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

日本語

August 14, 2026
Nobuhiro Abe*1
Ryuichiro Hirano*2
Sohei Kaihatsu*3

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.

JEL classification
E24, E52, J30

Keywords
Wage-Productivity Gap, Nominal Wage Rigidity, Trend Inflation, Reallocation Effect
  1. * We are grateful to Raphael Abiry, Kosuke Aoki, Adrien Auclert, Mike Elsby, Hiroshi Fujiki, Shigeru Fujita, Ippei Fujiwara, Masao Fukui, Daisuke Ikeda, Mike Irwin, Yuichiro Ito, Shinnosuke Kikuchi, Nobuhiro Kiyotaki, Takuji Kondo, Takushi Kurozumi, Toshitaka Maruyama, Koji Nakamura, Akio Okuno, Athanasios Orphanides, Marco Pinchetti, Philip Schnattinger, Kirill Shakhnov, and Masaki Tanaka for their valuable comments and discussions. We also thank the staff of the Bank of Japan and participants at the BOC-Philadelphia Fed-BOJ Joint Workshop and RES Annual Conference 2026 for their comments. Wakako Kaku provided excellent research assistance. We acknowledge that the Ministry of Health, Labour and Welfare provides data from the Basic Survey on Wage Structure; the Ministry of Internal Affairs and Communications provides data from the Establishment Census, Establishment Directory Maintenance Survey, Establishment and Enterprise Census, and Economic Census for Business Frame; and the Ministry of Economy, Trade and Industry provides data from the Basic Survey of Japanese Business Structure and Activities. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Japan. Any remaining errors are those of the authors.
      1. *1Monetary Affairs Department, Bank of Japan
        E-mail : nobuhiro.abe@boj.or.jp
      2. *2Monetary Affairs Department (currently Financial Markets Department), Bank of Japan
        E-mail : ryuuichirou.hirano@boj.or.jp
      3. *3Monetary Affairs Department (currently Oita Branch), Bank of Japan
        E-mail : souhei.kaihatsu@boj.or.jp

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