Silviase/jgov_v1.4_full_ann huggingface dataset:
retention rate of the lifetime employees. Our brief-interval retention rate may help us to identify changes in the lifetime employment.

### 5. Empirical Findings

This section looks carefully at the time-series variation of the above-mentioned three variables. Our focus is to show what happened to the Japanese employment system after the bubble burst, especially in the period from the late 1990s up to the present.

### 5.1 Changes in the Wage Profile

We first examine recent developments in the age-wage profile. We divide the sample into the manufacturing and non-manufacturing industries, as those two industries probably have been exposed to different competitive environments. $ ^{16} $ The manufacturers, like the steel, auto, electrical equipment, machinery and electronic equipment industries, have long faced harsh international competition, whereas some non-manufacturing industries have been maintained in a less competitive environment by regulatory barriers. The profiles for the two industries are depicted for the following four subgroups: (1) university graduates in large-sized firms (more than 1,000 indefinite-contract employees), (2) university graduates in small to medium-sized firms (fewer than 1,000 indefinite-contract employees), (3) high school graduates in large-sized firms, and (4) high school graduates in small to medium-sized firms. $ ^{17} $

Figures 1a-1d and 2a-2d show the age-median wage profiles of the three selected periods (1989-1990, 1998-1999, and 2007-2008) for manufacturers and non-manufacturers, respectively. Originally, wages increased substantially with age in both sectors, but its pace was faster in the
non-manufacturers. The seniority-wage slope becomes slightly gradual over the period between 1989-1990 and 1998-1999 in almost every category except for high school graduates in large firms. The relative wage decline hit middle to older-aged workers especially hard. Differences between the two industries (manufacturers vs. non-manufacturers) noticeably widened in the second period (from 1998-1999 to 2007-2008). While the wage slope for workers in small to medium-sized manufacturing firms slightly declined between in this period, the slope remains steep regardless of school career in the large firms. On the other hand, the slope of the non-manufacturing industry substantially flattens around 40 years of age in 2007-2008. In particular, the wage of the university graduates barely increases after their mid-40s, regardless of firm size. While the wages of high school graduates in non-manufacturing gradually increase even in later in their careers, the growth rate is fairly small in 2007-2008 compared with those in 1989-1990 and 1998-1999.

While some of the prior studies reported that the slope of the wage curve became more gradual as the retirement age rose, they did not reveal the nearly nonincreasing wages in the latter half of career life (which we are calling the “kinked” wage profile), which is clearly revealed in our graphs.

### 5.2 Changes in the Share of Lifetime Workers

This subsection discusses the change in the share of lifetime workers over the past two decades. Figures 3a to 3d depict this share for the aforementioned four subgroups of all industries. $ ^{18} $ Among those groups, the downward trend of the lifetime employment rate is clearly observed for the youngest group of university graduates in large-sized firms (see Figure 3a). This group presents a sharp decline, by nearly 20 percent point between the mid-1990s and 2008. Figure 3b reveals a more moderate decreasing trend of the lifetime employment ratio in the youngest university graduate.
groups in the small to medium-sized firms. Figures 3a and 3b also suggest that the share of lifetime workers in the older age groups is largely invariant throughout our sample period, except for the oldest group in Figure 3a, which shows a slightly decreasing trend.

Figures 3c and 3d, which report the results for high school graduates, do not demonstrate any clear trend of the lifetime employment share, except for the oldest group, age 45-54. One reason for the increase of the share in this oldest age group may be the extension of the mandatory retirement age. The “law for the stabilization of the elderly employment” has been revised twice since the 1990s. The initial amendment, which was approved in 1994 and enforced in 1998, made the compulsory retirement age of 60 years old obligatory for firms. In the second revision, the retirement age was in turn raised to 65 years of age in 2004. Thus, it is not surprising for us to find that the share of lifetime workers has increased for employees who are close to retirement over the years. No increasing trend of the lifetime employment share for the older educated workers (Figure 3a) may suggest that they had been more likely to be covered by the compulsory retirement system with high retirement age right from the start.

