Silviase/jgov_v1.4_full_ann huggingface dataset:
the flattening age-wage profile may be only a temporal phenomenon which is specific to certain cohorts. In order to determine the significance of the cohort effect, we plot in Figures 3(a) to 3(d) the cohort-specific age-wage profiles for the non-manufacturing sector. The initial wage for those profiles is not normalized to 1, because the initial wage is not necessarily available for all cohorts. As can be clearly seen in Figures 3(a) and 3(b), the cohort-specific profiles also gradually flatten for more recent cohorts from around the age of 40. Thus, the flattening of wage profiles does not appear to be due to cohort factors but mainly due to the age effect.

## I nsert Figure 3

### 4.2 Changes in the Kernel Density Wage Distribution

While our finding of nearly non-increasing wages in the latter half of workers’ career appears to suggest that the seniority-wage system is breaking down, we must be careful to consider the possibility that the median wage may be affected by certain changes in the distribution of worker quality through labor hoarding and/or employment adjustments following the burst of the bubble. To examine this possibility, Figures 4 and 5 depict the age-group specific kernel density distributions of monthly wages for male university graduates in the non-manufacturing sector, for large firms and for small to medium-sized firms, respectively. As panels (a) and (b) in Figures 4 and 5 illustrate, in 1989-1990 and 1998-1999, the wage distribution used to shift to the right with age, reflecting pay rises with age and seniority. However, panel (c) for 2007-2008 shows that for the 45-49 and 50-54 age groups, the distribution hardly shifts at all. This minuscule shift, as well as the small difference in the shape of the distributions for the 45-49 and 50-54 age groups suggest that the recent decline of the median wage for middle-aged and older workers results not from changes in the distribution of worker quality but from the small increase in wages for the typical employee from middle age.
## I nsert Figures 4 and 5

### 4.3 Changes in the Share of Lifetime Employees

Next, we examine changes in the share of lifetime employees over the past two decades. Figures 6(a) to (d) depict this share for the aforementioned four subgroups in all industries. $ ^{7} $ Among these groups, a clear decline in the lifetime employment rate can be observed for the youngest age group (those aged 25-34) of university graduates working in large firms (see Figure 6(a)). The lifetime employment rate for this group shows a sharp decline of nearly 20 percentage points between the mid-1990s and 2008. On the other hand, Figure 6(b) indicates that the decline in lifetime employment among the youngest group of university graduates has been more moderate in small to medium-sized firms. Figures 6(a) and 6(b) also suggest that the share of lifetime employees in the older age groups has remained largely unchanged during our observation period, with the exception of the oldest (45-54) university graduates group working in large firms (Figure 6(a)), which shows a slightly decreasing trend.

## I nsert Figure 6

Turning to the lifetime employment ratio for high school graduates, shown in Figures 6(c) and (d), we find no clear trend, except again for the oldest group, i.e., those aged 45-54. The lifetime employment ratio for this oldest group has actually increased. A possible reason for this is the extension of the mandatory retirement age through revisions of the “Elderly Employment
Stabilization Law” since the early 1990s. The initial amendment, which was approved in 1994 and enforced in 1998, obliged firms to adopt a mandatory retirement age of 60. In the second revision, the retirement age was raised to 65 in 2004. While the impact of these revisions on the lifetime employment ratio for university graduates was limited since they, as mentioned above, traditionally leave their firm before the mandatory retirement age due to early retirement or temporary transfers, the revisions had a more visible impact on the lifetime employment ratio for high school graduates because they typically work up to the mandatory retirement age.

The contrast between university and high school graduates, as well as that between large firms and small to medium-sized firms, partially reflects the fact that the Japanese employment system is applied mainly to highly educated male workers in large firms. However, the findings of our analysis suggest that in recent years even for this privileged group of workers traditional Japanese employment practices no longer apply to the extent as in the past.

### 4.4 Changes in the Job Retention Rate

We now turn to our second measure of lifetime employment, the job retention rate. Table 1 reports the five-year job retention rate for university-educated lifetime employees in large and small to medium-sized firms. Specifically, it shows that in 1990, 91.5 percent of male indefinite-contract employees aged 20-24 at large firms satisfied the two lifetime employment conditions. However, five years later, in 1995, this was the case for only 65.8 percent of male indefinite-contract employees aged 25-29. Thus, using these figures, the five-year job retention rate for the period 1990 to 1995 is calculated as 65.8/91.5=71.9 percent. The three columns on the right-hand side of the table report the change in the retention rate between two neighboring periods.

Insert Table 1
Examining these figures in detail, we find the following. First, the retention rate for the youngest age group (those aged 20-24) started to decline significantly in the early 1990s. Although this trend can be observed for both large and small to medium-sized firms, it is considerably more pronounced for large firms. Further, for the second and third youngest categories (those aged 25-29 and 30-34), the retention rate also decreased, from the late 1990s and the early 2000s, respectively. These results indicate that young university graduates today are likely to leave indefinite-contract jobs earlier than young graduates did in the past. On the other hand, while the retention rate of middle-aged to older university graduates in large firms temporarily declined between the late 1990s and the early 2000s, this trend did not continue in the most recent period.

