Heterogeneity and wage growth of full-time workers in Japan: An empirical analysis using micro data

Abstract

In this paper we examine the driving forces of fluctuations in wage growth of full-time workers in Japan, taking into account the heterogeneity of wage structures among the workers and using micro data including those from the Basic Survey on Wage Structure. To this end, we first divide full-time 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 labor is reallocated within firms and wages follow a seniority-based system under long-term employment practices, and an "external labor market," where labor moves across firms and wages are mainly determined by supply and demand factors 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 influenced the wage growth rates in recent years at least until 2021, while higher potential growth has increased them. By contrast, in the external and the overall labor markets for full-time workers, improvements in labor market conditions and the output gap have accelerated the wage growth rates, even in recent years.