Silviase/jgov_v1.4_full_ann huggingface dataset:
thus taking their complementarity into account.

Second, development in the employment system has potentially significant implications for the prospects of the Japanese economy. As mentioned, the employment system has been widely regarded as an important pillar of Japan's rise to prosperity. However, if it is indeed the case that the employment system was a key factor underpinning the productivity and competitiveness of Japanese firms, as researchers suggest, then its erosion would indicate that this may no longer be the case in the present economic and social circumstances. Apart from the implications for the management of Japanese firms, the breakdown of the employment system would also have a significant impact on people's lives – an aspect that has received little attention so far. That is to say, without lifetime employment and seniority wages, individual households can no longer base their life plans (as is presumed by the Life-cycle/Permanent Income Hypothesis) on the expectation of a secure job and future salary increases for the head of household.

In order to examine if there have been changes in Japanese employment practices, we construct a variety of indicators for the two key elements. As for seniority wages, we calculate two indicators: (i) the age-wage profile of male lifetime employees, which are defined as workers that entered a firm immediately after graduation and continued to work in the same firm until the survey date; and (ii) the kernel density wage distribution of lifetime employees by age group. With regard to the first indicator, we find that the wage profile has become flatter in recent years, especially for the middle and final phases of workers' careers. More specifically, the wage slope gradually started to flatten in the 1990s and eventually developed a "kink" around age 40, which is most pronounced for university-educated workers in the non-manufacturing sector in 2007-2008. The kernel density wage distribution by age group also behaves in a manner consistent with the flattening wage profile. While until the 1990s, the wage distribution shifted more to the right (higher wages) the older the age group, reflecting pay rises with age and seniority, this rightward shift with age group can no longer be
observed in recent years for age groups above the mid-40s.

As for lifetime employment, we examined two indicators: (i) the share of lifetime employees; and (ii) the five-year job retention rate, both of which are calculated separately for several age groups for two education groups. Although we did not detect any obvious trend in the first indicator for the middle-aged and older groups, we found a clear downward trend in this share in the group of young university graduates from the late 1990s onward. The five-year job retention rate of lifetime employees – defined as the probability that a lifetime employee will continue working with the same employer for an additional five years – also declined noticeably in the 2000s for young university graduates.

Taken together, the results for the different indicators suggest that these two aspects of Japanese employment practices seem to have eroded in recent years. The wage that a young worker can expect during the course of his future career has declined considerably, especially in non-manufacturing sectors. This, in turn, may have discouraged many educated younger workers from staying in the same firm and they instead depart from a job with an indefinite employment contract. On the other hand, older workers have tended to stay in their present job, despite stagnating or falling wages, since it is more difficult for them to find an alternative job, which further adds to the downward pressure on wages for middle-aged and older workers.

The remainder of the paper is organized as follows. Section 2 briefly reviews the key elements of the Japanese employment system and provides further details on the focus of our analysis. Section 3 describes our data sources and the four measures of Japanese employment practices examined in this study. Section 4 reports our empirical findings and discusses their implications. Finally, Section 5 summarizes the findings and concludes the paper.
### 2. The Japanese Employment System and the Focus of Our Analysis

Although there are some variations in the definition of the Japanese employment system, most studies regard the following three components as key elements: (1) seniority wages, (2) lifetime employment, and (3) enterprise labor unions. Of these three elements, the relevance of labor unions was already in decline during the 1990s, as indicated by the fall in the union participation ratio and their power in wage bargaining (Tsuru, 2002). Consequently, our analysis focuses on developments regarding seniority wages and lifetime employment, the elements which until relatively recently appear to have remained intact.

Theoretical studies on labor practices not only in Japan but also elsewhere often emphasize the complementarity among a variety of labor practices (see, e.g., Milgrom and Roberts, 1992). Particularly in Japanese firms, seniority wages and lifetime employment go hand-in-hand, as shown by Itoh (1994) and Aoki et al. (1996). The rationale, as put forward in the literature, can be summarized as follows. Under the seniority wage system, wages increase with length of service (or chronological age). Employees receive wages below their marginal product when they are young, but can expect wages above their marginal product in later years because of the implicit guarantee embodied in the lifetime employment system. As long as employees feel that this arrangement is to their advantage – through the long-term employment stability and steady wage increases it provides – they remain with the same employer until retirement. Employers, on the other hand, benefit from this arrangement because of the formation of firm-specific skills, which in turn raise productivity. It is due to this institutional complementarity that the Japanese employment system has been stable for such a long period. However, because of this complementarity, if either of these elements starts to erode, this may usher in the breakdown of the entire system and the transition to other labor market structures and practices.