The contrast between the university graduates and high school graduates, as well as that between the large-sized firms and the small to medium-sized firms, probably indicates that Japanese labor practices have been applied mainly to highly educated workers, particularly to those in large firms. Our findings appear to suggest that this practice is recently deteriorating, even for such a selected group of workers. The decline of the lifetime employment share of university graduates in large firms seems to mean that even the employees that had been protected by the Japanese employment system are no longer entitled to a special status in recent years. On the other hand, many high school graduates have probably been excluded from the narrowly defined lifetime employment to begin with. A relatively small share of the lifetime workers in the high school group, especially in small to medium-sized firms, seems to support this inference. Because the trend of the lifetime employment
ratio differs little between manufacturers and non-manufacturers, we did not report the detailed pattern here (see Appendix Figures C-1-1 to C-1-4 and C-2-1 to C-2-4).

Before closing this subsection, we would like to note the distinct contrast between earlier studies and our findings. As explained in Section 3, Chuma (1997, 1998) discovered a non-decreasing trend of the lifetime employment share in the early 1990s. In fact, if we focus on the first half of our sample period, it is difficult to identify a clear trend of the share. However, a decreasing trend is clearly revealed in the second half.

### 5.3 Changes in the Job Retention Rate

This subsection examines the change in the lifetime employment practice utilizing our second measure, the job retention rate. Table 1 reports the five-year job retention rate of university-educated workers in large-sized firms (1a) and small to medium-sized firms (1b). For example, in 1990, 91.5% of male indefinite-contract employees aged 20-24 satisfied the two conditions necessary for the lifetime employee. Five years later, in 1995, 65.8% of the male indefinite-contract employees in ages 25-29 were considered lifetime employees. The five-year job retention rate for the period 1990 to 1995 is eventually calculated to be 65.8/91.5=71.9%. $ ^{19} $ The right three columns report the change of the retention rate between two neighboring periods.

First, we can point out that the retention rate of the youngest category started to decline significantly in the early 1990s. Although this trend does not depend on the firm size, its magnitude is considerably larger in the large-sized firms than in the smaller ones. $ ^{20} $ Further, in the second and third youngest categories, the retention rate also decreased after the late 1990s and the early 2000s,
respectively. Those results indicate that today’s young university graduates are likely to leave the tenure-track position earlier than they did in the past. $ ^{21} $ On the other hand, while the retention rate of the middle to older-aged university graduates in the large-sized firm temporarily declined between the late 1990s to early 2000s, the trend did not hold in the more recent period.

Next, let us turn to the change in the job retention rate of high school graduates. Table 2 reports that the retention rate of the young age groups has declined since the late 1990s. Among young workers, about 8 to 17 percent of the people in their 20s left their first jobs relatively quickly in recent years. In contrast, the retention rate of middle to older-aged workers remains unchanged, except for the up-and-down movement in the small to medium-sized firms during the period from the 1990s to early 2000s. Overall, the recent deterioration of lifetime employment in the young workers is a common finding for university and high school graduates, whereas such a trend is not found in the older workers.

Contrary to our findings, Kato (2001) as well as Kambayashi and Kato (2009) concluded—based on their ten-year job retention rate without the “infancy” condition—that they found little evidence of serious deterioration of lifetime employment for male workers, even in the post-bubble period. Although they reported a drop of the job retention rate for young male workers in the late 1990s, they underemphasized the change and pointed to the resilience of the Japanese employment system. They instead highlighted a substantial reduction in job security of female workers throughout the 1990s, saying that the burden of restructuring fell disproportionately in female indefinite-contract employees.

In our analysis, with extended sample period up to 2008, we think that we could demonstrate a drop in the retention rate after the late 1990s more vividly than the prior studies did.
### 5.4 Discussion

Summarizing the above findings, recent changes in the Japanese employment system are characterized by the suspension of wage increases for older workers, particularly in the nonmanufacturing industries, and of lifetime employment for highly educated young workers. Based on the theory of complementary institutions, both the seniority-wage and the lifetime employment systems would fall apart if either one starts to deteriorate. Our findings for the non-manufacturers appear to be consistent with this thesis.

On the basis of institutional complementarity, it is possible to give a more detailed explanation for our results, namely, the asymmetry between young and older employees. It is not surprising that the deterioration of lifetime employment began with the young workers, since they are more likely to leave their jobs if they cannot expect a satisfactory wage increase for their long service in the same company. Because they can find another job more easily than the middle/older-aged workers can, they are probably more sensitive to future wage declines. In contrast, older workers have to stick to their jobs because it is hard for them to find an alternative job without taking a significant pay cut. In other words, the labor mobility of older-aged workers is relatively low.

