Wage-Price Dynamics and Structural Reforms in Japan

IMF Working Papers, February 10, 2016

Source details

Author: Davide Porcellacchia
Date: February 10, 2016
Series: Working Paper No. 2016/020
Issue: 020; Volume: 2016; Pages: 26
DOI: https://doi.org/10.5089/9781498316637.001
ISBN: 9781498316637; ISSN: 1018-5941
Core question: How do key characteristics of Japan’s labor and product markets—labor-market duality and weak corporate governance—affect wage-price dynamics in a liquidity trap, and can structural reforms help reflate the economy in the short run?

Structural reforms in a liquidity trap need not be deflationary.
Labor-market duality and weak corporate governance can generate unfavorable wage-price dynamics.
Boosting inflation with structural reforms implies an unusual trade-off with employment, characterized as an inverted Phillips curve.
Simultaneous implementation of labor-market and product-market reforms is most effective in reflating the economy.

The paper develops a simple framework to analyze the role of:
- labor-market duality (including the presence of single open-ended contracts and segmented employment conditions), and
- weak corporate governance (including incentives that affect cash holding and pricing/market power).
The framework is used to discuss whether, and in what form, structural reforms may contribute to Japan’s short-run reflation objective under a zero lower bound (liquidity trap) environment.

Structural reforms should be designed and sequenced with attention to short-run wage-price interactions because reforms that increase inflation can create trade-offs with employment (inverted Phillips curve).
Coordinated reforms across labor and product markets are recommended as the most effective approach to achieve reflationary outcomes.
Reform packages that only target one dimension (either labor-market or product-market) may be less effective than simultaneous implementation.

Subjects: Asset and liability management, Financial services, Inflation, Labor, Labor markets, Liquidity, Prices, Zero lower bound
Keywords: Abenomics, cash holding, corporate governance, Global, inflation, Japan, labor market, Labor markets, labor-market duality, Liquidity, liquidity trap, market power, nominal interest rate, Phillips curve, price level, real wage, single open-ended contract, structural reforms, wage-price dynamics, WP, Zero lower bound

IMF Working Paper — Davide Porcellacchia, "Wage-Price Dynamics and Structural Reforms in Japan", Working Paper No. 2016/020, February 10, 2016.