Thursday, August 25, 2011

Japan's low unemployment is easily explained

Tyler CowenKarl Smith, Scott Sumner, and Matt Yglesias raise a question about the Japanese economy: Why is Japan's unemployment rate so low (<5%) when Japan's growth has been so low for so long?

This is not a puzzle to me. I actually know not one, but two or even three good answers to this question.

Answer 1: Many women in Japan do not work. The unemployment rate is the percent of the labor force who can't find work; if a bunch of women say "I am a housewife and am not looking for work" when the economy turns bad, that will drastically reduce the unemployment rate. This 2010 report from the Bank of Japan finds that the labor force participation rate is 5 percentage points higher in the U.S. than in Japan, with the entire difference due to women. If housewifery were completely cyclical, that right there would be enough to make up the entire difference between the U.S. and Japanese unemployment rates. So comparing U.S. and Japanese unemployment is comparing apples and oranges, because of differing gender roles.

(Note: for this explanation to work, the female labor force participation rate has to go up and down cyclically; i.e., in bad times there must be some housewives who would be willing to work if times were good, and who are therefore actually unemployed. There is some evidence that this has been happening since 1990. This is kind of the mirror image of the claim that some long-term American "unemployed" people are only halfheartedly looking for work while being supported by their families.)

Answer 2: Japan's per capita growth was not so bad in the 2000s. Karl Smith gets this right; Japan's shrinking population makes for low headline growth, but in per capita terms they did just as well as us in the last decade. Check it out:

See? Not too shabby! (Of course, per capita growth since '08 has been horrible, so this doesn't solve the whole puzzle.)

Answer 3:  Falling real wages. Observe:

Wages plummeted in the recession, but they were falling even in 06-07, when things were doing better than they had been since the 80s. If real wages fall, unemployment will not rise as much for a given growth slowdown.

(Note: One place that falling real wages will show up is if companies or governments that feel a social obligation to maintain employment levels will shift regular employees to low-wage make-work jobs in a recession. The thought that this may be happening occurred to me as I observed the massive armies of rent-a-cops thronging the streets of Tokyo and Osaka on my most recent visit. But to find out if this is really happening, would have to look in the productivity statistics, and I am too busy to go do that.)

So to me, low Japanese unemployment is not a puzzle at all. The problem, if anything, is overdetermined; given housewives, falling real wages, and robust per-capita growth in the 2000s, the real puzzle might be why Japanese unemployment is so high. (The solution to this counter-puzzle may be that some young people say they are looking for jobs but aren't really; see Karl Smith's graph of youth unemployment.)

(Final note: A word to the wise...if you ever do an image search for "Japanese housewife," make sure SafeSearch is ON.)

Update: Looking at more data, I'm starting to really doubt that my first explanation is driving much of the "puzzle," here, since female labor force participation hasn't fallen much in this recession (unlike in the recession of the late 90s, when it fell by quite a bit). I therefore think falling wages must be driving most of it.


  1. Anonymous3:01 PM

    You are supposed to be working on your thesis.

  2. Anonymous4:35 PM

    You are confused about your first answer. Flows between "not in the labor force" to "in the labor force" will add to both the numerator and the denominator, so the effect on the unemployment rate is ambiguous. It depends on the counterfactual of how women would do if they were in the labor force. If USA is the comparison, women seem to do as good (maybe even better) in terms of employment.

    Btw, Japan's unemployment rate is 5% even within the sample of men ( So maybe you only have two good answers.. didn't read that far.

  3. Many women in Japan do not work. The unemployment rate is the percent of the labor force who can't find work; if a bunch of women say "I am a housewife and am not looking for work," that will drastically reduce the unemployment rate.

    It seems you are implicitly and inversely denying the "lump of labor fallacy" which is itself a canard with no factual nor theoretical basis.

    Is that your intent, or does it even matter?


  4. You are supposed to be working on your thesis.


  5. Btw, Japan's unemployment rate is 5% even within the sample of men

    Hmm, good point. So maybe the falling wages are really driving most of the "puzzle" right now.

  6. Anonymous3:46 AM

    It might be useful to check the employment ratio instead of the unemployment rate... That should give you an immediate answer as to whether the unemployment rates of Japan and the US are comparable.

