The Long‐Run Dynamics of the Labor Share in Japan

• Published date: 01 June 2021
• Author: Kyoji Fukao,Cristiano Perugini
• Date: 01 June 2021
• DOI: http://doi.org/10.1111/roiw.12465

© 2020 International Association for Research in Income and Wealth

445

THE LONG-RUN DYNAMICS OF THE LABOR SHARE IN JAPAN

by Kyoji FuKao

IER,Hitotsubashi University

AND

Cristiano Perugini*

University of Perugia and IZA

The structural transformation started in Japan during the last decades of the past century and the insti-

tutional adjustments that followed have significantly reshaped personal and functional income distribu-

tion patterns. In this paper we investigate the long-term drivers of the share of output accruing to labor

in Japan. Our contribution lies in extending the theoretical SK schedule model by Bentotila and Saint-

Paul to multiple inputs and in providing new empirical evidence on Japan over the period 1970–2012.

Results indicate that low-knowledge-intensive market services were mainly responsible for the decline

in the labor share in Japan over the four decades considered. This was related to technological change

and, more importantly, to labor and product market structural and institutional features. These drivers

could have significantly contributed to reducing the bargaining power of labor vis-à-vis employers and,

consequently, the labor share.

JEL Codes: E25, J30, L11, O14

Keywords: Japan, labor share, mark-up, non-regular work

1. introduCtion

The Japanese capitalistic model has undergone major transformations during

the last decades as a result of the pressure posed by many interrelated factors. Labor

markets underwent massive changes along three main dimensions: (i) the decline of

the lifetime employment system (Ono, 2010; Kawaguchi and Ueno, 2013); (ii) the

growth in non-regular work (Asano et al., 2013; OECD, 2017a); and (iii) the huge

increase of women in the labor force (Inoue et al., 2016). On the product market

side, both domestic and international forces reshaped the structural features of

markets in terms of concentration, exposure to competitive pressures and market

power, giving rise to profit and mark-up patterns that significantly differ across

Note: This work was supported by JSPS KAKENHI Grant Number 16H06322 and largely devel-

oped while Cristiano Perugini was a visiting faculty at IER, Hitotsubashi University. The authors are

indebted to Paul Saumik for his valuable comments and insights in the initial stage of the research and

to Francesco Venturini for assistance on econometric aspects. They are also grateful for the feedbacks

received during presentations at conferences and workshops held in Assisi, Tokyo and Brighton. The

final version of the paper has greatly benefitted from the comments and suggestions by the three anon-

ymous referees and the Editor, Prasada Rao.

*Correspondence to: Cristiano Perugini, Department of Economics, University of Perugia, Via

Pascoli 20, 06123 Perugia, Italy (cristiano.perugini@unipg.it).

Review of Income and Wealth

Series 67, Number 2, June 2021

DOI: 10.1111/roiw.12465

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Review of Income and Wealth, Series 67, Number 2, June 2021

446

© 2020 International Association for Research in Income and Wealth

sectors (Fukao and Nishioka, 2017). Such extensive transformations contributed

to reshaping social and economic inequalities in Japan, traditionally considered as

a relatively equitable market economy. In this paper, we focus on the evolutions of

functional income distribution, a perspective of analysis that has recently regained

importance in the economic research agenda (Krueger, 1999; Atkinson, 2009). The

welfare implications of the decline of the labor share have also been extensively

considered (Zeira, 1998; Blanchard and Giavazzi, 2003). In particular, due to cap-

ital income and profits being more unequally distributed than labor income, the

negative association between labor share and personal income inequality has been

extensively documented (Schlenker and Schmid, 2015). Moreover, the well-known

heterogeneity in marginal propensity to consumption at different income levels

explains why the trend in the labor share is crucial in determining domestic demand

patterns. These reasons make the analysis of the dynamics of the labor share in

Japan particularly interesting, since in the last decades the country has experienced

a long period of stagnation, coupled with an unprecedented increase in economic

inequalities (Minami, 2008; Funabashi and Kushner, 2015).

