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Labor Markets and Firm Benefit Policies in Japan and the United States / Edition 1

Labor Markets and Firm Benefit Policies in Japan and the United States / Edition 1


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This volume, the fourth to result from a remarkably productive collaboration between the National Bureau of Economic Research and the Japan Center for Economic Research, presents a selection of thirteen high-caliber papers addressing issues in the employment practices, labor markets, and health, benefit, and pension policies of the United States and Japan.

After an opening chapter assessing the recent ascendance of the U.S. economy, papers diverge to tackle a range of specific issues. Focusing less on international comparison than on the assembly of high-quality research, contributors hone in on a variety of individual topics. Chapters delve into issues of youth employment, participatory employment, information sharing, fringe benefits, and drug coverage in Japan, as well as the dynamics of medical savings accounts, private insurance coverage, and benefit options in the U.S.

Like previous volumes stemming from NBER/JCER collaboration, this book represents a valuable mass of empirical data on some of the most notable employment and benefits issues in each nation, information that will both anchor and provoke scholarly analysis of these topics well into the future.

Product Details

ISBN-13: 9780226620947
Publisher: University of Chicago Press
Publication date: 10/28/2003
Series: National Bureau of Economic Research Conference Report Series
Edition description: 1
Pages: 409
Product dimensions: 6.00(w) x 9.00(h) x 1.10(d)

About the Author

Seiritsu Ogura is an associate of the Japan Center for Economic Research.

Toshiaki Tachibanaki is a professor in the Institute for Economic Research at Kyoto University.

David A. Wise is the John F. Stambaugh professor of Political Economy at the John F. Kennedy School of Government at Harvard University and a research associate of the NBER. Together, the three coedited the most recent volume resulting from collaboration between the NBER and JCER, Aging Issues in the United States and Japan.

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Labor Markets and Firm Benefit Policies in Japan and the United States

By David A. Wise

University of Chicago Press

Copyright © 2003 David A. Wise
All right reserved.

ISBN: 0226620948

1 Changing the Guard: The Rise of the United States to Peak Capitalist Economy

Richard B. Freeman

1.1 Introduction

At the turn of the twenty-first century, many analysts view the United States as the peak capitalist economy--the economy whose institutions other countries should emulate. With an unemployment rate below 4 percent in 1999-2000--lower than in Japan or Germany or other European Union countries--a huge federal budget surplus, declines in crime, a booming stock market, rapid productivity growth, and the integration of welfare mothers into work, the United States seemingly found the magic formula for economic success in the new millennium.

A decade or so earlier, analysts saw the United States in a very different light. In the 1970s and 1980s most viewed Japan as the peak capitalist economy, whose institutions other countries should emulate. American business leaders feared Japanese competitors to the extent that they made the four-teenth-century samurai warrior Miyamoto Musashi's A Book of Five Rings (1982) a best-seller on the business charts. Financial experts saw Japanese banks as the 800-pound gorillas on financial markets and wondered if lead bank-financing andmonitoring firms worked better than stock market monitoring of performance. Labor economists argued that job rotation, permanent employment, consensual decision making, and other Japanese institutions contributed to labor market success. Few doubted that Ezra Vogel was right when he described Japan as Number One (1979).

The "changing of the guard" from Japan to the United States as peak capitalist economy raises important questions about the relation between economic institutions and outcomes. Is there in fact a single capitalist model that deserves the title of peak economy? Does the performance of the U.S. and Japanese economies support the notion that in the 1990s the United States had the right stuff, whereas in the 1980s Japan had the best economic institutions? What features of the U.S. system enabled it to outperform other capitalist countries in the 1990s? How do these features compare to those that enabled Japan to outperform other capitalist countries in the 1990s?

This paper examines these questions. Section 1.2 develops criteria to judge whether any economy merits peak economy status in a particular period. Section 1.3 assesses how well the United States fits this position in the 1990s and compares the U.S. record with that of Japan in its peak economy period of the 1980s. Section 1.4 assesses the features of the U.S. capitalist model that contributed to its economic success in the 1990s and 2000. The final section contrasts these features with the features of the Japanese model that contributed to its success in the 1970s and 1980s. The similarities and differences between the institutions of these two peak economies highlight the difficulty of linking with any surety institutions, policies, and economic outcomes in a changing world.

1.2 Single-Peaked versus Diversified Capitalism

Behind the claim or belief that the United States or Japan or any other country has developed the ideal form of capitalism is the notion that economic outcomes are related to institutions and policies according to a single-peaked social maximand. When institutions or policies produce a single peak in the space of social outcomes, one set of arrangements is indeed the global optimum. This is shown in the first landscape in figure 1.1. The horizontal axis measures institutions along some dimension such as centralization of wage setting or the role of unions or the state in economic decision making, whereas the vertical axis represents some aggregate social output. In the first landscape the set of institutions N (for nirvana) produces the highest output, and every move in the direction of N raises wellbeing. It behooves all economies to adopt the nirvana institutions as quickly as they can.

