Transcript LS20060324

Prices, wages & mark-up.
An analysis of the deflation in
Japan
Sebastien Lechevalier
(MFJ/ Tokyo University / EHESS)
In collaboration with N. Canry (U. Paris 1)
Lunch Seminar on the Japanese economy
Nichi futsu kaikan
2006/3/24
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Introduction
• Deflation at the macro and the industry
levels
• Surveying the debate on deflation in Japan
• Aims, questions & analytical framework
• Contents of today’s presentation
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At the macro level
Inflation rates in Japan (1981-2004, CY)
(%)
6
4
GDP Deflator
CPI
2
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
0
-2
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At the sectoral level (1):
6
All Industries
Manufacturing
4
2
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
-2
1981
0
-4
-6
6
All Industries
Service activities
4
2
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
-2
1981
0
-4
-6
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At the sectoral level (2):
6
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
81
-4
19
83
1
-9
-14
All Industries
-19
Electrical machinery ,equipment and supplies
-24
Manufacturing
5
-10
-15
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
-5
1981
0
All Industries
Chemicals
Manufacturing
-20
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Surveying the debate on deflation
in Japan
• The debate on deflation in Japan focused on the
inefficiency of monetary policy :
- Good news: we learned about what a Central
Bank should not do…
- Bad news: no real improvement of our knowledge
on the mechanisms of the deflation (“Under
persistent low inflation or deflation as seen over
the past several years, it has become more
difficult to forecast the development of prices
based on a Phillips curve relationship between
inflation and demand” - OECD Economic
Surveys 2001-2002, Japan)
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Surveying the debate on deflation
in Japan (cont’d)
• As for the real economy, what is the common
wisdom?
- “The fact that deflation cannot be explained fully
by the change in the output gap may suggest the
significance of supply side factors such as the
intensified competitive pressure due to higher
import penetration and deregulation” (OECD
Economic Surveys 2001-2002, Japan)
- “Labor market adjustment to deflation has been
difficult in Japan owing to downward wage
rigidities” (Baig – IMF, 2003)
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Why to study the deflation in Japan
in 2006?
• In 2006, the deflation in Japan is now over. Why
to study it?
- Because we have still to understand what
happened since the mid-1990s. Need for
alternative theories (see limits of Phillips curve)
and for alternative determinants of the growth
rate of price
- Not satisfied with the common wisdom
- It provides a good introduction on the structural
changes of the Japanese economy since the
beginning of the 1990s
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Our questions
Q1: Is the deflation in Japan related to the
decline of mark-ups (goods market) or to
the decline of wages (labor market)?
Q2: Is it caused by competitive pressures,
the dynamics of firms or the decline of the
bargaining power of the employees?
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Our analytical framework
• (monetary)/REAL;
• Joint analysis of goods and labor markets
(complementarity?): how the goods market
structure AND the mechanisms on the labor
market do affect the prices?
• Imperfect competition - economics of rent: the
size (resp. distribution) of the rent is determined
on the goods (resp. labor) market
• How to distinguish between the effects of the
increasing competition (deregulation and
increasing openness), the market dynamics &
the declining bargaining power of employees?
