Apr 1, 2012 - Mar 31, 2014
Over the long-recession of the 1990s Japanese unemployment rose by 2.5 times and has remained high ever since. Some age groups such as young and old were more affected by this increase, as were women compared to men. Similar trends were observed in the U.S. during the recessions of the 1970s caused by the two oil crises, when unemployment increased from 4 to 10 percent. Europe saw even larger increases during the 1980s, when in a country such as Spain unemployment rose from 5 to 20 percent in 10 years.
During these recessionary periods when the labor market suffered so much, governments did not stay idle and implemented several policies to alleviate the state of the economy. For instance, in Japan during the so-called “Lost Decade” of the 1990s, the government put into place several measures to counteract the deep and prolong recessions, as did many European governments to fight the increase in unemployment of the 1980s. In Japan, such measures included, the increase of general government expenditures to stimulate demand (from 13.5 to 15.5 percent as a fraction of GDP), the rise of expenditures that directly involved the hiring of workers (e.g. for construction of public buildings or roads), and the enactment of regulations that allowed for higher flexibility in the labor market in terms of hiring and firing of workers (for instance through the deregulation of dispatched workers in a series of amendments of the “Dispatched Workers Act”). In Europe, countries such as Spain, France and Italy, enacted similar laws in order to liberalize the labor market and counteract the rise in unemployment seen in the 1980s.
Some of the previously mentioned government interventions have frequently come under criticism due in part to their potentially undesirable side effects, such as the increase in government debt or the rise of contingent employment. While many papers in the literature offer important contributions and insights, none of the existing research performs a quantitative assessment of the effects of specific government interventions in the labor market changes during periods of deep recessions, such as in Japan from the 1990s or in Europe in the 1980s, using a rigorous and structural analysis with sophisticated counterfactual simulations.
During the first year (April 2012 – March 2013), we did the empirical part of the project, and it is almost finalized. We studied microeconomic data, as well as government policy data to understand the changes in Japan’s labor market during the last two decades, as well as the policies put in place by the government during this time. We find that it was mostly young and older workers, as well as people in the Kinki area, and employees with non-regular employment who were most affected by the Lost Decade. The main results will soon be published as a GRIPS Policy Research Center Discussion Paper.
The theoretical phase, which we already started using some preliminary data, will be mostly developed during the this fiscal year (April 2013 – March 2014), we will build a model based on the neo-classical growth literature with search frictions in the labor market, and realistic government interventions. We will modify the state-of-the art available models further than ever before and build features that will not only capture the idiosyncrasies of the labor markets of Japan, but that will include a realistic government sector that will allow us to study the effect of policies in a meaningful way. We will carefully calibrate and simulate these models, performing counterfactual simulations to understand the effects of each policy in the changes observed in the labor market since the 1990s. Furthermore, we will study other policies different from the implemented ones, to analyze what could have been done to prevent some of the changes that took place.