An extensive literature on the drivers of the labor share has developed in

the last two decades. Its decline has first of all been connected to changes in the

production function, in terms of capital augmenting technological change and

capital deepening (Piketty, 2014; Piketty and Zucman, 2014; Karabarbounis and

Neiman, 2014) and of increasing substitutability of labor with capital (Bentolila

and Saint-Paul, 2003; Antràs, 2004). To this regard, the consideration of differ-

ent types of labor and capital has provided additional and useful insights, as the

overall effect of technological change on the labor share crucially depends on the

interplay between levels of substitutability of different types of capital and labor

and on their relative remunerations (Karaborbonis and Neuman, 2014). A second

group of drivers of the labor share relates to globalization. Classical trade theories

predict that developed countries specialize in capital-intensive industries and this

drives the labor share downwards, provided that the elasticity of substitution is

lower than one (European Commission, 2007). However, differences in the elastic-

ity of substitution of heterogeneous types of labor (high/low-skilled) can signifi-

cantly alter the impact of openness of markets on the overall labor share (Guscina,

2006; ILO, 2011). The relocation of production abroad through FDI, outsourc-

ing or imports of intermediate inputs has also been explored in terms of changes

in labor demand, wage elasticity and bargaining power of labor (Harrison, 2002;

Jaumotte and Tytell, 2007). The interplay of all these factors originates many pos-

sible outcomes and the impact of the various trajectories of globalization on the

labor share is ultimately an empirical matter (see Guerriero and Sen, 2012). A third

set of explanations is related to market imperfections. When remunerations do not

mirror workers’ marginal productivity, the extent to which emerging rents accrue

to capital or labor depends on the institutional settings that shape the bargaining

power of workers vis-a-vis employers (Blanchard and Giavazzi, 2003). The exist-

ing literature has emphasized particularly the role of product market competition

(Azmat et al., 2012; Barkai, 2019; Autor et al., 2017a, 2017b) and labor market

institutions (Bentotila and Sain-Paul, 2003; European Commission, 2007; Bental

and Demougin, 2010; OECD, 2012).

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We add to this literature by analyzing the long-run pattern and drivers of

the labor share in Japan, on which research has so far been rather limited (see

Wakita, 2006; Agnese and Sala, 2011; Takeuchi, 2005). As it is shown in the fol-

lowing Section, Japan is one of the economies where the decline of the labor share

has been more pronounced, being mainly concentrated in specific segments of the

tertiary sector. The possible reasons behind such trends explored here—production

factors heterogeneity and labor/product market institutional features—shed some

new light on aspects that might be of a more general interest.

Our paper contributes to the existing knowledge on different fronts. First, in

terms of theory, we propose an original extension to more than two inputs of the

seminal model by Bentotila and Saint-Paul (2003), based on the SK (labor share/

capital) schedule. This enables us investigate the degree of substitutability of dif-

ferent types of capital and work and its impact on the labor share (henceforth, SL).

In particular, we distinguish between information technology—IT—and non-IT

capital and between regular (i.e. permanent) and non-regular labor (see Section 5

for details on the definitions). Separating out different types of capital is crucial to

account for the impact of new digital technologies, identified as one of the main

drivers of growth and distributional patters in the last decades (Acemoglu and

Autor, 2011; Acemoglu and Restrepo, 2018). As the intensity of new technolo-

gies varies remarkably across sectors, such aspects are particularly important in

detailed industry level analysis like ours. Existing research on these aspects is not

extensive, but provides meaningful insights. Bassanini and Manfredi (2002) distin-

guish between the impact of ICT and non-ICT capital intensity and find that only

the latter has a relatively stable negative effect on the labor share; ICT capital has

a modest and weakly significant positive effect only in some econometric speci-

fications. On the contrary, O’Mahony et al. (2019a, 2019b) find that ICT capital

is the only driver of capital/labor substitution and its negative effect on the labor

share differs across sectors. Another stream of the literature focused on tangible/

intangible capital, providing mixed results (see Perugini et al., 2017; Fukao et al.,

2019; O’Mahony et al., 2019b). As for labor heterogeneity, in view of the specific

features of the Japanese labor market, we focus on the duality between standard

(or regular) and non-standard (or non-regular) employment. The idea of investi-

gating how the decline in traditional forms of employment has shaped the labor

share has received limited attention, despite having been one of the most pervasive

and inequality-enhancing labor market developments of the last decades (see, for

example, Blanchard and Landier, 2002; Boeri and Garibaldi, 2007; Perugini and

Pompei, 2017).

Our study is also the first to provide long-run evidence on SL dynamics and

drivers in Japan (from 1970 to 2012) and with such a detailed industry breakdown

(84 market sectors). This allows for proper accounting for differences in technology

as well as in labor market (union density, non-regular employment) and product

market features (mark-ups) (see Section 3.2).

Our results indicate, in the first instance, that the dynamic of the labor share in

Japan differed remarkably across industries and that the low-knowledge-intensive

market services were mainly responsible of its decline. This aggregate has gained

importance in the Japanese economy over time, accounting in the most recent years

for almost half of total hours worked, and has developed specific features (i.e. high