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Heterogeneity and Wage Growth of Full-time Workers in Japan: An Empirical Analysis Using Micro Data


June 19, 2023
Daiki Date*1
Takushi Kurozumi*2
Takashi Nakazawa*3
Yu Sugioka*4


In this paper we examine the driving forces behind fluctuations in wage growth of full-time workers in Japan, taking into account the heterogeneity of wage structures among the workers, using micro data including those from the Basic Survey on Wage Structure. Specifically, we first divide the workers into two classes with distinct wage structures, based on a finite mixture model estimated using various characteristics of the workers and the firms they work for. We find that the two classes correspond to what previous studies have called an "internal labor market," where, under long-term employment practices, labor is reallocated within firms and wages follow a seniority-based system, and an "external labor market," where labor moves across firms and wages are mainly determined by supply and demand in the market. We next analyze the effects of economic factors on individual full-time workers' wage growth rates. We show that, in the internal labor market, neither labor market conditions at the industry and firm-size level nor the output gap at the macro level have had an effect on the wage growth rates in recent years, while higher potential growth has had a positive effect. By contrast, in the external and the overall labor markets, improvements in labor market conditions and the output gap have accelerated the wage growth rates, even in recent years.

JEL classification
E24, J30, J40

Full-time worker, Heterogeneity of wage structures, Internal and external labor markets

This paper is based on a presentation at the second session of the Bank of Japan's third workshop on "Issues Surrounding Price Developments during the COVID-19 Pandemic," entitled "The Wage Formation Mechanisms in Japan," held on November 25, 2022 (see Bank of Japan Monetary Affairs Department and Research and Statistics Department (2023) for a summary). The authors would like to thank Tsutomu Watanabe (discussant), Kosuke Aoki, Takeo Hoshi, Ryo Kambayashi, Daiji Kawaguchi, Ayako Kondo, Jouchi Nakajima, Mototsugu Shintani, Etsuro Shioji, Toyoichiro Shirota, Isamu Yamamoto, participants at the workshop and 30th SNDE Annual Symposium, and colleagues at the Bank of Japan for valuable comments. The authors also thank the Ministry of Health, Labour and Welfare for providing data from the Basic Survey on Wage Structure, and the Ministry of Internal Affairs and Communications for providing data from the Establishment Census, Establishment Directory Maintenance Survey, Establishment and Enterprise Census, and Economic Census for Business Frame. Any remaining errors are the authors' own. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Japan.

  1. *1Monetary Affairs Department (currently Financial System and Bank Examination Department), Bank of Japan
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  2. *2Monetary Affairs Department (currently Nagasaki Branch), Bank of Japan
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  3. *3Monetary Affairs Department, Bank of Japan
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  4. *4Monetary Affairs Department, Bank of Japan
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