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Contents of today’s presentation
• The theoretical model: oligopolistic
competition and wage bargaining
• Statistical analysis: macro and industry
levels
• Econometric analysis: the determinants of
prices formation in Japan
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Part 1: The theoretical model
• A brief comparison between (2003)
Blanchard & Giavazzi’s model & our model
• The goods market
• The labor market
• Equilibrium and expected impact of the
key parameters and variables on the
prices
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Source of Inspiration (Blanchard &
Giavazzi, 2003) / our model
• Imperfect competition
framework (oligopolistic
competition and “optimum
control”);
• Aim: to study the impact
of labor & goods markets
regulation on
macroeconomic
outcomes;
• Application:
unemployment and wage
share in Europe
• Imperfect competition
framework (oligopolistic
competition and right to
manage);
• Aim: to study the impact
of labor & goods markets
regulation & dynamics on
macroeconomic
outcomes;
• Application : to explain
deflation in Japan
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The goods market:
oligopolistic competition
• Determining the level of the rent
• Oligopolistic competition: each firm determines the price
of its product by applying a markup to its costs : P=M.C
• Constant returns to scale in the production function:
marginal cost (markup) = average cost (markup)
• Number of the firms : given in the short run, determined
by an entry condition in the long run (entry cost: c)
• 0≤ η ≤1: degree of competition on the goods markets
(not only the consequence of regulation; basically, it is
the degree of substitutability among products (for
whatever reason)
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The labor market:
wage bargaining
• Determining the rent sharing
• Right to manage model (decentralized
bargaining on the wage only)
• Empirical and theoretical reasons of this
choice
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Equilibrium (1)
• Resolution: partial / general equilibrium;
short (fixed number of firms) / long run
equilibrium
• Key variables:
- γ (bargaining power of the employees)
- η (degree of competition on the goods
market)
- c (cost of entry: determines the number of
firms on the goods market)
- a (productivity) and wu (reservation wage)
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Equilibrium (2): fundamental
relationships & expected signs
1
w
p
.
1  a
 . 

w  1 
.
w
u

1  

p ( ,  , c , w )



u

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Part 2: statistical analysis
•
•
•
•
Characteristics of the database
Prices, wages and markups
Macro level
Sectoral level
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The database
• Database: Stan (OECD), national
accounts, international comparison
• Industrial classification: intermediate level
of aggregation ; manufacturing and non
manufacturing industries
• Period: 1970-2002
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Prices, wages & markups
• Rough calculation of the (average) markup
rate:
Δμ/μ =Δp/p- ΔULC/ULC
• Reasons and consequences of not
calculating the marginal markup but the
average mark-up
• Calculation of the labor productivity
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Macro level (1)
Decomposition of the inflation rate (deflator of the gross value
added) into markup and ULC (total economy, 1981-2002)
5
3
1
-1
Growth rate of the ULC
-3
Growth rate of the markup rate
Inflation rate of the Gross Added Value
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2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
-5
21
Macro level (2)
Decomposition of the growth rate of ULC into producitivity and
