Academic journal article Economic Perspectives

Labor Market Fluctuations in Japan and the U.S.-How Similar Are They?

Academic journal article Economic Perspectives

Labor Market Fluctuations in Japan and the U.S.-How Similar Are They?

Article excerpt

Are business cycles across countries alike? Are there similarities in the dynamics of labor markets across countries? How important are different types of shocks in explaining these dynamics?

In this article, we try to answer these questions by examining the sources of labor market fluctuations in Japan and the U.S. in the post-1972 period. In particular, we focus on unemployment and job vacancies in the two countries and examine how sectoral and aggregate shocks affect the relationship between these variables.

Trying to assess the relative importance of various types of shocks--real versus nominal or aggregate demand versus aggregate supply--has been the focus of much recent work on business cycles. Although most of these "business-cycle accounting" exercises have been carried out within the context of a closed economy, with much of the evidence coming from U.S. data, a number of recent studies have carried out similar exercises for other economies.(1) As stated by West (1992), "apart from the intrinsic interest in sources of fluctuations in other countries, such work could, in principle, shed light on theories of the business cycle that purport to explain fluctuations in market economies in general."

The Japanese economy provides a particularly interesting opportunity to assess whether similar forces shape economic fluctuations in different countries. Some observers argue that there are intrinsic and qualitative differences between the economic, financial, and legal structures of Japan and those of the U.S. These differences may affect the relative importance and propagation of various economic shocks. For instance, while trade flows account for a small fraction of Japanese gross national product (GNP), results in West (1992, 1993) and Kaneko and Lee (1995) indicate that the fractions of movements in Japanese output, inventories, and stock returns accounted for by external shocks (such as changes in exchange rates, oil prices, and foreign output) are much greater than in the U.S.

Another difference that is commonly pointed out is the behavior of the Japanese unemployment rate. For a variety of reasons, reviewed below, the Japanese unemployment rate historically has been lower and more stable than the U.S. rate. Given this and other differences between the two countries' labor markets, how similar are they in their responses to various shocks?

We focus on one aspect of labor markets, the relationship between job vacancies and unemployment. According to economic theory, the different rates of job creation and job loss in the economy, the cost of conducting a job search, and the mismatch between jobs and workers result in a steady-state level of unemployment and vacancies. Furthermore, aggregate and sectoral (that is, shifts in relative demand for different types of labor) shocks to the economy result in different movements in the relationship between vacancies and unemployment.

We examine the sources of fluctuations in Japanese and U.S. unemployment rates and vacancies and focus on shocks that economic theory and prior empirical evidence suggest are important: sectoral, external, output, and monetary shocks. Throughout our analysis, which is implemented by a six-variable recursive vector autoregression (VAR), we pose two general questions: Do unemployment and vacancies in Japan and the U.S. respond to shocks in a manner that is broadly consistent with economic theory? Are the responses of Japanese and U.S. variables to shocks similar?

Overall, our results suggest that despite the differences that may exist between Japanese and U.S. labor markets, unemployment and vacancies in the two countries respond similarly to aggregate disturbances. Responses to sectoral and external shocks differ to some extent across the two countries. In addition, there are some differences in the relative importance of various shocks in explaining movements in unemployment and vacancies. …

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