Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-24T02:29:08.183Z Has data issue: false hasContentIssue false

FISCAL POLICY CHANGES AND LABOR MARKET DYNAMICS IN JAPAN’S LOST DECADE

Published online by Cambridge University Press:  15 February 2021

Julen Esteban-Pretel
Affiliation:
City University of New York
Xiangcai Meng
Affiliation:
Woosong University
Ryuichi Tanaka*
Affiliation:
The University of Tokyo
*
Address correspondence to: Ryuichi Tanaka, Institute of Social Science, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-0033, Japan. e-mail: [email protected]. Phone: +81-3-5841-4982, Fax: +81-3-5841-4982.
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Japan’s so-called Lost Decade of the 1990s presents a unique case study of an economy with a recent severe and prolonged recession, with large changes in the labor market and fiscal policy as the main policy available to the government. Japanese unemployment rate surged from 2.1% in 1991 to 5.4% in 2002. Meanwhile, the Japanese economy experienced a rise in government expenditures, while taxes remained fairly stable. This paper quantitatively evaluates the impact of these changes in fiscal policies on labor market variables, in particular the unemployment rate, during the 1990s. We build, calibrate, and simulate a dynamic general equilibrium model with search frictions in the labor market, a productive government sector, heterogenous government spendings, and different categories of taxes. Our model is able to reproduce the paths of the main labor market variables, and the counterfactual experiments show that the changes that took place in the different spending components affected the unemployment rate heterogeneously, although overall they kept unemployment lower than it could have been. We also find that had the government also implemented countercyclical tax policies, unemployment would not have risen as much as it did by 2002.

Type
Articles
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© Cambridge University Press 2021

Footnotes

*

The authors wish to thank Javier Andrés, Junichi Fujimoto, Pedro Gomes, Daiji Kawaguchi, Hiroaki Miyamoto, Ryo Nakajima, Yasuyuki Sawada, Hiroshi Teruyama, and participants at 1st Workshop ANAECO, in Valencia (Spain) for valuable comments and discussions. The authors acknowledge financial support for this project by the Ministry of Education, Culture, Sports, Science and Technology of Japan through the Grant-in-Aid for Scientific Research (Grant Numbers 24330063 for Julen Esteban-Pretel, and 20H05629 for Ryuichi Tanaka), from the Policy Research Center at the National Graduate Institute for Policy Studies. Julen Esteban-Pretel also acknowledges financial support from PSC-CUNY (Award # 69440-00 47), as well as support provided for this project by a PSC-CUNY Award, jointly funded by The Professional Staff Congress and The City University of New York (Award #69440-00 47). All remaining errors are our own.

