Working Paper Series no. 399: Wage and Productivity differentials in Japan. The Role of Labor Market Mechanisms

Abstract

This paper aims at explaining two stylized facts of the Lost Decade in Japan: rising wage inequalities and increasing firm-level productivity differentials. We build a model where firms can choose between efficiency wages with endogenous effort and competitive wages, and show that it can replicate those facts. Using Japanese microeconomic data, we find support for the existence of efficiency wages in one group of firms and competitive wages in the other group. Based on those results, a simulation shows that the share of firms using efficiency wages has declined, within sectors, during the Lost Decade, as predicted by the model.

Yannick KALANTZIS, Ryo KAMBAYASHI and Sébastien LECHEVALIER
September 2012

Classification JEL : L23, J24, J31, J42

Keywords : heterogeneity of firms, efficiency wages, job security, effort, productivity differentials, wage inequalities, matched employer-employee data .