## I nsert Table 2

Next, let us turn to changes in the job retention rate for high school graduates. Table 2 shows that the retention rate for the youngest age group has declined since the late 1990s. In this group, 6.1 percent of employees at large firms and 2.6 percent of employees at small to medium-sized firms left their first jobs between the 1995-2000 period and the 2000-2005 period. Furthermore, in the most recent period, between 2000-2005 and 2003-2008, among the youngest age group, 16.9 percent of employees at large firms and 8.2 percent of employees at small to medium-sized firms left their first job. In the same period, the retention rate of the second youngest group also started to decline. In contrast, the retention rate for age groups of 30 and above remained largely unchanged, with the exception of the large increase in the 1990s and subsequent decrease in the early 2000s in small to medium-sized firms.

Taken together, the results suggest that there has been an erosion of lifetime employment
among young workers, both university and high school graduates, although no such trend is found for older workers.

### 4.5 Discussion

Summarizing the findings above, clear changes in Japan’s employment system can be observed. First, older workers, particularly those in the non-manufacturing sector, no longer enjoy the same wage increases as in the past. And second, there is a clear erosion of lifetime employment especially among highly educated young workers. According to theoretical studies of the Japanese employment system, which stress the role of institutional complementarity, the seniority-wage system and the lifetime employment system should both disintegrate if either one begins to unravel. Our findings for the non-manufacturing sector may be consistent with this hypothesis.

Let us consider our results – and especially the different findings for younger and older employees – in detail, taking the role of institutional complementarity into account. Starting with the erosion of lifetime employment, it is not surprising that this began with younger workers, since these are more likely to leave their job if they cannot expect satisfactory wage increases in return for their loyalty to the same company. As they can find another job more easily than middle-aged or older workers, they are likely to be more sensitive to a decline in their future wage. In contrast, older workers often have little choice but to stick with their job because it is difficult for them to find an alternative job without taking a significant pay cut. In other words, the labor mobility of older workers is relatively low.

A number of reasons can be given for the wage decline of older employees in the 1990s. First, firms held on to excess workers during the period of slow growth following the burst of the bubble. Had the economy recovered quickly, firms could have simply absorbed the cost of having excess workers. Since this was not the case, however, firms were forced to reduce costs, and older
workers were more likely to accept wage reductions in return for employment guarantees. A second possible reason is the changing age structure of the workforce. In particular, wage costs (=average wage × number of workers) for middle-aged and older workers would have increased disproportionately from the late 1990s as the baby boomer generation (those born between 1947 and 1949, called dankai in Japanese) swelled the ranks of the oldest age groups with the highest wages.

Considering the erosion of lifetime employment among younger workers, a number of other reasons apart from the decline in the predicted seniority wage can be given. One reason is the high (or excess) intake of new graduates during the bubble period and the subsequent cutback on the hiring of new graduates in the post-bubble period. The bubble cohort, which likely makes up a bulge in the age pyramid of large firms, hinders the promotion of the workers in the post-bubble cohort, because, under the seniority-based promotion system that is prevalent among Japanese firms, the bubble cohort workers must be promoted before post-bubble cohort workers (see, e.g., Moriguchi and Ono, 2004). The bubble cohort may also have deprived subsequent cohorts of on-the-job-training opportunities within the firm because the latter had to stay in lower or less important positions for longer. As a result, young workers are likely to have been discouraged from working for the same company throughout their career. This age structure problem may partly explain our finding that the lifetime employment ratio and the job retention rate started to decline even before wages began to flatten.

Yet another possible reason for the erosion of lifetime employment among younger employees is the rapid transformation of Japan’s industrial structure. An important element of lifetime employment and seniority wages is, of course, the development of firm-specific skills. However, if young employees expect their firm-specific skills to become obsolete as a result of structural change, then such skills carry less of a premium, lowering the incentive to stay in the same firm. An additional potential reason for the higher job turnover among younger workers is legislative
changes. Japan’s Labor Standards Laws were modified in 1998 to permit fixed-period contracts of three years or less for particular types of jobs. The law was further amended in 2004, extending it to all types of jobs. Until then, the law had obliged firms to choose either indefinite period contracts or definite period contracts of up to one year. The introduction of multi-year definite contracts may have increased the options for firms as well as workers, resulting in greater inter-firm mobility, particularly among younger workers.

Finally, let us consider the differences in wage profile patterns between the manufacturing and the non-manufacturing sector. Specifically, we found that whereas wages for university graduates in the non-manufacturing sector more or less stagnate once workers reach their mid-40s, wages in the manufacturing sector continue to increase even in later stages of workers' career. One possibility is that the slow growth and the distorted age structure in the non-manufacturing sector are responsible for this. The average growth rate for the period 1989-2007 for the manufacturing sector was 2.1 percent, while that for the non-manufacturing sector was 1.2 percent. $ ^{8} $ This growth differential may partly explain the difference in the developments in wage profiles, but it seems too small to completely explain the large differences in wage developments between the two sectors. Similarly, the changing age structure due to population aging cannot really explain the difference between the manufacturing and the non-manufacturing sector, since it is common to both.

