With its tradition of a job for life for most citizens, Japan once had a much lo

ID: 1189151 • Letter: W

Question

With its tradition of a job for life for most citizens, Japan once had a much lower unemployment rate than that of Canada: from 1960 to 1995, the unemployment rate in Japan exceeded 3% only once. However, because of the crash of its stock market in 1989 and slow economic growth through the 1990s, the job-for-life system broke down. Unemployment rose to 5% in the early 2000s, and is not expected to fall below 3% again.

Given the determinants of the natural rate of unemployment [NRU], why has the breakdown of the Japanese job-for-life increased long run unemployment?

Explanation / Answer

The rate of unemployment that exists even when labor market is in equilibrium is referred to as Natural Rate of Unemployment.

Natural rate of unemployment includes frictional unemployment and structural unemployment.

Any change in these two types of unemployment leads to change in natural rate of unemployment as well.

Frictional unemployment refers to the unemployment that prevails in the economy because workers moving or changing their jobs.

In other words, frictionally unemployed is one who has quit his job voluntarily and is now looking for better job.

The time period between quitting the job and finding new one is known as frictional unemployment.

It has been provided that Japanese tradition of job for life has now been broken.

This means instead of sticking to their present job for life time, more and more Japanese are now voluntarily quitting their jobs and are searching for new and better jobs.

This implies an increase in frictional unemployment in Japan.

Change in frictional unemployment leads to change in natural rate of unemployment.

So, increase in frictional unemployment is Japan has resulted in an increase in natural rate of unemployment in Japan as well.

Therefore, the breakdown of the Japanese job-for-life tradition has resulted in rise in frictional unemployment that in result has increased the natural rate of unemployment leading to increased long-run unemployment in Japan.

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