Comment on “Is Downward Wage Flexibility the Primary Factor of Japan's Prolonged Deflation?”

• DOI: http://doi.org/10.1111/aepr.12058
• Date: 01 January 2014
• Author: Ryo Kambayashi
• Published date: 01 January 2014

Comment on “Is Downward Wage

Flexibility the Primary Factor of Japan’s

Prolonged Deflation?”

Ryo KAMBAYASHI†

Hitotsubashi University

JEL codes: J60, J30

Kuroda and Yamamoto (2014) have two objectives: to examine the nonexistence of

downward nominal wage rigidity and to discuss the relation between downward wage

adjustment and the deflationary economy in Japan recently. The first issue is answered

through a summary of Kuroda and Yamamoto’s past research; they repeat that the Japa-

nese labor market did not have downward nominal wage rigidity. The second issue has

been originally proposed by Yoshikawa (2013). Contrary to Yoshikawa’s conjecture,

Kuroda and Yamamoto conclude that downward wage adjustment was not responsible

for the deflation. In general, I agree with their conclusions; however, in order to fully

understand the relation between labor market phenomena and the deflationary economy

in recent Japan, some unexplored arguments need to be developed.

The first point of discussion is the role of wage adjustment through external markets.

Even in the Japanese labor market, the yearly labor turnover ratio amounts to around

30% of the stock of employment (according to the Employment Trend Survey of the Min-

istry of Labor, Health and Welfare (MLHW)). More importantly, contrary to the flexibil-

ity of internal wage adjustment, the recent nominal wage in the Japanese external labor

markets has not adjusted much.

Here, I wish to quote the result of statistical examination of the transition of the

hourly wages of full-time male workers.

Based on microdata from the MHLW’sB asic Survey on Wage Structure, Figure 1 pres-

ents the estimated coefficients of year dummies in wage equations. The black lines depict

the yearly shifts of the average hourly wage for newly hired full-time male workers since

1993, and the gray lines depict the shifts for full-time male workers with 30 years of

tenure after controlling for age and educational attainment. First, the nominal hourly

wage for newly hired workers has not changed from year to year, especially when we

exploit within-establishment variation. It is possible, from this point of view, the flexibil-

ity of wage cannot be exaggerated if we discuss the whole of labor market because of the

stickiness of nominal wage in external labor market.

Figure 1 also provides some information for the second point of discussion, namely,

that internal wage adjustment is highly concentrated in particular groups. In Figure 1,

the sizes of the estimated coefficients are much smaller when establishment fixed effects

†Correspondence: Ryo Kambayashi, Institute of Economic Research, 2-1 Naka, Kunitachi City,

Tokyo186-8603, Japan. Email: kambayas@ier.hit-u.ac.jp

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doi: 10.1111/aepr.12058 Asian Economic Policy Review (2014) 9, 161–162

© 2014 The Author

Asian Economic Policy Review © 2014 Japan Center for Economic Research 161