But there is nothing in economic logic that rules out different institu-tion-outcome landscapes. One alternative is a landscape with multiple peaks separated by valleys. Some of the multiple peaks may have similar heights, so that different institutional arrangements produce the same well-being, but most peaks are local optima, separated from higher optima by valleys that make it costly to change. The peak economy might have better outcomes than others, but it may not be worthwhile for countries with slightly lower outcomes to invest in change by going down from their peak.

It is also possible, however, that different institutions produce similar levels of output with little cost to changing them. This produces the flat peak in figure 1.1. This is a Coasian world side payments guarantee that whatever the initial property arrangements, the economy reaches an efficient outcome. This diagram predicts similar gross domestic product (GDP) per capita (other social maximands) within a wide range of institutional settings. Each country can do it its own way without suffering any economic penalty.

Belief in a single-peaked outcome function is deeply ingrained in economics. Models of optimizing behavior assume convex functions so that first derivatives yield the maximizing conditions and second derivatives or matrices thereof have the appropriate sign for the second order conditions. Even if individuals choose blindly, persons who pick points around the peak do better and eventually increase their share of markets. Marxian analysis also takes a single-peaked view of capitalism, predicting the growth of monopolies and proletariat in all countries.

There is a case for diversified capitalism as well, however. Since the end of World War II, living standards in advanced capitalist economies with differing institutions have converged. The coefficient of variation of GDP per capita, measured in purchasing power parity terms, declined over time among major Organization for Economic Cooperation and Development (OECD) countries as Japan and European Union (EU) countries closed much of the income gap with the United States. Comparative advantage argues for diversity. If Japan can operate a consensual stake-holder model of the firm better than the United States and the United States is more adept at a high-mobility or decentralized wage-setting model, Japan will do better with its system than to mimic the U.S. system, and the converse is true as well. Game theory teaches us that interactive decision making creates many potential outcomes, with institutional rules or norms determining equilibrium (Kreps 1990). This is more consistent with multiple or flat peaks--diversity--than with single-peak optima.

Finally, there is a third possibility: that some economic institutions are better adapted to some economic environments than others. Perhaps indicative planning and corporatist arrangements were peak institutions in an era of mass factory production but are ill suited for an information-based economy, whereas high mobility and flexibility work better in that environment than in others. The notion that institutions are better suited for some environments than for others is a more subtle and demanding interpretation of economic history than the single-peak "X works best" claim or the "many roads to Rome" diversified capitalism claim. It requires that we understand how institutions function in different environments and how they learn to adapt to changing circumstances. If we are to draw policy lessons from current successes, this view requires that the current environment maintain itself for some period of time. The evidence is consistent with an adaptionist interpretation, in part because it affords us an additional degree of freedom with which to interpret events.

1.2.1 Criteria for Peak Status

What factors might help us determine which landscape best describes the economics world, and whether the United States or some other economy represents the economic peak in any given time period?

Table 1.1 lists six factors that differentiate peak landscapes from other landscapes and that can thus guide any assessment of whether any economy has achieved peak status. The first criterion for a single-peak landscape is that the peak economy does better than other economies in sustainable aggregate economic performance. The natural measure of aggregate performance is long-term sustainable GDP per capita or GDP per hour worked. If there was general agreement how to weigh the impact of outcomes like inflation, balance of payments, unemployment, fiscal deficits, and so forth on long-term output, we could form a single weighted average of those outcomes, per so-called misery indexes of various forms. But whereas some economists weigh inflation heavily, others weigh unemployment heavily in judging how well an economy does in the aggregate. In some periods, there is widespread consensus that a negative balance of payments is a critical constraint on long-term growth. In other periods, as in the United States in the late 1990s, many ignore trade imbalances. In any case, the peak economy must do better on some dimensions of aggregate performance.

The second criterion is distributional. The peak economy should produce higher incomes throughout much of the income distribution than competing economies. If one economy produces higher outcomes at all points in the income distribution, who would not declare it the peak economy? Beyond that, however, there is no universally accepted ordering of distributions. Rawls values how the poorest fare; your local billionaire may value how the richest fare; and political economy considerations make the middle of the distribution important. My criterion is again vague, simply that the peak economy has higher incomes throughout much of the distribution. This is a way of saying that distributional factors must enter any assessment.

The third criterion relates to the convexity of the landscape space. As figure 1.1 shows, N* lies at the top of a mountain, so neighbors with characteristics close to those of N* should also have good social outcomes, and the more features of the single-peak economy they have, the higher their social outcome should be. This is the standard calculus requirement for a local maximum.

