The Wage Formation Mechanism in Japan: Summary of the Third Workshop on "Issues Surrounding Price Developments during the COVID-19 Pandemic"

Monetary Affairs Department and Research and Statistics Department
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Monetary Affairs Department: Bank of Japan
Research and Statistics Department: Bank of Japan

No 23-01-31, Bank of Japan Research Papers from Bank of Japan

Abstract: On November 25, 2022, the third workshop on "Issues Surrounding Price Developments during the COVID-19 Pandemic," entitled "The Wage Formation Mechanism in Japan," was held at the Bank of Japan's Head Office. The workshop featured lively discussions on wage developments and the link between wages and prices based on the characteristics of Japan's labor market and recent changes therein, involving experts and scholars in economics and empirical analysis. Session 1 highlighted various factors that made nominal wages in Japan prior to the COVID-19 pandemic more sluggish than those in the United States and Europe and reported recent changes in the factors. Further, issues on the outlook for the pace of wage growth in the future were presented, and problems in looking at average wages as well as the link between wages and prices were discussed. Session 2 focused on the nominal wage growth of full-time workers in Japan taking into account Japan's "dual labor market," consisting of an "internal labor market," where labor reallocation takes place within firms and wages follow the seniority-based system, and an "external labor market," where employment adjustment occurs across firms and wages are mainly determined by supply and demand in the market. It was shown that the sensitivity of nominal wage growth to labor market conditions differed between the internal and external labor markets. The panel discussion in Session 3 mainly covered two issues: (i) what were the key factors in considering nominal wage developments, and (ii) whether inflation caused by cost-push factors would lead to higher wages and in turn make stable 2 percent inflation achievable. With regard to issue (i), the view was expressed that while it was necessary to assess the link between wages and labor market conditions and between wages and productivity for each type of employment, factors arising from changes in the composition of workers mainly due to demographic changes were also important. Regarding issue (ii), it was pointed out that future developments in aggregate demand and the outcomes of efforts to reflect the previous fiscal year's inflation in the annual spring labor-management wage negotiations would be important. Moreover, the view was expressed that in terms of the outlook for whether the price stability target of 2 percent could be achieved in a sustainable and stable manner, it was important whether 2 percent inflation would become the new social norm in Japan.

Date: 2023-01-31
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