References

Afonso, A. and Gomes, P. (2014) Interactions between private and public sector wages. Journal of Macroeconomics 39, 97112.CrossRefGoogle Scholar
Baxter, M. and King, R. G. (1993) Fiscal policy in general equilibrium. The American Economic Review 83(3), 315334.Google Scholar
Bermperoglou, D., Pappa, E. and Vella, E. (2017) The government wage bill and private activity. Journal of Economic Dynamics and Control 79, 2147.CrossRefGoogle Scholar
Blanchflower, D. (1996) The role and influence of trade unions in the OECD. Number 310. Centre for Economic Performance, London School of Economics and Political Science.Google Scholar
Bouakez, H. and Rebei, N. (2007) Why does private consumption rise after a government spending shock? Canadian Journal of Economics/Revue canadienne d’ économique 40(3), 954979.CrossRefGoogle Scholar
Braun, R. A., Esteban-Pretel, J., Okada, T. and Sudou, N. (2006). A comparison of the Japanese and us business cycles. Japan and the World Economy 18(4), 441463.CrossRefGoogle Scholar
Braun, R. A., Okada, T. and Sudou, N. (2006) Us r&d and Japanese medium term cycles. Technical report, Bank of Japan Working Paper Series 06-E6. Econometric Society 2007 North American Winter Meetings contributed paper.Google Scholar
Bruckner, M. and Pappa, E. (2012) Fiscal expansions, unemployment, and labor force participation: Theory and evidence. International Economic Review 53(4), 12051228.CrossRefGoogle Scholar
Burgert, M. and Gomes, P. (2011) The effects of government spending: A disaggregated approach. Working Paper at Goethe University of Frankfurt and University Carlos III de Madrid.Google Scholar
Caballero, R. J., Hoshi, T. and Kashyap, A. K. (2008) Zombie lending and depressed restructuring in Japan. The American Economic Review 98(5), 19431977.CrossRefGoogle Scholar
Cass, D. (1965) Optimum growth in an aggregative model of capital accumulation. The Review of Economic Studies, 233240.CrossRefGoogle Scholar
Cortuk, O. and Güler, M. H. (2013) A disaggregated approach to the government spending shocks: an theoretical analysis. MPRA Paper No. 45318, March 2013.Google Scholar
Cubas, G. (2011) Accounting for cross-country income differences with public capital. Unpublished Manuscript, Central Bank of Uruguay, March 2011.Google Scholar
Dominguez, K. M., Rogoff, K. S. and Krugman, P. R. (1998) It’ s baaack: Japan’ s slump and the return of the liquidity trap. Brookings Papers on Economic Activity 2, 137205.Google Scholar
Drygalla, A., Holtemöller, O. and Kiesel, K. (2020) The effects of fiscal policy in an estimated dsge model – the case of the german stimulus packages during the great recession. Macroeconomic Dynamics 24(6), 13151345.CrossRefGoogle Scholar
Eggertsson, G. B. and Woodford, M. (2003) The zero bound on interest rates and optimal monetary policy. Brookings Papers on Economic Activity 34(1), 139235.CrossRefGoogle Scholar
Esteban-Pretel, J., Nakajima, R. and Tanaka, R. (2010) Tfp growth slowdown and the Japanese labor market in the 1990s. Journal of the Japanese and International Economies 24(1), 5068.CrossRefGoogle Scholar
Esteban-Pretel, J., Nakajima, R. and Tanaka, R. (2011) Changes in Japan’ s labor market flows due to the lost decade. Discussion papers 11039, Research Institute of Economy, Trade and Industry (RIETI).Google Scholar
Esteban-Pretel, J., Tanaka, R. and Meng, X. (2017) Changes in Japan’ s labor market during the lost decade and the role of demographics. Journal of the Japanese and International Economies 43, 1937.Google Scholar
Flotho, S. (2015) Fiscal multipliers in a monetary union under the zero-lower-bound constraint. Macroeconomic Dynamics 19(6), 1171.CrossRefGoogle Scholar
Fontaine, I., Gálvez-Iniesta, I., Gomes, P. and Vila-Martin, D. (2020) Labour market flows: Accounting for the public sector. Labour Economics 62(C).CrossRefGoogle Scholar
García, V. E. and Llopis, J. A. S. (2005) Estimating the substitutability between private and public consumption: the case of spain, 1960-2001. In XII Encuentro de Economía Pública: Evaluación de las Políticas Públicas: Palma de Mallorca los días 3 y 4 de febrero de 2005, pp. 36.Google Scholar
Gomes, P. (2011) Fiscal policy and the labour market: the effects of public sector employ- ment and wages. European Economy—Economic Papers 439, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.CrossRefGoogle Scholar
Gomes, P. (2015) Optimal public sector wages. The Economic Journal 125(587), 14251451.CrossRefGoogle Scholar
Gregory, R. G. and Borland, J. (1999) Recent developments in public sector labor markets. Handbook of Labor Economics 3, 35733630.CrossRefGoogle Scholar
Hayashi, F. and Prescott, E. C. (2002) The 1990s in Japan: A lost decade. Review of Economic Dynamics 5(1), 206235.CrossRefGoogle Scholar
Kamps, C. (2004) The Dynamic Macroeconomic Effects of Public Capital. Theory and Evidence for OECD Countries, Volume XIV. Berlin: Springer.Google Scholar
Kato, R. R. and Miyamoto, H. (2013) Fiscal stimulus and labor market dynamics in Japan. Journal of the Japanese and International Economies 30, 3358.Google Scholar
Kato, R. R. and Miyamoto, H. (2015) Effects of fiscal stimulus on the labor market. Public Policy Review 11(2), 277302.Google Scholar
Koopmans, T. C. (1965) On the Concept of Optimal Economic Growth, in the Econometric Approach to Development Planning. Amsterdam: North holland.Google Scholar
Kuo, C.-H. and Miyamoto, H. (2014) Fiscal stimulus and unemployment dynamics. Technical report, Working Paper, Graduate School of Public Policy, the University of Tokyo.Google Scholar
Mendoza, E. G., Razin, A. and Tesar, L. L. (1994). Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption. Journal of Monetary Economics 34(3), 297323.Google Scholar
Meng, X. (2015) Heterogenous government spending and labor market dynamics: A perspective from directed search. Job Market Paper, National Graduate Institute For Policy Studies (GRIPS), Tokyo, Japan.Google Scholar
Merz, M. (1995) Search in the labor market and the real business cycle. Journal of Monetary Economics 36(2), 269300.CrossRefGoogle Scholar
Michaillat, P. (2011) Fiscal multipliers over the business cycle. Economic Journal 112(482), 766785.Google Scholar
Mitra, K., Evans, G. W. and Honkapohja, S. (2019) Fiscal policy multipliers in an rbc model with learning. Macroeconomic Dynamics 23(1), 240283.CrossRefGoogle Scholar
Monacelli, T., Perotti, R. and Trigari, A. (2010). Unemployment fiscal multipliers. Journal of Monetary Economics 57(5), 531553.CrossRefGoogle Scholar
Morikawa, M. (2014) A comparison of the wage structure between the public and private sectors in Japan. Discussion Papers (by fiscal year) 2013, 2012.CrossRefGoogle Scholar
Oh, H. and Reis, R. (2012) Targeted transfers and the fiscal response to the great recession. Journal of Monetary Economics 59, S50S64.CrossRefGoogle Scholar
Peek, J. and Rosengren, E. S. (2005). Unnatural selection: Perverse incentives and the misallocation of credit in Japan. The American Economic Review 95(4), 11441166.CrossRefGoogle Scholar
Pissarides, C. A. (2000) Equilibrium Unemployment Theory. MIT Press.Google Scholar
Quadrini, V. and Trigari, A. (2007) Public employment and the business cycle. The Scandinavian Journal of Economics 109(4), 723742.CrossRefGoogle Scholar
Rossi, R. (2014) Designing monetary and fiscal policy rules in a new keynesian model with rule-of-thumb consumers. Macroeconomic Dynamics 18(2), 395417.CrossRefGoogle Scholar
Tanzi, V. (2015) Fiscal and monetary policies during the great recession: A critical evaluation. Comparative Economic Studies 57(2), 243275.CrossRefGoogle Scholar
Yum, M. (2020) General equilibrium feedback regarding the employment effects of labor taxes. Macroeconomic Dynamics 24(8), 20122032.CrossRefGoogle Scholar