It is important to note, though, that what is labeled the “Japanese employment system”
actually covers only a minority of employees, who are typically male (reflecting Japan’s patriarchal society), have a university degree, and work for a large firm (since only large firms tend to be sufficiently stable to credibly promise lifetime employment). Since many firms are trying to replace regular full-time employees on indefinite contracts with other types of workers to provide greater flexibility to cut fixed labor costs in the face of slow economic growth, the percentage of core workers who are actually covered by the practices making up the Japanese employment system is gradually decreasing. This decrease in the share of indefinite-contract workers itself could already be regarded as an erosion of the Japanese employment system. The purpose here, however, is to examine employment practices among this core group of indefinite-contract workers traditionally covered by the Japanese employment system.

At this point, it is useful to briefly consider what is meant by lifetime employment. Although definitions provided by scholars differ slightly (see, e.g., Ohkochi, 1972, and Aoki et al., 1996), lifetime employment is generally characterized by the following two conditions:

i) lifetime employees are hired immediately after graduation; and

ii) lifetime employees remain in the same firm until the retirement age.

While we adopt the first condition, which we refer to as the “infancy” condition, for our own definition, we moderately relax the second condition (referred to as “loyalty” below) to make our analysis empirically feasible. If we took the second condition literally, given the nature of our repeated cross-sectional dataset, we would not be able to use the observations for young employees, since it is not sure whether they will remain in the same firm until their retirement. Therefore, as mentioned above, we define lifetime employees as workers who were hired by a firm immediately after graduation and continued to work in the same firm until the survey date, not until the mandatory retirement age.

Utilizing our definition of lifetime employees, we examine wage profiles and lifetime
employment patterns for workers until their early 50s. The reason for focusing on workers until their early 50s only is the prevalence of early retirement and/or transfers to other (subsidiary firms) several years before the mandatory retirement age (60 years) among employees in Japan, especially those with a university degree and working for a large firm. $ ^{2} $ These practices mean that it is difficult to properly assess the age-wage relationship and employment continuity of workers close to their retirement. Moreover, the time variation in lifetime employment measures, such as the share of lifetime employees and the job retention rate, for male workers in their late 50s is likely to be directly affected by the extension of the mandatory retirement age by revisions of the “Elderly Employment Stabilization Law,” because the retirement age of Japanese workers depends greatly on the mandatory retirement age stipulated by the law. To avoid any spurious variation in these measures close to workers’ retirement, we drop observations for workers in their late 50s (i.e., 55 to 59) from our analyses.

### 3. Data Description

### 3.1 Data Sources

This study uses micro-level data from the BSWS for the period between 1989 and 2008. The survey provides information both on establishments and on individuals. Information on establishments includes their 3-digit industrial classification number, the total number of indefinite-contract employees in the firm to which the establishment belongs, and the location. Information on individuals includes not only their wages and bonus payments, but also their age, sex, educational attainment, type of employment, regular/part-time status, length of service in the firm, and actual number of days/hours worked per month. We merged the information on establishments and individuals using the establishment identification number. As mentioned, among the different types
of workers, our analysis will focus on male regular indefinite-contract workers. $ ^{3} $

The BSWS covers all areas of Japan and all major industries. Industries were originally classified into approximately 400 very detailed categories. These categories can be reclassified into the 14 major industries of the 2002 Japan Standard Industry Classification. The 14 industries are (1) mining; (2) construction; (3) manufacturing; (4) electricity, gas, heat supply, and water; (5) information and communication; (6) transport; (7) wholesale and retail trade; (8) finance and insurance; (9) real estate; (10) eating and drinking places, accommodations; (11) medical, health care and welfare; (12) education, learning support; (13) compound services; and (14) services, n.e.c. The establishments are either (a) establishments with 10 indefinite-contract employees or more, either in the private or public sector, or (b) private establishments with 5-9 indefinite-contract employees. The total number of establishments falling under the BSWS criteria was about 1.1 to 1.5 million during the observation period, while the total number of persons employed by these establishments was around 30 to 38 million. The Ministry of Health, Labour, and Welfare, the ministry implementing the BSWS, selects establishments in the first stage of a two-stage stratified sampling scheme. In the second stage, each establishment is then asked to randomly choose employees from its payroll records. The number of establishments and of employees sampled per year was about 70,000–80,000 and 1.4 to 1.6 million, respectively.

The way the BSWS is compiled was revised in 2005, meriting two comments. First, the way that employees are classified was revised. Until 2004, employees were divided into only two categories, namely indefinite-period contract employees and definite-period contract employees. Since 2005, however, employees have been divided into five categories: (1) regular employees with an indefinite-period contract; (2) regular employees with a definite-period contract; (3) non-regular employees with an indefinite-period contract; (4) non-regular employees with a definite-period contract.
contract; and (5) temporary employees. Categories (1) and (3) after 2005 correspond to indefinite-period contract employees before 2004. Thus, we can smoothly connect the data before and after the revision without any significant discrepancy in the definition.

