Employment in Japan: Theory and Practice

Well unemployment in Japan has fallen yet one more time (and here in Bloomberg). Now there is nothing really surprising about this, since Japan's economic expansion is continuing (albeit driven by exports rather than by domestic consumption) and the population of working age is declining, so there is evidently a "capacity" problem here (although it would perhaps be interesting to ask in the light of my post about the Irish "phenomenon" yesterday, why exactly it is that this expansionary wave is not producing more inward migration). Some background posting on the Japanese labour supply issue can be found here, and here (and incidentally Scott Peterson, Claus Vistesen and I are all now cross-posting on the Japan Economy Watch) blog.

Essentially the position is that Japan's unemployment rate dropped in April to 3.8% from 4% in March. Now, as I say, there is nothing really surprising in this drop, since it is to some extent built into the demographics of the situation. More surprising perhaps is that as unemployment is falling wages have not been rising:

So far higher demand for workers has yet to reverse a decade-long slide in wages or drive up prices. Wages declined for a fourth month in March after rising 0.3 percent in 2006. Consumer prices excluding fresh food fell for a third month in April, declining 0.1 percent after a 0.3 percent drop in March.
Bloomberg

As the FT also notes Economy Minister Hiroko Ota is clearly not too impressed with the situation:

Hiroko Ota, Japan’s economy minister, who has been cautious about declaring an end to deflation, said she remained concerned that wages had not responded to tighter labour market conditions. Household disposable income fell 0.4 per cent year on year in April, the first fall in more than six months, suggesting that wages had not picked up as fast as many had hoped.

and

Bank officials have admitted they are puzzled by the slow rate at which improved corporate performance has influenced other sectors of the economy. However, they say they are confident that they are witnessing merely a lag effect, rather than a breakdown in their central scenario.

Now all of this is interesting, since it will be remembered that standard neo-classical theory would suggest a different impact from a growing shortage in the supply of labour - namely that wages should rise, and that this increase in wages should lead to labour being systematically replaced by capital intensive equipment (and especially in Japan, where capital, as is well known, remains incredibly cheap and widely available). This replacement of labour by capital is also one of the arguments behind the assumption that ageing should lead to a technology driven productivity surge to help offset the impact on the growth rate of fewer workers being employed (Japan has not hit this capacity ceiling yet, but at the present rate, and absent immigration, she soon will). Could we expect the neo-classical idea to kick in as we tank fills, and the water rises steadily towards the ceiling.

Personally I am not sure, which is why I think that this new and very interesting situation (which has large implications for all of us as our societies age) should perhaps be being investigated with rather more intensity than currently seems to be the case.