This explanation is supported by the results of the Survey on Career Formation of Working People in 2000, conducted by the Research Institute for Advancement of Living Standards. It finds that roughly 70 percent of male workers who had changed jobs experienced their job switch before they turned 29. Furthermore, their first and second major reasons for the job switch were “uncertainty about the future of one’s firm” and “low wage payment,” respectively. $ ^{22} $ The percentage of choosing the second reason declines with the age of the job switch. Those findings are consistent with our interpretation. The survey also shows that the younger workers were more likely
to report “having found a better job” as a reason for leaving the former job than the elderly ones did. This is also consistent with the above explanation.

A number of reasons can be given for the wage decline of the older employees in the 1990s. First, firms tried to maintain excess employment under the prolonged low growth economy after the bubble burst, as previously stated. Under this circumstance, older workers were more likely to accept a wage reduction in return for guarantees of their employment. If the Japanese economy had rapidly recovered, the firms could have absorbed the burden of the temporal excess employment without wage reduction. The second possible reason is the changing age structure of the workforce. In particular, wage costs (=average wage $ \times $ number of workers) for the middle to older-aged workers would have disproportionately increased after the late 1990s due to the entry of the baby boom generation (born from 1947 to 1949, called Dankai in Japanese) into the older-aged category.

For a recent breakdown of lifetime employment among younger workers, there are at least a few reasons other than the decline of the predicted seniority wage. One explanation is the high (or excess) intake of the new graduates during the bubble period, and the subsequent cutbacks on hiring of new graduates in the post-bubble period. The distorted age structure has hindered the promotion of young workers in the post-bubble cohort because a large fraction of the bubble cohort must be promoted before them (Moriguchi and Ono, 2004). At the same time, the bubble cohort also deprived their subsequent cohorts of the opportunity of job training within firms. As a result, the young workers were discouraged from continuously working in the same company. This age structure problem may partly justify our findings that the lifetime employment ratio and job retention rate started to decline even before wages began to flatten. Another possibility is the rapid transformation of Japan’s industrial structure. If young employees expect the obsolescence of their firm-specific skill owing to changes in the industrial structure, they may think that it is not in their best interests to develop such a skill over time in the same company.
Additionally, we must point to the legislative changes as a reason for the higher turnover of the younger workers. Japan’s labor standards laws were modified in 1998 to permit fixed-period contracts of three years or less for particular types of workers. $ ^{23} $ The scope was extended to all types of job in 2004. $ ^{24} $ Until then, the law had forced firms to choose either indefinite period contracts or definite ones of up to one year. The introduction of the multiple-year definite contract could have increased the options of firms as well as workers, resulting in a great inter-firm mobility, particularly for younger workers.

Before concluding, we need to consider the background of the different pattern of wage profiles between industries. Whereas wages for university graduate workers in non-manufacturing remains roughly constant after workers reach their mid-40s, wages in the manufacturing continue to increase even later in one’s career. Our tentative hypotheses were lower growth, and a distorted age structure in non-manufacturing. First, the average growth rate (1989-2007) of manufacturing and non-manufacturing was 2.1% and 1.2%, respectively. $ ^{25} $ This different growth rate may be partly responsible for the difference in the change of wage profiles, although this small difference is not sufficient to explain the remarkable difference completely. Nor can the second factor, the changing age structure due to Japan’s aging population, explain the difference between industries, since it is common to both manufacturing and non-manufacturing.

Another conceivable possibility is the increased competition in the product market of the non-manufacturing sector. At least until the late 1990s, the slope of the wage profile in non-manufacturing—which had enjoyed stronger protection—looked steeper than that in the manufacturing, leaving some room for adjustments for the non-manufacturing firms. Market entry deregulation in recent days, especially those in the non-manufacturing industry, could have
facilitated market competition among firms in finance and insurance, information and communications, and wholesale and retail. As the intensity of competition increased, firms in non-manufacturing were forced to adapt to the environmental changes and to improve their managerial efficiency. However, the changes observed for university graduates in the non-manufacturing sector look somewhat excessive for only a competition-induced adjustment between the two industries. Hence, further research is required to solve this remaining "puzzle."