Second, 22 occupations were newly included in the BSWS. Of these, 12 occupations were transferred from the Wage Survey of Outdoor Workers by Occupation owing to its integration with the BSWS. The other 10 occupations were newly added to cover professional jobs, such as dentists, veterinarians, lawyers, certified public accountants, certified social insurance labor consultants, university lecturers, and so on. In the construction of our sample, we exclude workers in these added occupations to avoid spurious time variations in wage structures and employment.

The BSWS has some distinctive advantages for examining changes in Japan’s employment practices. First, even after controlling for a variety of employee attributes, such as educational attainment or the size of the firm they work for, the sample size is still sufficiently large. Second, in contrast with other surveys such as the Employment Status Survey, which is conducted only every five years but has often been used in previous studies, the BSWS is compiled annually. This high frequency allows us to closely follow developments in labor market practices and to identify the timing of potential changes.

That being said, even the BSWS, and hence our data set based on it, has some shortcomings. Since establishments sampled in the BSWS are randomly selected from the establishments in the Survey of Firms and Establishments (SFE), which is revised every three to five years, the BSWS suffers from large discontinuities between before and after revisions of the SFE. In our sample period, such revisions occurred in 1991, 1994, 1996, 1999, 2001, and 2004. To avoid any discontinuities in variables due to the SFE revisions, we adjust the original data obtained from the BSWS using sampling ratios of individual workers, available from the survey, to obtain the population median-based wage profile. We also compute the population-based kernel density wage
distribution, the ratio of lifetime employees, and the retention rate in the same way.

### 3.2 Calculated Measures

To examine recent developments in Japanese employment practices, we compute the following four measures for each year: (1) the age-wage profile; (2) the kernel density wage distribution; (3) the share of lifetime employees; and (4) the job retention rate. $ ^{4} $ As already explained in the previous section, we exclude the age group of 55-59 year-olds in order to avoid any potential distortions of wages and employment resulting from early retirement, transfer to subsidiary firms, and the extension of the compulsory retirement age.

#### 3.2.1 Age-wage Profile

To construct the age-wage profile, which is the most commonly used measure of seniority wages in the literature, we use the median of monthly wages for lifetime employees. Monthly wages here are total monthly contractual cash earnings plus one-twelfth of annual special cash earnings in the previous year. Many previous studies used hourly wages (rather than monthly wages) for the calculation of age-wage profiles because they focus on productivity effects of the Japanese employment system. The reason for using monthly wages here is that this should result in more stable age-wage profiles since monthly wages are unlikely to be significantly affected by fluctuations in hours worked. $ ^{5} $ Further, using monthly wages means that the increase in hourly wages caused by the 1988 and 1994 revisions of the Japanese Labor Standards Law successively reducing the maximum weekly working hours from 48 to 40 does not affect our age-wage profiles.
Specifically, we use contractual cash earnings before taxes in the month of June, including overtime payments. This amount is then deflated by the consumer price index for all of Japan (general, excluding imputed rent). Finally, we plot the wage profile using the median values of the monthly wage from 18 (for high school graduates) or 22 (for university graduates) to 54 years of age. The initial wage at 18 or 22 is normalized to 1 to make the variation in the wage slope more visible.

#### 3.2.2 Kernel Density Wage Distribution

While the age-wage profile only allows us to examine trends in the median wage, examining the entire wage distribution may allow us to identify changes in higher statistical moments such as the dispersion, skewness, and kurtosis. As our second measure to examine seniority wages we here use the kernel density distribution of monthly wages by age group. Specifically, we plot the kernel density distributions for the following five age groups against each other: (1) 30-34 year olds; (2) 35-39 year olds; (3) 40-44 year olds; (4) 45-49 year olds; and (5) 50-54 year olds. If the seniority wage system is still intact, we would expect the wage distribution to lie further to the right the older the age group, as wages rise with age and seniority. On the other hand, if the system no longer operates, we would not expect such a clear-cut pattern. In the latter case, even if the seniority wage system is no longer intact, wages may still increase with age to some extent, but the increments between age groups and the distributional pattern are likely to differ from those in the situation where the seniority wage system is intact, reflecting pay schemes in which seniority plays a smaller role and other aspects, such ability or performance, are more important.

