Overview

In chapter 9, we showed that the slope of Japanese wage–tenure profiles declined in recent years, and we explained this decline by the slowdown in economic growth and the ageing of the labor force. In this chapter we show that the slowdown in economic growth has also been a key factor behind the long-run changes in relative wages by rank, spans of control, and promotion rates described in chapter 8. These changes can be summarized as follows: during the past 20 years, relative wages and spans of control have declined, whereas promotion rates have shown large fluctuations around a negative trend.

We start by presenting a simple theoretical model that highlights the interaction between growth (measured by employment growth), relative wages, spans of control, and promotion probabilities in firms that adopt internal labor markets. Next, we turn to the discussion of cohort effects on average wages, distinguishing between changes in the size and in the average quality of a cohort of newly hired employees. Our empirical investigation, based upon the data described in chapter 8, clearly supports the implications of the theoretical model.

In the second part of the chapter we turn to the analysis of the effects of business cycle fluctuations on the wage structure of Japanese firms. We show that, while average wages are clearly pro-cyclical, relative wages are sensitive to the cycle only in the finance industry. We find no evidence that the responsiveness of wages to short-run fluctuations varies with the seniority of employees.