Temporal changes in factor adjustment of the Japanese manufacturing industry

Abstract

This study investigated temporal changes in factor adjustment of the Japanese manufacturing industry by applying a dynamic factor model, in which labor and capital were quasi-fixed to a panel of industries from 1972 to 2012. Estimations show that the adjustment speeds, with which factors approach their optimum levels, have increased over the period. Particularly, factor adjustment rates have significantly increased since 2000. The estimations suggest that Japanese manufacturers have become more flexible in hiring workers and faster in making investments, which reduces adjustment cost significantly. This dynamic gain is ignored from static analysis, underestimating the benefit of labor market reform. The study suggests that policymakers should consider dynamic factor adjustment in assessing policy impacts accurately when implementing an industrial policy.

Keywords:

• adjustment costs
• dynamic duality
• production
• Japanese manufacturing

JEL Classification:

• C61
• D20
• J23
• L60

Acknowledgements

The author wishes to thank anonymous referees for their valuable comments and suggestions. Financial support from the Japan Society for the Promotion of Science of Research (JSPS KAKENHI Grant Number 17K03745) is gratefully acknowledged.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Behavioral equations can be obtained either primarily from the first-order optimization conditions of the Hamilton-Jacobi equation (Berndt et al., 1981; Treadway, 1970) or dually by applying the envelope theorem to the equation (Epstein, 1981; Epstein & Denny, 1983; McLaren & Cooper, 1980)

2. Disembodied technical change is captured by vector $H$ in the value function (6).

3. In the JIP database, there are two variables representing the total labor costs: compensation to employees and total labor cost. Of the two, the total labor cost is used here to calculate wage rate because this paper is interested in the dynamic adjustment of labor demand. However, the two variables are highly correlated, with a correlation coefficient of 0.972. The two variables do not make any difference to the estimation.

4. Estimations based on the whole sample can be obtained from the author upon request.

5. To check the robustness of estimates, future discount rates that are lower by 1% and reflect low Japanese interest rate were used in the estimation without any discernable change in adjustment rates.

Additional information

Funding

This work was supported by the Japan Society for the Promotion of Science of Research [JSPS KAKENHI Grant Number 17K03745].

Notes on contributors

Sangho Kim

Sangho Kim is a full professor at College of International Management in Ritsumeikan Asia Pacific University. He received his Ph.D. degree in economics at Michigan State University in 1990. His main research interests are economic development, international trade, and productivity. His recent publications include Journal of the Asia Pacific Economy (2021), Sustainable Production and Consumption (2021), Global Economic Review (2020), Applied Economics (2018), Contemporary Economic Policy (2016, 2014). Some of his research projects were conducted with international organizations including ADB (2009, 2008), APEC (2014, 2008), and MPC (2014, 2007). Prior to his appointment at APU in 2012, He worked at Honam University in Korea. He is currently on editorial board for several academic journals including Journal of Asian Business and Economic Studies and Journal of Market Economy.