The Japanese Lost Decade and Beyond: A Chain Reaction Theory Approach

Pablo Agnese

No 5463, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The Japanese lost decade has become an intriguing puzzle for both economists and policy-makers alike, as the unemployment rate climbed to unprecedented levels and the growth rate of productivity decreased considerably. More recent times seem to present with a more optimistic outlook, but this is not yet the last word in the matter. In this paper we estimate two alternative multi-equation structural models descriptive of the Japanese labor market, that are then used to conduct dynamic simulations both for the lost decade period (1990-2002) and beyond (2002-2007). Our results point, primarily, to the damaging effects of the ever-increasing public debt as a major source of labor market inefficiencies. In addition, we find the fall in labor union power to have a significant easing effect on the unemployment rate, but also to be a major driver in the apparently eroding pattern of the labor income share in recent years.

Keywords: labor market dynamics; structural multi-equation models; chain reaction theory; simulations (search for similar items in EconPapers)
JEL-codes: C32 E17 E24 J08 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2011-01
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