Labor reallocation, Productivity and Output Volatility in Japan

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2005-07-18

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The dissertation offers an analysis of the labor reallocation process in Japan and sheds light on its relationship with productivity and output volatility during the 1990s, the period of sluggish growth. The first chapter provides descriptive statistics of job reallocation rates among relatively large Japanese firms. The main results show that job reallocation follows a steady decline in volatility between 1967 and 1997 and exhibits little deviation from its long-run trend in the 1990s. At the same time, the idiosyncratic effects of job reallocation appear to counteract the sectoral/aggregate effects during the 1990s in the manufacturing sector. Finally, the contribution of net entry to overall productivity growth has decreased during this period, mainly through exits by relatively productive firms.

The second chapter investigates the labor input and inventory responses to demand shocks in both the Japanese manufacturing sector as a whole, and the Iron and Steel industry. The main results show that first, demand shocks increased in volatility after 1992 in both the manufacturing sector and the Iron and Steel industry. Second, for the manufacturing sector, the adjustment mechanism shifted from an intensive use of inventories to more of a reliance on employment and work hours after 1992. Finally, for the Iron and Steel industry, the employment and inventory adjustments do not exhibit any systematic changes while the work hour adjustment has become more intense since 1992.

The third chapter provides a theoretical examination of the impact of the Employment Adjustment Subsidy (EAS). A partial equilibrium industry model with heterogeneous establishments and aggregate uncertainty shows that the EAS lowers labor productivity, while reducing job flows and increasing average firm-level employment. While the directly measured impact on productivity is proportional to the fraction of subsidized workers, the indirect effects of the subsidy on output and employment volatility can be substantially larger. The subsidy can lead to a sizable increase in output fluctuations over the business cycle by symmetrically increasing the output response to shocks, while still meeting its primary objective of reduced employment volatility.

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