Dynamic factor adjustment and corporate tax reduction in the Japanese manufacturing industry

Abstract

This study investigates dynamic factor adjustment and corporate tax reduction in Japanese manufacturing industry using a dynamic dual approach. The own-price elasticity of the output supply is negative in the long run, whereas that of demand for labor is positive both in the short- and long-run. This is consistent with facts that output grows slowly despite deflation and employment level is irresponsive to wage changes. Labor and capital reach the new equilibrium 7–11 years after policy shocks. Providing a tax reduction as an incentive to firms for raising wage turns out to boost not only capital investment but also employment.