Economic Growth and Labor Market Friction: A Quantitative Study on Japanese Structural Transformation

Abstract

This paper develops a tractable multi-sector endogenous growth model with labor market friction and human capital accumulation to analyze the underlying link between economic growth and labor market institutions. The model, calibrated based on the Japanese structural transformation episodes, demonstrates that lifetime employment system has contributed to unprecedentedly rapid economic growth, by enhancing human capital accumulation and facilitating physical capital formation. The counterfactual experiment finds that had the job durations of a typical worker been 1 year (roughly one tenth of the actual average job duration) for 1960-1990 in the Japanese labor market, the non-agricultural GDP per capita in 1990 would have accounted for 71 percent of the actual values.

Keywords: Structural Transformation, Economic Growth, Labor Market Friction

JEL Classification: O11, O14, O24, O41, J62