What Prevents Productivity Gains from Translating into Wages: Lessons from Japan's Deflationary Period

Nobuhiro Abe, Ryuichiro Hirano and Sohei Kaihatsu
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Nobuhiro Abe: Bank of Japan
Ryuichiro Hirano: Bank of Japan

No 26-E-12, Bank of Japan Working Paper Series from Bank of Japan

Abstract: What prevents productivity gains from translating into wages? This paper examines the roles of deflation and labor market frictions, with particular emphasis on job security, in driving the widening wage-productivity gap. Our empirical analysis shows that wage-setting in Japan was rigid in both upward and downward directions during the deflationary period, with upward rigidity being more pronounced. These wage freezes suppressed wage growth and contributed to the widening wage-productivity gap. Using a heterogeneous-firm general equilibrium model, we show that downward nominal wage rigidity, together with deflation and an emphasis on job security, suppresses wage growth and widens the wage-productivity gap by inducing firms to impose larger wage markdowns. Alleviating these factors raises not only wages but also aggregate productivity through labor reallocation across firms.

Keywords: Wage-Productivity Gap; Nominal Wage Rigidity; Trend Inflation; Reallocation Effect (search for similar items in EconPapers)
JEL-codes: E24 E52 J30 (search for similar items in EconPapers)
Date: 2026-08-14
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