In section 1.2 attention was drawn to the cyclical features of post-war labour productivity in Japan and other countries. Labour market policy-makers devote considerable time to attempting to understand cyclical fluctuations in employment, productivity and labour costs given their close association with the problems of unemployment and labour force participation (notably the ‘discouraged worker effect’). Aspects of these latter associations were reviewed in section 1.5. This chapter is devoted to labour market issues related to the cyclicality of employment and costs not only because of the importance of the topic but also because Japanese performance in several important areas appears to differ significantly from several other major economies. In broad terms, and in comparative international settings, we investigate (i) the so-called labour hoarding hypothesis in relation to Japanese business cycles and (ii) the movements of Japanese marginal cost and price over the cycle.

Pro-cyclical productivity and the labour hoarding hypothesis

Japanese labour productivity varies pro-cyclically. In other words, output per hour is observed to decrease during downturns in the business cycle and increase during upturns. This finding is by no means restricted to Japan; it is a common feature of productivity movements in all major economies, at both micro- and macro-levels of observation. The dominant explanation of this phenomenon is the so-called labour hoarding hypothesis. While attention is principally conned to this hypothesis, we also comment on competing theories in section 7.6.