The next three criteria relate to changes over time.

Since there is only one peak in the figure 1.1 landscape, any change in the direction of the peak--large-scale as well as small-scale--ought to improve well-being. In practice, an economy that chooses radical reform in the direction of the peak economy ought to see economic improvements. By contrast, economies that, for whatever reason, move away from peak institutions should suffer economic losses. This is the requirement for a global maximum.

Criterion five requires that the economy with peak institutions dominate other economies for some period--probably at least a decade or so. Given that candidates for the peak, such as the United States, are likely to have high income per capita and that other economies can take advantage of catch-up, I do not require that the peak economy grow more rapidly than other economies, only that it maintain an edge on outcomes over an extended period.

The sixth criterion requires that the peak economy be an attractor in in-stitution-outcome space. Other economies seeking to improve their performance should imitate the features of the peak economy. That U.S. firms tried to copy Japanese modes of production in the 1970s-1990s indicates that businesses, at least, saw Japan as the peak economy. The fact that European and Japanese policymakers tried to alter the way they regulated markets in the 1990s in the direction of the United States indicates that they now see the United States in that light.

In short, economic institutions merit peak status if they fulfill the standard calculus conditions for a global optimum for extended periods of time and are an attractor to other economies.

1.3 Comparing the Peak Economies

How well did the candidate for peak economy in the 1990s through 2000, the United States, fare by these criteria? How did the 1980s candidate for peak economy, Japan, fare by these criteria in the earlier period?

Table 1.2 examines the performance of the United States, Japan, and the leading EU economy, Germany, in the late 1990s, when the United States moved into peak status in the eyes of many observers; in the early 1990s, when U.S. economic performance was more uncertain; and in the 1980s, when few analysts saw the United States as a candidate for peak economy. The exhibit records data on employment, unemployment, growth of GDP, productivity, and earnings growth.

The strongest case for the United States as peak economy is its success in increasing employment--what I have labeled the magnitude of work. Throughout the 1990s the United States had higher ratios of employment to population than Japan or Germany and the rest of the EU. If we look back to 1970, the Bureau of Labor Statistics files show that the United States had a higher employment-population rate than Germany and a markedly lower rate than Japan. Since then the U.S. rate rose by 6.9 points, while the German rate fell by 4.4 points and the Japanese rate fell by the same 4.4 points. Unemployment rates tell a similar story for the United States and EU in the 1990s but show that even in the late 1990s, the United States had higher unemployment than Japan. Not until 1998-99 did U.S. unemployment rates fall below Japanese rates. Along with employment, hours worked also rose in the United States compared to Japan and the EU. Using the magnitude of work as indicator of economic success, the United States has a strong case for peak economy in the 1990s.

The economic growth figures in table 1.2 make a weaker case for the United States. In the late 1990s the United States outperforms both Japan and Germany in growth of GDP per capita and GDP per worker, but in the earlier 1990s, it falls behind both countries. Both in Japan and Germany, however, productivity measured by GDP per employee or per hour worked grew more rapidly than in the United States, so that by the mid-1990s output per hour worked in Japan and major EU countries was roughly on a par with output per hour worked in the United States (Freeman 1996; van Ark and McGuckin 1999; McKinsey Global Institute 1997).


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Table of Contents

David A. Wise
1. Changing the Guard: The Rise of the United States to Peak Capitalist Economy
Richard B. Freeman
2. The Recent Transformation of Participatory Employment Practices in Japan
Takao Kato
3. Determinants of the Shadow Value of Simultaneous Information Sharing in the Japanese Machine-Tool Manufacturing Industry
Hiroyuki Chuma
4. Who Really Lost Jobs in Japan? Youth Employment in an Aging Japanese Society
Yuji Genda
5. Total Labor Costs and the Employment Adjustment Behavior of Large Japanese Firms
Yoshifumi Nakata and Ryoji Takehiro
6. Individual Expenditures and Medical Saving Accounts: Can They Work?
Matthew J. Eichner, Mark B. McClellan, and David A. Wise
7. Supplementing Public Insurance Coverage with Private Coverage: Implications for Medical Care Systems
David M. Cutler
8. Option Value Estimation with Health and Retirement Study Data
Andrew Samwick and David A. Wise
9. Why Do the Japanese Spend So Much on Drugs?
Seiritsu Ogura and Takehiko Hagino
10. The Demand for Health Checkups under Uncertainty
Tadashi Yamada and Tetsuji Yamada
11. The Role of Firms in Welfare Provision
Toshiaki Tachibanaki
12. Fringe Benefit Provision for Female Part-Time Workers in Japan
Yukiko Abe
13. Unions, the Costs of Job Loss, and Vacation
Fumio Ohtake
Author Index
Subject Index

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