  7. Anonymous7:20 AM

    I am not suggesting that this is the key to the puzzle but here is some anecdotal information for your consideration.

    The Japanese firms with whom we deal have shifted a lot of the older employees into what had previously been jobs for OLs or young employees. Rather than offer tin handshakes to this bulge of low/mid-management 55-65 year-olds as US firms might have done, they have shifted the underperformers to clerical work while they run out the clock.

    That data concerning youth unemployment might be explained in part by this anecdote. Older workers are clogging the positions that used to be done by new hires or the young women they expected to recycle every 4 years or so.

    This phenomenon should correct over the next decade or so as these "lifetimers" are pensioned off and the variable labour force system becomes fully entrenched.

  8. Funny I saw a new post from you before your JMPs showed up in my inbox. Really you like the pay of a grad student?

  9. Anonymous8:22 AM

    Two additional thoughts on your last point. I'm not an economist but have been following discussions about wage stickiness in recessions with interest. The Japan data suggests that wage stickiness might not be as significant an issue there as it is here. Two non-cultural differences might also help explain this.

    First, the typical salaried worker - even low-level employees - in Japan historically received a fairly significant portion of their income in the form of semi-annual bonuses. In the boom years, these bonuses could equal a year's worth of salary, although more common was between four and eight months' worth. (One reason given for this compensation structure is that Japan's national health insurance premium are keyed to an employee's monthly, not annual, salary, and backloading compensation into bonuses kept premium contributions to a minimum.) Friends have told me that bonuses have dropped over the past 15 years. Is it possible that compensation in the form of bonuses exhibits less stickiness than an hourly wage or a base salary?

    Second, the dirty secret of Japanese industry over the past two decades is the increasing reliance on low-paid contract employees. Rather than bringing in new employees on a career track, it's increasingly common to hire on an as-needed contract basis for a much lower salary (and typically no, or very small, bonus). Data I've seen suggests that upwards of 35% of the Japanese labor force now consists of contract labor. (Even my left-of-center Japanese friends readily acknowledge that this is largely driven by the difficulty under Japanese law of firing non-contract employees, even during downturns.)

  10. Anonymous9:50 AM

    No one has brought this up, and it's not a theme that I'm comfortable with, but could (lack of) immigration be a factor? My non-expert understanding is that they import very few foreign workers up and down the wage spectrum, unlike other large countries that have far less of a language barrier, and this may offer much of the low end protection against the ravages of surplused workers from overseas. Of course I would hasten to point out that this also reduces any opportunity for domestic demand growth given their demographic circumstances.

  11. I want to "Like" Claudia's comment. Noah, you should really be spending your procrastination time playing tower defense games, rather than writing blog entries. The former is much less apparent to your profs.

  12. "Second, the dirty secret of Japanese industry over the past two decades is the increasing reliance on low-paid contract employees."

    While I think that you are right that this shift is important (and bad news for the current generation), it's not a secret in the slightest. There was even a (seriously brilliant) TV drama about the trials and tribulations of temp staff at big companies: Haken no Hinkaku (2007).

  13. Anonymous9:17 PM


    Good. Let us know what it is about when it is finished.

  14. Anonymous2:27 AM

    Why was your safe search off in the fist place?

  15. Anonymous1:45 AM

    More japanese are working abroad than before. More temporarily hired. More foreigners working on contracts. More unproductive jobs by state intervention. State and corporations working on social stability package, not immediately good for markets though.

  16. Unemployment all around the globe should really be eradicated. It is good to have a safety net like income insurance but being able to cut the root cause of the problem is even better.

  17. Anonymous8:37 PM

    Two more reasons: 1) Japan seems to create superficial jobs to hire unskilled people to do useless tasks. Opening elevator doors, directing cars out of parking decks, telling pedestrians when to cross the street, etc. This kind of superfluous labor keeps the employment rate artificially low.
    2) It's virtually impossible to get fired from a Japanese company. If the company decides it doesn't like you, it won't promote you, and may transfer you to a less prestigious position, but they'll never fire you in the absence of a total scandal or criminal act. Lifetime employment contracts do a good job of preventing unemployment.