Downward wage rigidity and deflation widen wage-productivity gap
A Bank of Japan working paper shows that downward nominal wage rigidity combined with prolonged deflation and job security preferences widened Japan's wage-productivity gap over the past 30 years.
Upward rigidity dominates the deflation era
Using worker-level microdata covering 1990 to 2024 from the Basic Survey on Wage Structure, the study evaluates both upward and downward nominal wage rigidities in Japan.
Empirical estimations reveal that wage freezes occurred consistently throughout the past three decades.
Crucially, upward wage rigidity became significantly more influential during the deflationary period starting in the late 1990s, exerting strong downward pressure on actual wage growth relative to potential productivity gains.
At its peak in the early 2000s, seven percent of workers faced upward rigidity while four percent faced downward rigidity.
Recent price inflation since 2020 has begun to weaken these rigidities, restoring flexibility to wage setting.
How job security freezes worker reallocation
A general equilibrium model demonstrates that downward nominal wage rigidity creates endogenous upward rigidity as firms restrain current wage increases to avoid costly future wage cuts.
When labor-management bargaining prioritizes job security over wage gains, workers become less sensitive to relative wage signals.
This dynamic suppresses aggregate wage pass-through and prevents labor from reallocating toward higher-productivity firms.
Counterfactual simulations indicate that achieving a two percent inflation target alongside greater worker mobility would significantly narrow Japan's long-standing wage-productivity gap.
Breaking a thirty-year structural trap
The study rightly identifies Japan's wage slump as a structural coordination trap.
Yet inflation alone will not fix the problem if entrenched preferences for job tenure persist.
Real wage recovery demands systemic reforms that encourage worker mobility across firms.