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Inequality through wage response to the business cycle–Evidence from the FFL decomposition method

Izumi Yokoyama, Naomi Kodama and Yoshio Higuchi

Journal of the Japanese and International Economies, 2019, vol. 51, issue C, 87-98

Abstract: This study explores the change in wage response to the business cycle and resultant wage inequality. First, we find that the pro-cyclical relationship between wage and business cycle has weakened among low-income earners after the late 1990s, despite the fact that wages of low earners had been vulnerable to the business cycle fluctuations before this period, using the Firpo, Fortin, and Lemieux decomposition method. Second, our empirical analyses using the DiNardo, Fortin, and Lemieux decomposition method confirm that the change contributed to mitigating wage inequality among employed people in the subsequent recessions such as the 2008 global financial crisis. This could be explained by the structural changes in Japanese employment system triggered by the financial crisis in 1997, which turned firms’ attitude towards downsizing more aggressive than before. This change affected mainly low-income earners who tend to belong to the secondary segment, while the wages and job security of the high-wage workers who mainly belong to the primary segment have stayed stable even after the structural changes. As a result, employment adjustment has dominated wage adjustment for the low-income earners after the change in the employment practice, which led to the results found in this study.

Keywords: Inequality; Wage response to the business cycle; Segmented labor market; Firpo; Fortin; Lemieux decomposition (search for similar items in EconPapers)
JEL-codes: J11 J31 J82 (search for similar items in EconPapers)
Date: 2019
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