nominal wage (total economy, 1981-2002)
8
6
4
2
0
-2
Growth rate of the labor productivity
-4
Growth rate of the nominal wage rate
Growth rate of the unit labor cost
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2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
-6
22
-4
Average
1981-1990
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FINANCIAL
INTERMEDIATION
WHOLESALE AND
RETAIL TRADE;
RESTAURANTS
AND HOTELS
TRANSPORT AND
STORAGE AND
COMMUNICATION
-2
CONSTRUCTION
BASIC METALS,
METAL
PRODUCTS,
MACHINERY, ETC
ELECTRICITY,
GAS AND WATER
SUPPLY
TOTAL
MANUFACTURING
TOTAL ECONOMY
Average annual inflation rate by industry
(1981-1990 & 1991-2002)
4
2
0
Average
1992-2002
23
-3
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FINANCIAL
INTERMEDIATION
WHOLESALE AND
RETAIL TRADE;
RESTAURANTS
AND HOTELS
TRANSPORT AND
STORAGE AND
COMMUNICATION
CONSTRUCTION
Average
1981-1990
BASIC METALS,
METAL
PRODUCTS,
MACHINERY, ETC
ELECTRICITY,
GAS AND WATER
SUPPLY
TOTAL
MANUFACTURING
-2
TOTAL ECONOMY
Markup rates by industry
(1981-1990 & 1991-2002)
4
3
2
1
0
-1
Average
1992-2002
24
-6
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FINANCIAL
INTERMEDIATION
WHOLESALE AND
RETAIL TRADE;
RESTAURANTS
AND HOTELS
TRANSPORT AND
STORAGE AND
COMMUNICATION
CONSTRUCTION
Average
1981-1990
BASIC METALS,
METAL
PRODUCTS,
MACHINERY AND
ELECTRICITY,
GAS AND WATER
SUPPLY
-4
TOTAL
MANUFACTURING
TOTAL ECONOMY
Average annual growth rate of ULC by industry
(1981-1990 & 1991-2002)
4
2
0
-2
Average
1992-2002
25
-3
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FINANCIAL
INTERMEDIATION
Productivity
WHOLESALE AND
RETAIL TRADE;
RESTAURANTS
AND HOTELS
TRANSPORT AND
STORAGE AND
COMMUNICATION
CONSTRUCTION
FINANCIAL
INTERMEDIATION
TRANSPORT AND
STORAGE AND
COMMUNICATION
WHOLESALE AND
RETAIL TRADE;
RESTAURANTS
AND HOTELS
CONSTRUCTION
ELECTRICITY,
GAS AND WATER
SUPPLY
BASIC METALS,
METAL
PRODUCTS,
MACHINERY, ETC
TOTAL
MANUFACTURING
Productivity
BASIC METALS,
METAL
PRODUCTS,
MACHINERY, ETC
ELECTRICITY,
GAS AND WATER
SUPPLY
TOTAL
MANUFACTURING
0
TOTAL ECONOMY
6
TOTAL ECONOMY
Average annual growth rate of labor productivity &
nominal wage by industry
(1981-1990 & 1991-2002)
8
1981-1990
Nominal Wage
4
2
5
1992-2002
3
Nominal Wage
1
-1
26
Part 3: Econometric Analysis
• Data and industrial classification: focusing
on manufacturing industries
• Basic features
• Results
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Data
source
data
description of the data
i
indice of the industry (1-10)
t
time indice (1981-2001)
gprice inflation rate
STAN (OECD)
gnomwa_u growth rate of the unit nominal wage
STAN (OECD)
gULC growth rate of the unit labor cost
STAN (OECD)
gpdty growth rate of the labor productivity
STAN (OECD)
gVA growth rate of the value added (volume)
STAN (OECD)
markup_r mark-up ratio
STAN (OECD)
R&D INTENSITY using VALUE ADDED (R&D
RDIV expenditures by sector relative to the value
STAN (OECD)
added)
IMPORT PENETRATION (share of imports in total
domestic demand; total domestic demand being
MPEN
STAN (OECD)
estimated as production plus imports less
exports)
vac_rat vacancy rate by sector
Survey on Employment trends
percentage of employees involved in dispute
dis_emp
Survey on labor Disputes
relative to the number of employees by sector
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Data (cont’d)
data
description of the data
source
gnbfirm
growth rate of the number of firms (> 20
employees)
Census of manufacturers
pfirm300
percentage of firms with more than 300
employees
Census of manufacturers
fi_avsi average size of the firms
Census of manufacturers
gfi_avsi growth rate of the average size of the firms
Census of manufacturers
gnbest growth rate of the number of establishments
Census of manufacturers
est_avsi average size of the establishments
