ESRI Discussion Paper Series No.45
WAGE RIGIDITY
AND THE IMPORTANCE OF MONETARY POLICY

June, 2003
Yutaka Harada
(Executive Research Fellow,
Economic and Social Research Institute, Cabinet Office)
Kenichi Kawasaki
(Senior Research Fellow,
Economic and Social Research Institute,Cabinet Office)
Akio Egawa
(Deputy Director for Policy Planning and Coordination, Cabinet Office)
Hideaki Kitaki
(Deputy Director,
Economic and Social Research Institute, Cabinet Office)

The full text is written in Japanese.

(Abstract)

The increase of Japanese real wages in the 1990s has gradually become well-known. This increase was formed by the institutional reduction of contracted labor hours in the early 1990s and by deflation in the 1990s. Quantitative studies on the effect of the increase of wages on real GDP, however, are not readily available.

This paper will try to estimate the effect of deflation on real wages, and to quantitatively analyze the effect of the increase of real wages on real GDP by using a VAR model, a traditional macro econometric model, and an applied general equilibrium model.

First, we found that 1 percent deflation would increase real wages by more than 1 percent, but this estimate might be too large.

Second, we analyzed the impact of a 1 percent increase of real wages, independent from market forces, on real GDP. Simulation results by the traditional macro-econometric model are not necessarily clear-cut. On the contrary, a VAR model and an applied general equilibrium model show that the impacts are negative and that the impact of the applied general equilibrium model is especially large.

The difference can be explained: the effect of a real-wages increase on employment is estimated to be small, and the effect on consumption is estimated to be large in a Keynesian short-term macro-econometric model based on the IS-LM curve. Small elasticity of real wages on employment, however, is only a short-term relation. The long-term effects of an accumulative increase of real wages on the real economy under long-term deflation are thought to be similar to the results of the VAR model and the applied general equilibrium model.

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