Japan's changing wage structure: The impact of internal factors and international competition

Abstract

This paper examines in detail the effects of internal and external shocks over the business cycle on wages of workers by job tenure and age in Japan. The effects of the external labor market condition and the business results within a firm are distinguished in this paper. When the market is brisk the wage growth of workers with limited years of service is higher than that of workers with long service, and wage disparities tend to narrow. On the other hand, value-added labor productivity and per capita ordinary profit in each firm have almost the same effects on wages regardless of job tenure and they do not affect the wage disparities. Some of the recent declines in the relative wages of traded goods industries can be accounted for by the deterioration of their profits in comparison with other industries reflecting the keen competition in the international and domestic product market. The rapid appreciation of the yen reduces ordinary profits in Japan's traded goods industries, undermining workers' sense of job security. Its “blackmail effect” on wages is especially pronounced among senior workers with high turnover costs and few opportunities for reemployment. This finding corroborates the view that job turnover costs for workers play a crucial role in determining wage flexibility.