Sectoral shifts and unemployment in Japan

Abstract

The unemployment rate in Japan has increased after the first oil crisis. Though its level is still low compared to other industrialized countries, the upward trend is significant. It is widely held that changes in labor supply, especially extensive female labor force participation are primarily responsible for this trend. This study uses sectoral shift theory to investigate the effects of rapid changes in labor demand across sectors on the Japanese unemployment rate. Sectoral shifts such as large relative price changes, rapid technological changes and shifts in output demand require reallocation of labor across sectors. If labor is specific to a sector, sectoral shift disturbances could increase the unemployment rate. The sectoral shift view differs much from conventional view of the business cycle. They explain aggregate fluctuations by aggregate demand movements. The sectoral shift argument attributes aggregate fluctuation primarily to allocative disturbances across sectors. In this study, the distinction between these two disturbances is essential. Previous methods developed in macroeconomics and the sectoral shift literature are employed. The two oil crisis and volatile exchange rate movements generated large variations among industrial sectors. Firms are now quicker to adjust their employment level. Regional imbalances of labor markets are observed. However, statistical tests using unemployment rate equations do not support the sectoral shift hypothesis. Japanese-specific aspects of labor markets are posited as reasons for this rejection. Japanese firms tend to avoid dismissals by utilizing various measures such as changes in hours worked, personnel transposition within a firm, loaning workers to related or new businesses, and hiring newly graduates in expanding sectors. They do not dismiss workers until other alternatives are exhausted and a demand decline is found to be persistent. In general, the flexibility of Japanese labor markets mitigates the effect of sectoral shifts.