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

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

NRU has two components: Structural unemployment and Frictional unemployment. Any factor that affects either of these components will affect NRU and long run employment.

While structural unemployment refers to the normal level of unemployment in the economy, caused by changes in the economic model or technological enhancement and/or a massive change in resource endowment of the economy. Any economy will have some structural unemployment at any point of time.

Frictional unemployment is the unemployment caused by either college pass-outs looking for a job, or by job-seekers who are looking for a job in between two jobs.

The breakdown of Japan's job-for-life, or lifetime employment model, affects the frictional unemployment component of NRU.

Under the lifetime employment model, large Japanese firms used to make mass-scale hiring from campuses and the employees thus recruited, were employed with the same firm until retirement. Any frictional unemployment and job-shifting used to happen with medium or small scale companies.

But breakdown of this system made employees from the bigger companies to leave the company and join another company, therefore increasing frictional unemployment. This addition in frictional unemployment resulted in increased long run unemployment.

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