The persistence of firm-size earnings differentials and labor market segmentation in Japan

Abstract

This paper shows that the differential in earnings between large and small companies is a much more prominent feature of the Japanese than of the American labor market. Up to one-third of the differential is explained by differing levels of education and experience in the United States, while in Japan, only some 10% of the differential is explained by these factors. The Japanese and U.S. differentials also differ with respect to their behavior in response to local labor market conditions. Japanese small firms show an unemployment elasticity of the regional wage of - 8%, slightly less than that shown by all U.S. firms. Japanese large firms show an inelastic response to local labor market conditions. The recent increase in the firm-size differential in Japan between 1974 and 1987 is a phenomenon that can be understood primarily in relation to the increase in the unemployment rate over this period. The stability of the U.S. firm-size differential is due to the absence of labor market segmentation between large and small firms, as well as to relatively small changes in differences in schooling and experience by firm size. J. Japan Int. Econ., June 1993, 7(2), pp. 132-156. New York State School of Industrial and Labor Relations, Cornell University, Ithaca, New York 14853-3901. © 1993 Academic Press Limited.