Has the Phillips curve lost its validity?

Outlook for the Labor Market: The Big Picture


July 27, 2018

  • Shunsuke Kobayashi
  • Yota Hirono


◆Japan’s labor market is moving into a new phase. While the decline in working-age population as such began sometime during the middle of the 1990s, the shortage of manpower only became evident around 2010 as a result of progress in the hollowing out effect. But now corporations have begun to seek out a cheap underutilized labor force as a result of the relative decline in unit labor cost. Until now, the majority of this market was accounted for by women part-time workers. Over the past few years, the labor participation rate of women has improved considerably, centering on the age-range of 30 to 50, and it is difficult to hold down a head count any larger than this. As a result, corporations are now taking new approaches to acquiring more workers. These are (1) changing the status of non-regular employees to that of regular employee as a means of extending average work hours, and (2) using the underutilized work force, which includes younger workers, the elderly, and foreigners.

◆While the shortage of manpower deepens, the average wage does not rise, which leads some to question the validity of the Phillips curve. However, if we look at wage growth according to the Phillips curve and perform a breakdown by age-group, we find that in current-day Japan, the Phillips curve is still valid. The essential problem is that the labor market is tight only in the younger age range, while the figure for the middle-aged slacks off considerably. In other words, a “generational mismatch” has occurred between the profile of human resources being sought (demand for labor) and the labor supply. The current condition of Japan’s labor market is represented by the fact that wage inflation and deflation is partially mixed.

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