (Zero pro…t condition is also independent from the size of the unemployment pool).

6.5

Local Stability (2) The economy with E market

We now consider the four types of equilibrium with a separate submarket for school leavers. Recall that we assume, in line with theJapanese case, that it is a privilege of school leavers. There is nothingthat prevents school leavers applying for other quali…ed vacancies. I.e.,
if they so wish, they can search jobs in general untrained (U ) market.
With this key ingredient, we immediately see that in Separating equilibrium, the assumption of school leaver market is inconsequential because in this equilibrium, types of workers are fully revealed by self selection. Thus there is no meaningful distinction between the school leavers
36and other untrained workers. Moreover, in Separating equilibrium, there
is no meaningful distinction between the trained and untrained workers
for type S jobs. By assumption, the previous training is useless if theyreceived type S training. Since only type H workers are in S market,
there is no information gain from the past work experience either.
The E market complicates the matter on other types of equilibrium
because we now have to consider the deviations at two stages, viz., at
the market for school leavers, and the market for the general untrained
workers.
Let us start from (Gall) equilibrium as we have done above. It is
the deviation of type H workers we need to consider. Note that type
L workers have no incentive to deviate when type H workers are indifferent between type S and type G jobs because of the smaller impact
of productivity gain from speci…c training. Unlike the economy without
E market, type H untrained workers have two options to deviate: at E
market, i.e., immediately after they enter the labor market, or in U, themarket for the untrained.
If type H worker deviates at E, he will reveal his type by applying
to S job. Thus to prevent this from happening, we need the expected
return from search in Gall for type H must be at least large as UH givenbyk ( US ) =U
H=0( US ) UH ;
Z
U
( S)

N
yH

q S (eH + x)
R

U
H

c dF;

Now recall that the expected return from search is strictly lower forboth types at U market because of the larger share of type L workers.
Thus the relevant condition is not market E, but the returns from search
for type H in market U.
U! UH
H
What will happen if this condition is violated? Then, type H workers
see the opportunities and they all switch to type S jobs when they are in
U market. Then what about their choice in E market? Now that they
understand that it will be optimal to apply for type S jobs if he fails in E
market, does it still make sense to apply for type G jobs in E ? At …rst
glance, it seems impossible to rule out this case. As a matter of fact,
this type of equilibrium is unstable. Suppose that at E market, type
H …nds it better to apply for type G although they optimally choose
type S if they fail in E market. This switch occurs not because the payo¤ from applying to type S di¤ers between the two timings, but only
because in E market the share of type H is larger. Then the deviation37

of type H workers shifts the balance in favor of type S jobs. If all type H
workers decide to apply for type S jobs in E market, then, the advantage
of applying for G jobs in E market is washed out. Consequently, we canrule out this type of equilibrium and the condition above is the necessary
and su¢ cient condition for Gall equilibrium.
As before, the stability of Separating equilibrium relative to Gallequilibrium di¤ers. We need to consider the deviation by type H workers
to type G jobs, wherein only (except for the deviating worker himself)
type L workers search. Since there is no meaningful distinction between
E and U markets, the argument is identical to the one above and we
get
U
!
e UH
H
as the necessary condition. Therefore if!
e UH <UU
H < !H

both types of equilibria are possible.
Now we compare Separating and Mixed equilibria. In the Mixed equilibrium, we require that type L workers are indi¤erent between type S
and type G choices. We also know that there is no meaningful distinction between E and U sub-markets for type G jobs because only type
L workers are in G markets. How about the S markets? E and U submarkets can di¤er in respective returns if and only if the share of type L
workers in the two markets di¤er. Since school leavers can always searchin both E and U, the only possibility is that returns are equal or returns
is higher in E market.
But if the latter is the case, and if the returns from the search for
type L workers are the same in E market between S and G training,
it implies that no type L workers will search in U market for S jobs, acontradiction. Is it then possible that only in market E type L workers
search for type S jobs? No, because in that case the share of type H
workers in U market for type S jobs is unity hence the returns must be
higher in U if you apply for a type S job than in E market. Hence it
is impossible that market returns di¤er between E and U for type G,
which means that there really is no meaningful distinction between E
and U markets in this mixed equilibrium either.
Consequently, the comparison between Separating and the Mixed
equilibria is identical to the one without E market. In a nutshell, thedistinction between E and U markets are meaningful only in Gall andSall equilibria wherein two types of workers are mixed in all sub-markets.
Finally, we compare the Mixed equilibrium wherein E and U markets
are integrated, with Sall equilibrium. Again, the deviation of type L is38

our interest. Starting from Mixed equilibrium, as we move parametercon…guration in favor of S jobs, untrained type L workers consider thedeviation to apply for S jobs. Since type G equilibrium does not depend
upon the size of type L workers, we need to consider the threshold casewherein the return from applying for G job is equal to the return fromapplying to S job for type L workers when all but one type L workers
have applied to type S jobs.
Thus we have the same stability condition as the case without E jobs
except that the we need to incorporate the fact the composition of type
L workers in U market for S jobs di¤er from the one without E market.