### 6. Conclusion

By comprehensively analyzing the recent 20-year observations of the BSWS, this paper adduced new evidence for Japan’s degenerating employment system. First, as for seniority-based wages, we examined the developments of the age-wage profile for lifetime employees and found a much flatter wage slope after age 40 in recent years. More specifically, the flattening of the wage slope gradually developed in the 1990s, and thereafter the profile appeared to have eventually kinked, in 2007-2008. This change is most clearly observed for the university graduate workers in the non-manufacturing industry. Second, in order to examine the developments of the lifetime employment, we calculated the share of the lifetime workers and five-year job retention rate. While we could not identify a clear trend in the share of the lifetime workers for middle to older-aged male indefinite-contract employees, we found an evident downward trend in the share for the university-graduated young workers after the late 1990s. The job retention rate also declined noticeably in the 2000s for highly educated younger workers.

The long-term pattern of our three measures suggests that the two key practices of the Japanese employment system have recently deteriorated simultaneously. Owing to the wage flattening later in the career stage, a higher portion of educated young workers may have incentives to depart from their current tenure-track positions. On the other hand, older workers probably decided to stay in
their present jobs in exchange for wage growth, since they cannot easily find alternative jobs. Their lower job mobility facilitates the disproportionate wage reduction in the middle to older-aged workers. Thus, the logical consideration of the structure of the institutional complementarity suggests that Japanese employment system probably has already started to deteriorate in recent years.

Finally, we have to note that some of the previous studies, such as Kambayashi and Kato (2009), emphasized resilience of the Japanese employment system, although they discovered a few signs of the degeneration of lifetime employment for young male workers. In fact, the middle to older-aged workers, who were considered to be the core of the system, appear to be still protected by the practice. However, their wages have barely increased in more recent years, thereby discouraging the young workers from entering into the traditional system. Again, from the viewpoint of the institutional complementarity, the widely-observed dropout of the young workers from the lifetime employment system probably suggests that the Japanese employment system has started to degenerate, and is not sustainable in the long run.

### Appendix A. Reason for Focusing on Small Subgroups

This Appendix explains the reason for dividing the employees into the four subgroups. Appendix Figure B-1 shows the lifetime employment share for all-male indefinite-contract employees for the three age groups. The share in the youngest age group (25-34) gradually decreased in the 2000s, while the share in the oldest age group (45-54) consistently increased. If we take those trends at face value, we can point to the deterioration of the practice of lifetime employment practice for young workers and its evolution for the older ones. However, this time-series variation of the share would reflect some spurious trends that are irrelevant to the changes in the employment system. One likely explanation for those trends is an increase of the university graduates rate in the data, due primarily
to an increase in the university entrance ratio in the 1990s. $ ^{26} $

To discern the real change of the lifetime employment from that owing to other socioeconomic trends, we further divide male indefinite-contract employees according to school career (high school graduates and university graduates). Appendix Figures B-2 and B-3 demonstrate the lifetime employment share of university and high school graduate employees, respectively. Of the university graduates, the share for the youngest age group started to decline in the mid-1990s, whereas that of other age groups underwent little change. On the other hand, as for the high school graduates, the lifetime employment share in the youngest age group appeared to have merely fluctuated within a small range. In addition, the share of lifetime employees in the oldest age group has gradually increased. Overall, recent developments in the lifetime employment seem to differ according to school career. Similarly, observations of the small and large-sized firms also show the different changes between the firm sizes. We therefore further divide the observations in each school career by firm size.
Figure 1. The median monthly wage profile of the manufacturing industry

Source: Basic Survey on the Wage Structure (various issues)

Note: The median monthly wage is calculated based on the total amount of monthly contractual cash earnings and the twelfth part of annual special cash earnings of previous year. This is deflated by the consumer price index for Japan (general, excluding imputed rent). "Large-sized firm" has more than 1000 indefinite-contract employees. "Small- to medium-sized firm" has less than 1000 indefinite-contract employees.
Figure 2. The median monthly wage profile of the non-manufacturing industry

Source and Note: The same as Figure 1.
Figure 3. The share of the lifetime employee in all industries

Source: The same as Figure 1.

Note: The lifetime employee is defined as those who are hired immediately upon graduating from school and continue working in the same firm until survey date. The share of the lifetime employee in age group i at time t is calculated by dividing the number of lifetime employees by the total number of employees in the same category (age group i and time t). "Large-sized firm" has more than 1000 indefinite-contract employees. "Small- to medium-sized firm" has less than 1000 indefinite-contract employees.