Why Productivity Gains Did Not Raise Wages: Lessons from Japan's Deflation

In Japan, productivity increased while real wages remained flat from the late 1990s onward, widening the divergence. During the deflationary period, nominal wage growth rates were concentrated near zero percent, making it difficult for productivity gains to be reflected in wages.

The analysis focuses on ideas and practices rooted in the deflationary period that wages and prices should not rise, examining the mechanisms of wage rigidity from both theoretical and empirical perspectives.

The analysis suggests that wage rigidity depressed real wages and may also have depressed economy-wide productivity by hindering labor mobility in response to wages as signals.

The findings suggest that moving away from ideas and practices rooted in the deflationary period could ease wage rigidity and improve productivity through more efficient resource allocation.

The analysis estimates wage setting using a friction model with thresholds in both upward and downward directions, examining a mechanism in which nominal wages remain unchanged when the potential wage growth rate falls within a certain range. During the deflationary period, the threshold for upward wage adjustments increased.

The theoretical model used the level of trend inflation and the emphasis placed on wages in labor-management negotiations as factors. Counterfactual simulations and analysis of firm-level microdata tested the relationship between wage rigidity, labor mobility, and productivity. The effects are estimates based on certain assumptions.

This article focuses on the mechanisms of wage rigidity and does not explicitly consider other factors, such as worsening terms of trade or the expansion of non-regular employment.