(Research Paper) What Prevents Productivity Gains from Translating into Wages: Lessons from Japan's Deflationary Period

This paper investigates why productivity gains fail to translate into higher wages, focusing on the roles of deflation and labor market factors in Japan's deflationary period. The research reveals that wage-setting in Japan was rigid both upwards and downwards during this time, with a stronger tendency towards upward rigidity. These wage freezes limited wage growth and contributed to the growing gap between wages and productivity.

Utilizing a model of heterogeneous firms, the study demonstrates that nominal wage rigidity downwardly, coupled with deflation and a focus on job security, hampers wage growth and exacerbates the wage-productivity gap by prompting firms to impose larger wage cuts. Releasing these constraints not only boosts wages but also enhances overall productivity through labor redistribution across companies.

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