Labor Market Impact of Labor Cost Increase without Productivity Gain: A natural experiment from the 2003 social insurance premium reform in Japan

         
Author Name KODAMA Naomi (Consulting Fellow, RIETI) / YOKOYAMA Izumi (Hitotsubashi University)
Creation Date/NO. June 2017 17-E-093
Research Project Change in the Utilization of and Investment in Human Resources
Download / Links

Abstract

Exploiting heterogeneous variations in labor cost increases due to Japan's 2003 social insurance premium reform as a natural experiment, we estimate the impacts of the increased social insurance premiums on employment, working hours, and payroll costs. Using the difference in differences (DID) method with establishment fixed effects, we find that firms reduce the number of employees and increase average annual earnings from longer working hours in response to an exogenous increase in labor costs without productivity gains. Firms manage to pay for this increase in the average wage paid to the remaining workers by reducing the number of employees to keep total payroll costs unchanged. In contrast, since social insurance premiums are shared equally between employees and employers, firms pay the remaining half of the premiums with which that they are imposed. Our results imply that an increase in labor costs without productivity gain may reduce employment.