Another possible explanation is increased product market competition in the non-manufacturing sector. At least until the late 1990s, the slope of the wage profile in the non-manufacturing sector – which had enjoyed stronger protection – looked steeper than that in the manufacturing sector, leaving some room for wage cuts for middle-aged and older workers. Deregulation in recent years, especially in the non-manufacturing sector, may have led to greater competition among firms in areas such as finance and insurance, information and communications,
and wholesale and retail. With the increase in competition, firms in the non-manufacturing sector were forced to adapt and to improve their managerial efficiency. Again, though, this seems only a partial explanation at best: the changes observed for university graduates in the non-manufacturing sector look a bit too extreme to be the result of competition-induced adjustments only. Hence, further research is required to solve this remaining "puzzle."

### 5. Conclusion

The purpose of this paper was to examine developments in two key components of the Japanese employment system – seniority-based wages and lifetime employment – over the past 20 years using data from the Basic Survey on Wage Structure. The findings can be summarized as follows. First, with regard to seniority-based wages, we examined developments in the age-wage profile for lifetime employees and found a gradual flattening of the wage slope in the 1990s, followed by a kink in 2007-2008. Examining, moreover, developments in the wage distribution over time, we found that the shift to the right (higher wages) for older age groups observed in earlier periods had almost disappeared in 2007-2008. Second, in order to examine developments in lifetime employment patterns, we calculated the share of lifetime employees and the five-year job retention rate. While we did not detect a clear trend in the share of lifetime employees among middle-aged and older male indefinite-contract employees, we did find a discernible downward trend in the share for university-educated younger workers from the early 2000s. The job retention rate also declined noticeably in the 2000s for university-educated younger workers.

Overall, the long-term trends of our four measures suggest that the two key elements of the Japanese employment system have recently started to erode simultaneously. It appears that as a result of the flattening of the wage curve in later career stages, younger educated workers have a greater incentive to leave indefinite-contract jobs, and a growing proportion are beginning to do so.
On the other hand, older workers probably decided to stay in their present job, accepting a stagnation or cut in their wages, since they cannot easily find an alternative job. As a result, the lower job mobility of middle-aged to older workers is likely to have contributed to the disproportionate wage reductions they have had to endure. Thus, given the complementarity of seniority-based wages and lifetime employment, the observed trends overall suggest that the Japanese employment system has started to unravel in recent years.

The erosion of the traditional employment system is bound to have a significant impact both on people’s lives and on corporate management practices. Although this is an issue that has received little attention in the literature so far, the impact on people’s everyday lives is at least as significant as that in the corporate sectors. That is, without seniority-based wages and lifetime employment, individual households can no longer plan their lives based on the expectation of a secure job and future salary increases for the head of household. Therefore, considering how the erosion of the Japanese employment system affects the behavior of households (or consumers) is an important topic worthy of further careful study, and we hope to address this in our future work.
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Figure 1. Median monthly wage profile, manufacturing sector

Source: Basic Survey on Wage Structure (various issues, 1989-2008).

Notes: The median monthly wage is calculated based on the total amount of monthly contractual cash earnings and one-twelfth of the annual special cash earnings of the previous year. Large firms are firms with 1,000 or more indefinite-contract employees. Small to medium-sized firms are firms with fewer than 1,000 indefinite-contract employees. The median monthly wage is deflated by the consumer price index for Japan (general, excluding imputed rent).
Figure 2. Median monthly wage profile, non-manufacturing sector

Source and notes: See Figure 1.
Figure 3. Cohort-specific median monthly wage profile for the non-manufacturing sector

Source: See Figure 1.

Notes: The cohort-specific wage profile of monthly wages is constructed based on the monthly contractual cash earnings plus one-twelfth of the annual special cash earnings of the previous year, deflated by the CPI. Large firms are firms with 1,000 or more indefinite-contract employees. Small to medium-sized firms are firms with fewer than 1,000 indefinite-contract employees.
Figure 4. Kernel density distribution of monthly wages for large firms by age group (male university graduates, non-manufacturing sector)

Figure 5. Kernel density distribution of monthly wages for small to medium-sized firms by age group (male university graduates, non-manufacturing sector)

Source: See Figure 1.

Notes: The kernel density distribution of monthly wages (monthly contractual cash earnings plus one-twelfth of the annual special cash earnings of the previous year, deflated by the CPI) is based on the Epanechikov kernel and adjusted by the sampling ratio. Large firms are firms with 1,000 or more indefinite-contract employees. Small to medium-sized firms are firms with fewer than 1,000 indefinite-contract employees.
Figure 6. The share of lifetime employees in all industries

Source: See Figure 1.

Notes: Lifetime employees are defined as employees that were hired immediately upon graduation from school or university and continued to work in the same firm until the survey date. The share of lifetime employees 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 firms are firms with 1,000 or more indefinite-contract employees. Small to medium-sized firms are firms with fewer than 1,000 indefinite-contract employees.