RIETI Report April 2015

Main Issue in the Second Round of Wage Hikes: The real issue is to improve the terms of trade

Since its return, the Shinzo Abe government has been routinely urging the business community to increase wages which can be divided roughly into two features. One is a request for nominal wage hikes in line with a series of monetary easing implemented by the Bank of Japan which is seeking inflation. The other is a request for real wage hikes to counter the effective decline in the labor share, due to an increase in the ratio of non-regular workers and retained corporate profits. This column argues that the first request would be more justified. In the April issue of the RIETI Report, we present Faculty Fellow Daiji Kawaguchi's column "Main Issue in the Second Round of Wage Hikes: The real issue is to improve the terms of trade."

Kawaguchi first looks at the relations between labor productivity and wages over the last two decades to prove that there has been no real change in the way that wages are determined and also reviews the standard economic theory which states that marginal productivity determines the level of wages. As the relations of wages and labor productivity adjusted by the gross domestic product (GDP) deflator are stable, this standard economic theory more or less has explained successfully the state of wage determination in Japan. He acknowledges that nominal wages decline at a level greater than the consumer price index (CPI), which has caused a decline in the standard of living for Japanese workers, but that the drop in Japanese workers' purchasing power is due to the deteriorated terms of trade, and improving the terms of trade is necessary including through a variety of policy responses. Finally, as the relations between real labor productivity and real wages are stable, an increase in real labor productivity leads to higher real wages. Kawaguchi believes higher wages could be achieved more smoothly by focusing on increasing wages in line with the rise in prices.

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Main Issue in the Second Round of Wage Hikes: The real issue is to improve the terms of trade

KAWAGUCHI DaijiFaculty Fellow, RIETI

Since the establishment of the second Shinzo Abe administration, the government has been routinely urging the business community to increase wages. The request can be divided roughly into two features. One is a request for nominal wage hikes in line with a series of monetary easing implemented by the Bank of Japan (BOJ) which is seeking inflation. The other is a request for real wage hikes to counter the effective decline in the labor share, due to an increase in the ratio of non-regular workers and retained corporate profits.

This column argues that should this request be significant, it would be justified from the first perspective, while the second perspective is poorly reasoned.

To confirm the second perspective, let us first review the relations between labor productivity and wages over the last two decades to prove that there has been no real change in the way that wages are determined.

To read the full text
http://www.rieti.go.jp/en/papers/contribution/kawaguchi/06.html

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