## Wage-Price Dynamics and Structural Reforms in Japan

_IMF Working Papers, February 10, 2016_

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## Bibliographic details
- Authors: Davide Porcellacchia
- Published: February 10, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498316637.001

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### Overview and purpose
- 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?

### Key findings
- 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.

### Model and analytical insights
- 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.

### Policy implications and recommendations
- 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 and keywords (as listed)
- 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.*

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## Content in this bundle

- **appendix 1**
  - [appendix 1 (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1620.pdf.md){rel="alternate" type="text/markdown"}
  - [appendix 1 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1620.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/wage-price-dynamics-and-structural-reforms-in-japan-43693_