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LIST  March 2017

LIST March 2017

Subject:

Labor market elasticities

From:

Alexander Arthur <[log in to unmask]>

Reply-To:

NBR's Japan Forum <[log in to unmask]>

Date:

Fri, 3 Mar 2017 21:53:58 -0500

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text/plain

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In the 1990s, I tried estimating the responsiveness of Japanese employment to changes in output. For example, if output changes by 5%, by what percent does employment change? The first time I did this, the employment response was almost unmeasurable. I recall running down the hall at the Japan Economic Institute to show my colleague, Doug Ostrom, the findings. He just shook his head and muttered, "Lifetime employment.”  In contrast, the US figures showed 100% response. The elasticity was 1.0, spread over two years; about 2/3 in the first year and 1/3 the second. 

In 2006, I took a new look at the data and found that things had changed. There was an upward trend in the elasticities from around 0.1 in 1955 to around 0.7 in 2006. Japan was becoming more American.

With ten more years of data, I returned to the analysis. The main conclusion is that the trend has slowed. The elasticity today is now measured at around 0.4. There appears to have been some long-delayed labor force reductions after the bubble that distorted the apparent trends. Since then, the responsiveness of Japanese companies to changes in output returned to their more sluggish past practice. The US numbers are almost exactly the same as first measured two decades ago.

My thought on discovering the above is that the action today is in labor hours, not in the number of people employed. So, I repeated the analysis using economy-wide aggregate hours rather than people. My expectation was that there would be an upward trend in responsiveness because of the much greater use of temporary and part-time workers. What the numbers show, however, is no trend, but a higher elasticity of 0.5, from the earliest data (1968) to the present. 

What to make of this? Lifetime employment always affected only about 20% of the work force, although it was a powerful norm that most companies respected if they could afford it. At the same time, there has been a more flexible contingent that absorbed the ups and down of demand. My surprise is that this contingent has not seemed to have changed. 

I am still trying to understand this better, so this is likely not the last word.

Arthur Alexander



 
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