2009 Reports

The Japanese Employment System after the Bubble Burst: New Evidence

Kambayashi, Ryo; Kato, Takao

Taking advantage of our first access to micro data from the 2002 Employment Status Survey (ESS) as well as previous years of the ESS, we provide new evidence on changes in the "lifetime employment" practice which serves as a foundation for a variety of complementary practices of the Japanese employment system. Overall, we find evidence for the resilience of the Japanese employment system. Job stability of regular employees did not fall even after the Japanese economy went deep into prolonged stagnation following the bubble burst. Our cohort analysis of narrowly-defined "lifetime employment" workers (new school graduate hires) also points to the stability of the size of the "lifetime employment" pool over time. To be consistent with the enduring nature of the "lifetime employment" system, we also find some evidence for the buoyancy of other complementary elements of the Japanese employment system. This, however, does not mean the complete rigidity of the Japanese employment system. Apparently the Japanese employment system has evolved in response to Japan's prolonged stagnation. First, job stability of regular employees eventually fell during the final years of the Great Recession. It took years yet the magnitude of the fall turned out to be not negligible and for some groups of workers it was large. Second, the burden of downsizing during Japan's prolonged stagnation fell disproportionately on women as opposed to men and on high-school graduates as opposed to college graduates. The largest fall in job stability was found for female regular employees who were mid-career hires and working for large firms. We interpret our findings as a rational response of Japanese firms that are in dire need for downward employment adjustment yet concerned about the cost of reneging on their implicit long-term employment contracts.