Abstract
This chapter explores the implications of possible bankruptcies of firms for their own wage schemes and the structure of labor market, using a two-period general equilibrium model. The bankruptcy risk flattens a wage profile of each firm, weakening its incentive effect, thereby making room for efficiency wage to be used as a supplementary incentive device. The use of the efficiency wage, in turn, stratifies the labor market into the primary one, in which job rationing is observed, and the secondary one, in which job rationing is not observed. Substantial utility differential emerges between those who have luckily found a job in the primary market and those who have not, although there is no difference in their innate abilities. This differential widens, as bankruptcies become more likely. Moreover, the dual structure of the labor market and the entry decisions of firms render the employment size in the primary market too small to attain a social optimum.
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Notes
- 1.
- 2.
Hori and Iwamoto (2012) confirm this finding, using a different dataset.
- 3.
See, e.g., Genda (2003).
- 4.
Some readers may think that this assumption is not justifiable, because the bankruptcy risk is idiosyncratic, and thus insurable at least in theory. However, there are some conceivable situations in which this assumption can be justified. For example, when insurance companies cannot at all track the working records of insured workers, they never provide insurance against the bankruptcy risk, since they cannot determine who should receive insurance money.
- 5.
- 6.
In contrast to the argument by Carmichael (1985), the workers of this economy cannot buy a job of the consumption good sector by paying “entrance fee”. In this model, the payment of entrance fee is equivalent to the reduction of wage payment in the first period, \(w^P_1\), which makes it difficult for the incentive compatibility constraint (2.9) to hold. Thus, every firm in that sector rejects such an offer.
- 7.
As the consumption good sector contains more and more firms, less and less workers are hired by that sector. This paradoxical result can be explained by the fact that an increase in the number of consumption-good-producing firms necessitates an increased production of physical capital, and thus an increased employment of the capital good sector.
- 8.
Uniqueness of the equilibrium value of \(w^P_1\) is established by the fact that the RHS of (2.22) is an increasing function of \(w^P_1\in [0,(1-\theta )/\theta )\), which takes a zero value at \(w^P_1=0\), and approaches a positive infinity as \(w^P_1\rightarrow (1-\theta )/\theta \).
- 9.
Workers are better off when \(k^{**}(t)\) is realized than when \(k^*(t)\) is realized. This is because both \(U^P(=\log r(1+w^P_1))\) and \(U^S(=\log r)\) are increasing with r, and because, under this policy, r is increasing with \(k\in (0,[\alpha /(1-\alpha )]B)\) (See (2.52)).
- 10.
A similar puzzle is also observed in Japan. In July 2002, Toyota Motor Corporation, one of the leading manufacturers in Japan, decided to implement defined contribution pensions, together with defined benefit ones, by diverting part of the retirement benefit towards contributions to this system. Toyota’s decision is puzzling, since it seems to contradict the corporate policy of maintaining lifetime employment, the importance of which top management of Toyota has repeatedly emphasized.
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Kitagawa, A., Ohta, S., Teruyama, H. (2018). Flatter Wage Profiles and Reduced Lifetime Employment: A Simple Formalization. In: The Changing Japanese Labor Market. Advances in Japanese Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-10-7158-4_2
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