#### 3.2.3 Share of Lifetime Employees

As mentioned earlier, lifetime employees here are defined as those who were hired immediately upon graduating from school or university and have continued to work for the same firm until the
survey date. This definition satisfies two necessary conditions for lifetime employment: “infancy” and “loyalty” to a single firm. Whether these conditions are satisfied can be determined by examining the difference between workers’ age and their length of service in their firm. University graduates are regarded as a lifetime employees if the difference is 22 or 23. For high school graduates, a difference of 18 indicates that these conditions are satisfied.

The share of lifetime employees in a particular age group i at time t is calculated by dividing the number of lifetime employees by the total number of workers in the same age group. For presentational reasons, we divide our sample into the following three age groups: (1) 25-34 year olds; (2) 35-44 year olds; and (3) 45-54 year olds.

#### 3.2.4 Job Retention Rate

Our second indicator for the prevalence of lifetime employment is the job retention rate. This is the probability that a worker retains the same job for a certain length of time. This measure has been used in a number of previous studies (e.g., Hall, 1982; Hashimoto and Raisian, 1985; Chuma, 1998; Kato, 2001; and Kambayashi and Kato, 2009), which, however, focused on the degree of labor mobility rather than on the prevalence of lifetime employment, since they examined workers with a relatively short length of service, typically 0-4 or 5-10 years.

As our primary interest is in lifetime employment, we apply the concept of the job retention rate to lifetime employees. The job retention rate for lifetime employees is calculated as the ratio of the lifetime employment share in an age category of one survey divided by that in the corresponding higher age category of a later survey. In this paper, we calculate the five-year job retention rates for lifetime employees in seven five year age groups, that is, 20-24 year olds, 25-29 year olds, 30-34 year olds, 35-39 year olds, 40-44 year olds, 45-49 year olds, and 50-54 year olds, for the four time periods of 1990 to 1995, 1995 to 2000, 2000 to 2005, and 2003 to 2008. We first
calculate the share of lifetime employees in each five year age group for the base years of 1990, 1995, 2000, and 2003. Next, we do the same for each age group in the BSWS five years later (1995, 2000, 2005, and 2008). Finally, we divide the share obtained in the first step for one age group by the corresponding value obtained in the second step by the next older age group. For example, the share of lifetime employees in the 20-24 year-old age group in 1990 is divided by that in the 25-29 year-old age group in 1995. The ratio thus obtained is the five-year job retention rate of lifetime employees. Our brief-interval retention rate may help to better identify changes in lifetime employment.

### 4. Empirical Findings

This section examines the time-series variation in the above-mentioned four measures to examine what happened to the Japanese employment system following the burst of the bubble in the early 1990s, but especially in the period from the late 1990s up to the present.

### 4.1 Changes in the Wage Profile

We first examine recent developments in the age-wage profile. We divide the sample into the manufacturing sector and the non-manufacturing sector, $ ^{6} $ as the competitive environment in these two sectors has been quite different. The manufacturing sector has long been subject to fierce international competition, whereas the non-manufacturing sector has been sheltered from competition by regulatory barriers.

We construct separate wage profiles for the two sectors for four different subgroups: (1) university graduates in large firms (defined as firms with more than 1,000 indefinite-contract
employees); (2) university graduates in small to medium-sized firms (firms with fewer than 1,000 indefinite-contract employees); (3) high school graduates in large firms; and (4) high school graduates in small to medium-sized firms. The results are presented in Figures 1(a) to 1(d) for the manufacturing sector and 2(a) to 2(d) for the non-manufacturing sector, which depict the age-median wage profiles for three selected two-year intervals, 1989-1990, 1998-1999, and 2007-2008. Looking first at the profiles for the first period, 1989-1990, we find that wages increased substantially with age in both sectors, although the slope was steeper in the non-manufacturing than in the manufacturing sector. However, by 1998-1999, the slope had started to flatten somewhat, except for high school graduates in large firms. The relative wage decline was particularly pronounced for middle-aged to older workers, as indicated by the growing divergence between the wage profiles for 1989-1990 and 1998-1999 from the age of around 40 for most subgroups.

## I nsert Figures 1 and 2

By 2007-2008, the flattening of wage profiles becomes even more pronounced. Moreover, differences between the manufacturing and non-manufacturing sector widened. The wage slope for workers in manufacturing firms slightly declined between 1998-1999 and 2007-2008, regardless of firm size and educational attainment. On the other hand, for 2007-2008, the wage profile in the non-manufacturing sector substantially flattens around the age of 40. Especially for university graduates, the wage barely increases after the mid-40s, regardless of firm size. And although the wage of high school graduates in the non-manufacturing sector continues to gradually increase with age, the increase in 2007-2008 is fairly small when compared with 1989-1990 and 1998-1999.

It should be noted that the age-wage relationship in the above profiles may also be influenced by cohort factors as well as the age effect. If the cohort factors dominate the relationship,