Top

Published in:

2018 | OriginalPaper | Chapter

2. Flatter Wage Profiles and Reduced Lifetime Employment: A Simple Formalization

Authors : Akiomi Kitagawa, Souichi Ohta, Hiroshi Teruyama

Published in: The Changing Japanese Labor Market

Publisher: Springer Singapore

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

This chapter explores the implications of possible bankruptcies of firms for their own wage schemes and the structure of labor market, using a two-period general equilibrium model. The bankruptcy risk flattens a wage profile of each firm, weakening its incentive effect, thereby making room for efficiency wage to be used as a supplementary incentive device. The use of the efficiency wage, in turn, stratifies the labor market into the primary one, in which job rationing is observed, and the secondary one, in which job rationing is not observed. Substantial utility differential emerges between those who have luckily found a job in the primary market and those who have not, although there is no difference in their innate abilities. This differential widens, as bankruptcies become more likely. Moreover, the dual structure of the labor market and the entry decisions of firms render the employment size in the primary market too small to attain a social optimum.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

previous chapter Overview

next chapter Ranking and Long-Term Unemployment in a Model with Efficiency Wages

For seniority wage, see, e.g., Rebick (2001). For lifetime employment, see, e.g., Chuma (1998), Kato (2001), Shimizutani and Yokoyama (2009) , and Kambayashi and Kato (2010, 2011) .

Hori and Iwamoto (2012) confirm this finding, using a different dataset.

See, e.g., Genda (2003).

Some readers may think that this assumption is not justifiable, because the bankruptcy risk is idiosyncratic, and thus insurable at least in theory. However, there are some conceivable situations in which this assumption can be justified. For example, when insurance companies cannot at all track the working records of insured workers, they never provide insurance against the bankruptcy risk, since they cannot determine who should receive insurance money.

The first-order condition with respect to \(w^P_1\) must be given by (2.12) and (2.13), because the optimal choice of \(w^P_1\) can be a corner solution, i.e., zero, in the absence of the bankruptcy risk. No such possibility arises as to \(L^P\) and \(w^P_2\).

In contrast to the argument by Carmichael (1985), the workers of this economy cannot buy a job of the consumption good sector by paying “entrance fee”. In this model, the payment of entrance fee is equivalent to the reduction of wage payment in the first period, \(w^P_1\), which makes it difficult for the incentive compatibility constraint (2.9) to hold. Thus, every firm in that sector rejects such an offer.

As the consumption good sector contains more and more firms, less and less workers are hired by that sector. This paradoxical result can be explained by the fact that an increase in the number of consumption-good-producing firms necessitates an increased production of physical capital, and thus an increased employment of the capital good sector.

Uniqueness of the equilibrium value of \(w^P_1\) is established by the fact that the RHS of (2.22) is an increasing function of \(w^P_1\in [0,(1-\theta )/\theta )\), which takes a zero value at \(w^P_1=0\), and approaches a positive infinity as \(w^P_1\rightarrow (1-\theta )/\theta \).

Workers are better off when \(k^{**}(t)\) is realized than when \(k^*(t)\) is realized. This is because both \(U^P(=\log r(1+w^P_1))\) and \(U^S(=\log r)\) are increasing with r, and because, under this policy, r is increasing with \(k\in (0,[\alpha /(1-\alpha )]B)\) (See (2.52)).

A similar puzzle is also observed in Japan. In July 2002, Toyota Motor Corporation, one of the leading manufacturers in Japan, decided to implement defined contribution pensions, together with defined benefit ones, by diverting part of the retirement benefit towards contributions to this system. Toyota’s decision is puzzling, since it seems to contradict the corporate policy of maintaining lifetime employment, the importance of which top management of Toyota has repeatedly emphasized.

Carmichael HL (1985) Can unemployment be involuntary? comment. Am Econ Rev 75(5):1213–1214

Chuma H (1998) Is Japan’s long-term employment system changing? In: Ohashi I, Tachibanaki T (eds) Internal Labour Markets Incentive and Employment. Macmillan Press, London, pp 225–268CrossRef

Genda Y (2003) Who really lost jobs in Japan? youth employment in the aging Japanese society. In: Ogura S, Tachibanaki T, Wise DA (eds) Labor markets and firm benefit policies in Japan and the United States, NBER Conference Report Series, University of Chicago Press, Chicago and London, pp 103–133

Hamaaki J, Hori M, Maeda S, Murata K (2012) Changes in the Japanese employment system in the two lost decades. Ind Labor Relat Rev 65(4):810–846CrossRef

Hori M, Iwamoto K (2012) Lifetime labor income and the erosion of seniority-based wages in Japan: Evidence based on administrative data records. PIE/CIS Discussion paper No 554, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University

Kambayashi R, Kato T (2010) The Japanese employment system after the bubble burst: New evidence. In: Hamada K, Kashyap AK, Weinstein DE (eds) Japan’s bubble, deflation, and long-term stagnation, MIT Press, Chap 7, pp 217–262

Kambayashi R, Kato T (2011) Long-term employment and job security over the last twenty-five years: A comparative study of Japan and the U.S. Discussion Paper No 6183, IZA

Kato T (2001) The end of lifetime employment in Japan? Evidence from national surveys and field research. J Japanese International Econ 15(4):489–514CrossRef

Lazear EP (1979) Why is there mandatory retirement? J Polit Econ 87(6):1261–1284CrossRef

Lazear EP (1981) Agency, earnings profiles, productivity, and hours restrictions. Am Econ Rev 71(4):606–620

Papke LE, Petersen M, Poterba JM (1996) Do 401(k) plans replace other employer-provided pensions? In: Wise DA (ed) Advances in the economics of aging, NBER conference report series, University of Chicago Press, Chicago and London, pp 105–138

Rebick ME (2001) Japanese labor markets: Can we expect significant change? In: Blomström M, Gangnes B, LaCroix S (eds) Japan’s New Economy: Continuity and Change in the Twenty-First Century. Oxford University Press, Oxford, pp 120–141

Shapiro C, Stiglitz JE (1984) Equilibrium unemployment as a worker discipline device. Am Econ Rev 74(3):433–444

Shimizutani S, Yokoyama I (2009) Has japan’s long-term employment practice survived? developments since the 1990s. Ind Labor Relat Rev 62(3):313–326CrossRef

Title: Flatter Wage Profiles and Reduced Lifetime Employment: A Simple Formalization
Authors: Akiomi Kitagawa
Souichi Ohta
Hiroshi Teruyama
Publisher: Springer Singapore
Book: The Changing Japanese Labor Market
Print ISBN: 978-981-10-7157-7

Electronic ISBN: 978-981-10-7158-4

Copyright Year: 2018
DOI: https://doi.org/10.1007/978-981-10-7158-4_2