Academic journal article Seoul Journal of Economics

A Decomposition of the Decline in Japanese Nominal Wages in the 1990s and 2000s

Academic journal article Seoul Journal of Economics

A Decomposition of the Decline in Japanese Nominal Wages in the 1990s and 2000s

Article excerpt

(ProQuest: ... denotes formulae omitted.)

I. Introduction

In the 1990s and the 2000s, the average nominal wage in Japan declined continuously.1 This is a sharp contrast to wage trends in other developed countries in the same period. As shown in Figure 1, OECD statistics indicate that the average nominal wage in the United States was 97 percent higher and that Germany 68 percent higher in 2012 than in 1991. On the other hand, in Japan, the average nominal wage has been declining since 1997 and in 2012 was 7 percent lower than in 1991. Against this background, Japanese Prime Minister Shinzo Abe recently asked business leaders to raise wages, reflecting the administration's resolve to accelerate the battle against chronic deflation (The Japan Times 2013). Some companies responded, with Lawson, a convenience store chain, for example, raising bonuses for their regular workers (Nikkei Shimbun 2013), Moreover, Toyota, the car manufacturer, and Hitachi, a major electrical machinery conglomerate, promised to increase base wages in the so-called wage "spring offensive" (SankeiBiz 2014).

Yoshikawa (2013) argued that the wage decline was due to both the rise in the number of low wage workers such as non-regular workers and a wage decline among regular workers. Meanwhile, Kuroda and Yamamoto (2006), using data from the Basic Survey on Wage Structure for 1985-2001, showed that the annual wages of full-time workers steadily fell from 1998 onward.2 However, there are few studies providing a quantitative analysis of the factors underlying this wage decline. Yet, in order to understand the decline in wages, it is important to know what factors are driving it. For example, if the increase in the share of the number of part-time workers is the main factor driving the wage decline, then wage increases for regular workers are unlikely to raise the average wage. Similarly, if the wage decline is due to changes in industrial structures resulting in an increase in the employment share of low-wage industries, wage increases at individual firms are unlikely to reverse the trend. The question therefore arises whether Prime Minister Abe's call on firms to raise wages will raise the average wage in Japan.

Given these considerations, the present study seeks to provide new evidence on the possible factors contributing to the nominal wage deafter cline in Japan's so-called "two lost decades" of the 1990s and the 2000s by quantitatively examining the causes of the decline in nominal wages for the economy as a whole as well as at the industry level. To do so, we decompose the wage decline into three factors, namely, changes in industrial structure, changes in the composition of the workforce, and changes in the wage structure, using micro data from the Basic Survey on Wage Structure for 1993-2008.

Specifically, employing the Blinder-Oaxaca decomposition technique,3 we decompose microdata by industry for three different subperiods between 1993 and 2008, which represent different phases of the business cycle:4 (1) the period of stagnation from 1993 to 1998 following the burst of the 1980s asset bubble; (2) the period of stagnation and deflation period from 1998 to 2003 following the Asian financial crisis; and (3) the period of the export-driven recovery from 2003 to 2008.5 Employing the Blinder-Oaxaca approach allows us to decompose wage changes into the following three effects: (a) the "endowment effect," which shows the effect of changes in the share of workers with different wages; (b) the "coefficient effect," which captures wage changes of workers that are similar in terms of their tenure, educational attainment, sex, hours worked, work status (full-time or part-time), region, and size of firm they work for in the same industry; and (c) the "interaction effect."

Our decomposition results suggest that the wages of workers in exportoriented industries such as manufacturing and wholesale did not necessarily decline, but those in most domestic service industries dropped sharply. …

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