39

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42

Table 1 Two Model Economies

Sub-markets

EU

Japan

U,T

E,U,T
H,L

Worker Types
Training

General(Firm) Specific

Job ProductivityqGq S (> q G )Unemployment benefits

bE

bJ

Benefits applicability

T,(U)

T,(U)

Table 2 Parameter Specifications
SymbolParameter description

EU

Japan

r

discount rate

0.02

d

retirement (= school graduation) rate

0.025

δ

exogenous separation rateAefficiency of matching function1

1

σmatching function parameter

0.5

sdev

standard deviation of match specific productivity20.8

μmean of match specific productivity

0q

job productivitykcost of keeping vacancybunemployment benefits

0.04

0.02

1.8

2.0
0.8

2.25

1.5

cost of training1

H0

population share of type H workers

0.5

eH

Innate productivity of type H worker

2eL

Innate productivity of type L worker

0.5

c

β

1

Matching function is specified as m = Avσ u (1−ο ) = Auθ σ

2Match specific productivity is assumed to follow a normal distribution with mean μand standard deviation sdev.

Table 3 Base Results
SymbolDescription

EU

Japan

Type HU

Unemployment rate

Type L

11.1%[10.2%]

Type H

Type L

5.57%[5.92%](3.97%3[3.66%])

Jfr

Annual job finding rate (E market)

n.a.

Jfr

Annual job finding rate (U market).485 [.491]

Jfr

Annual job finding rate (T market)

Repr.771[.691].678[.614].330 [.351].513[.521].369[.383].512 [.508].388 [.369].542 [.539].399 [.389]

U benefit replacement ratio (T market).282[.282].426 [.426].169 [.169].261 [.260]

w

Average wage (net of training cost)

7.92 [7.51]

5.23 [5.06]

9.04 [8.93]

6.96 [6.82]

βThe share of type H (L) workers in U

.375 [.389].625 [.611].356 [.373].644 [.627]

The share of type H (L) workers in T

.411 [.399].589 [.601].406 [.405].594 [.595]

ω Ej

Returns from search in E market----

7.57(0†)4.34(0†)ω Nj

Returns from search in U market

7.25(2.25†)

4.68(2.25†)

8.21(1.5†)

5.21(1.5†)

ω Tj

Returns from search in T market

7.34(2.25†)

4.76(2.25†)

8.27(1.5†)

5.46(1.5†)

H
U

β

H
T

Figures in [] shows the results when workers in U markets are not covered by unemployment benefits.

†Unemployment benefit

Table 4 The effect of increased micro turbulence in two cases[in Airga and Okazawa 2011]
benchmarkRetraining cost reduced to a half

Gross output (% change)

-4.9%

-3.9%

Unemployment rate

+1.4%

+1.6%

Annual worker turnover (full-time %)

+3.2%

+4.7%

3

The figure excludes school leavers.

Table 5 Japan with Europe Parameters
SymbolDescription

EU (the same as Table 1)

Japan

with

EuropeParameters

Type H

Type LType H

Type Lu

Unemployment rate

11.1%

7.12% (4.37%4)

jfr

Annual job finding rate (E market)

n.a.

.824

.756

jfr

Annual job finding rate (U market)

.495

.330

.511

.349

jfr

Annual job finding rate (T market)

.512

.368

.545

.384

repr

U benefit replacement ratio(T market)

.282

.426

.259

.397

w

Average wage (net of training cost)

7.92

5.23

8.93

6.93

β

The share of type H (L) workers in U

.375

.625

.332

.668

The share of type H (L) workers in T

.411

.589

.397

.603

ω Ej

Returns from search in E market----

7.41(0†)4.21(0†)ω Nj

Returns from search in U market

7.25(2.25†)

4.68(2.25†)

7.25(2.25†)

4.37(2.25†)

ω Tj

Returns from search in T market

7.34(2.25†)

4.76(2.25†)

7.29(2.25†)

4.41(2.25†)

H
U

β

H
T

Figures above assume that all workers except in E markets in Japan receive unemployment benefits

4

The figure excludes school leavers.

Figure 1 Impact of Permanent Productivity Change on Unemployment
1.25

Normalized Unemployment Rate

1.2

Japan
Europe

1.15

1.1

1.05

1

0.95

0.9

0.85
0.8

0.85

0.9

0.95

1

1.05

q (job productivity)

1.1

1.15

1.2

1.25

Figure 2 Impact of Permanent Productivity Change on Average Wage
1.4

Japan
EuropeNormalized Average Wage

1.3

1.2

1.1

1

0.9

0.8

0.7
0.8

0.85

0.9

0.95

1

1.05

q (job productivity)

1.1

1.15

1.2

1.25

Figure 3 Impact of productivity on Job Finding Rate
1.05

Normalized Job Finding Rate

1.04

Type L untrained in EU
1.03

1.02

1.01

1

Type L untrained(Emarket) in Japan

0.99

Type H untrained(Emarket) in Japan

0.98

Type H untrained in EU

0.97

0.96
0.9

0.95

1

1.05

q(job productivity)

1.1

1.15

1.25

Figure 4 Japanese Economy With European Parameters

Normalized Unemployment Rate

1.2

Japan
Europe

1.15

1.1

1.05

1

0.95

0.9

0.85
0.8

0.85

0.9

0.95

1

1.05

1.1

q (normalized job productivity)

1.15

1.2

1.25