1996 Reports

Endaka and Japanese employment adjustment

Dekle, Robert

In this paper, using annual data between 1975 and 1994, we estimate the effects of the fluctuations of the yen on Japanese employment, disaggregated by 15 tradeables (manufacturing) industries. We find significant and substantial effects of the yen appreciation on Japanese employment in the industries exporting a high proportion of their value-added, but surprisingly little impact on employment in the import-competing or low-exporting industries. We present a simple model that shows that employment is more responsive to exchange rate fluctuations when the Japanese industry in question is more "competitive," that is, when the monopolistic competitor that comprises the Japanese industry has less ability to set prices. If Japanese exporters face more competitive markets than Japanese import-competing firms, then one prediction of our model is that when the yen appreciates, employment falls by a greater amount for Japanese exporters than for Japanese non-exporters. We show econometrically that this prediction is strongly borne out.