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We are thankful to Ravi Balakrishnan, Stephan Danninger, Kenneth Kang, and participants in a seminar held at the IMF for providing many insightful comments.
Across countries, Japan’s share of manufacturing in total employment (19%) is less than Germany (24%), but greater than France (16%), the U.K. (14%) and the U.S. (10%). Similarly, the share of employment in retail sales (18%) is on average higher than comparative countries (Germany 14%, France 14%, U.K. 15%, and U.S. 15%).
This is an average of recessions in 1993, 1997, and 2001.
Employment in the health sector has increased around 40 percent since 2002.
Wages in Japan consist of base wages, bonuses, and overtime pay. Base wages are referred to as scheduled wages, while overtime pay and bonuses are included in non-scheduled wages. The share of non-scheduled wages in the total wage bill is higher for larger firms (33 percent for firms with more than 500 employees) than for smaller firms (18 percent for firms with 5–29 employees).
Japan’s dual labor force is divided between non-regular and regular workers. Within the non-regular category there are a variety of employment contracts, including part-time workers, contract workers, and dispatched workers. Non-regular workers more generally are outside of the normal employment system and are considered to have significant disadvantages.
The parameters p and q denote the autoregressive lag lengths, which are chosen based on Bayesian information criterion. All variables are seasonally adjusted. For industry and firm size estimates employment is used instead of unemployment.
The dynamic beta is defined as
Estimates are based on quarterly data covering a rolling twenty year window through 2007Q3. The methodology is based on Balakrishnan, Das, and Kannan (2010) but uses a different statistical technique to define the business cycle. The estimates use one lag for output and three for unemployment.
To account for the possibility of endogeneity between unemployment and output, we also instrument for the contemporaneous output variable with its own lagged values. The estimated coefficient is broadly of the same magnitude but with a much higher standard error. These results are available from the authors upon request.
Long-term changes in the labor force will be picked up in the constant.
Within manufacturing, there are two large outliers, textile (F11) and leather (F21) production. Both sectors were predicted to decline by 17 percent, with actual employment changes much less.
Large firms may have also relied on wage cuts, rather than cuts in employment, during the crisis because they perceived the shock to be temporary and not permanent. See for example Darius et al (2010).
The parameters p and q denote the autoregressive lag lengths, which are chosen based on Bayesian information criterion. All variables are seasonally adjusted. The regressions are run over 80 quarters through the quarter prior to the start of the recession. The dynamic beta for wages is defined similarly to the dynamic beta for unemployment.
The figure shows the dynamic beta for Japan estimated over rolling 80-quarter windows. The estimates use no lags for either output or real wages.
In defining the recession periods, we follow the definitions set out in Balakrishnan, Das, and Kannan (2010).
LLSV provide several other proxies for shareholders rights. Results are similar across variables due to a high degree of correlation between the different proxies. The commonly used proxy “antidirector’s rights” has a near identical result to the common law dummy variable.
The OECD’s employment protection legislation (EPL) variable, which is strongly correlated with the common law dummy and significant at the 10 percent level in Balakrishnan, Das, and Kannan (2010), is insignificant in this specification. We surmise that this variable is effective at explaining the extreme values—there is almost a perfect overlap between the top EPL countries and the common law countries—but is less effective at middle levels of protection. For example, both Japan and Switzerland have relatively good scores on the EPL but very low Okun coefficients.
The variable is insignificant once we control for temporary workers, which is due to the exclusion of part of the sample in regression 4.
A variable for unemployment benefits was also included but was insignificant due to differences in the sample selection.
Forecasts are calculated using the estimated Okun coefficients and staff’s projection of the current growth path.