gest_av
growth rate of the average size of the
establishments
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Census of manufacturers
Census of manufacturers
29
Industrial classification (ours/Jap. classification):
focusing on manufacturing industries
FOOD PRODUCTS, BEVERAGES AND TOBACCO
TEXTILES, TEXTILE PRODUCTS, LEATHER AND FOOTWEAR
WOOD AND PRODUCTS OF WOOD AND CORK
PULP, PAPER, PAPER PRODUCTS, PRINTING AND PUBLISHING
CHEMICAL, RUBBER, PLASTICS AND FUEL PRODUCTS
OTHER NON-METALLIC MINERAL PRODUCTS
BASIC METALS AND FABRICATED METAL PRODUCTS
MACHINERY AND EQUIPMENT
TRANSPORT EQUIPMENT
MANUFACTURING NEC; RECYCLING
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1
2
3
4
5
6
7
8
9
10
12 & 13
14&15
16 & 17
18&19
20, 21,22 & 23
24&25
26, 27 & 28
29; 30 & 32
31
33&34
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Basic Features (1)
SECTEURS
TOTAL
1
2
3
4
5
6
7
8
9
10
1981-1991 1992-2001 1981-1991 1992-2001 1981-1991 1992-2001 1981-1991 1992-2001 1981-1991 1992-2001
gprice
gnomwa_u
gpdty
gUCL
markup_r
0.46
3.01
2.77
3.25
1.66
0.89
1.02
0.75
-3.31
-1.04
0.83
-2.32
-0.01
0.65
2.06
0.92
-0.56
-1.77
-2.23
-5.62
-1.17
-2.48
4.15
5.18
3.62
2.90
3.87
4.28
4.36
3.64
4.38
3.97
3.34
1.22
-0.51
0.14
0.55
1.17
1.20
0.60
0.10
2.01
1.32
1.02
4.00
-0.62
1.96
2.68
3.04
3.45
3.44
3.28
8.71
4.39
3.53
3.18
-0.25
-0.70
-2.32
0.44
2.65
1.60
0.91
6.29
2.64
1.60
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0.15
5.84
1.62
0.22
0.81
0.81
0.89
0.35
-3.98
-0.40
-0.18
-1.90
-0.26
0.85
2.94
0.73
-1.41
-0.99
-0.80
-4.03
-1.29
-0.57
1.76
2.53
1.01
1.15
1.50
3.44
1.62
1.68
1.68
1.82
1.55
1.70
2.17
1.09
1.28
1.50
3.52
1.57
1.63
1.56
1.68
1.38
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Basic Features (2)
1987-1991 1992-2001 1981-1991 1992-2001 1981-1991 1992-2001 1981-1991 1992-2001 1981-1991 1992-2001
SECTEURS
rdiv
mpen
gnbfirm
vac_rat
disp_emp
TOTAL
5.42
6.05
6.14
10.07
0.88
-2.57
3.28
1.66
0.94
0.51
1
1.86
1.98
7.64
10.26
1.66
-0.29
3.01
1.88
1.29
0.08
2
1.47
1.82
10.60
24.79
0.41
-6.81
5.29
2.85
0.53
0.12
3
1.70
2.40
12.11
21.26
-2.45
-4.48
3.39
2.32
0.47
0.14
4
NA
NA
2.51
2.67
1.46
-1.39
2.64
1.64
3.92
3.22
5
11.01
11.33
9.27
9.30
2.34
-0.57
2.24
1.18
2.11
0.36
6
5.11
4.69
1.81
3.40
-0.46
-3.37
2.98
1.22
0.90
0.14
7
3.44
3.31
4.80
5.03
0.96
-1.63
4.00
1.89
1.51
0.42
8
12.54
15.61
4.61
11.32
2.68
-2.80
3.42
1.41
1.44
0.49
9
10.76
12.00
3.36
5.19
1.21
-1.31
2.47
1.00
0.82
0.12
10
0.91
1.29
4.72
7.52
1.34
-3.11
3.37
1.23
0.33
0.05
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Results
Dependent variable : Inflation
rate
Gpdty
RDIV
MPEN
Model 1
Model 2
Model 3
-0.359***
0.052
-1.144***
0.052
-0.416
0.298
-0.504***
0.047
-0.480***
0.059
-0.942**
0.036
0.038*
0.023
Gnbfirm
0.025
0.026
0.237***
0.056
Gnbest
Gfi_avsi
0.164***
0.054
0.115**
0.058
0.193***
0.064
Gest_av
Vac_rat
Dis_emp
0.375***
0.062
0.259
0.491
135
0.5763
0.302***
0.062
0.410***
0.154
180
0.5488
0.125*
0.067
0.360***
0.070
0.223
0.510
135
0.6317
Observations
R-squared
Notes :
1) Random – effect model is used for estimation (In all cases, the
fixed – effect model is rejected according to the Hausman Test).
2) ***, ** and * indicate level of significance at 1%, 5% and 10%
respectively. Figures into brackets are standards errors.
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Conclusions (1)
• R1: the deflation in Japan is better
explained by what happened on the labor
market than by what is related to the
goods market. The decrease of UCL
statistically explain the falling prices
• R2: deregulation, bargaining power,
market dynamics
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Conclusions (2)
• The FLEXIBILITY of nominal wages in
Japan may have contribute to hinder a
dramatic increase of the unemployment
rate. But the deflation may be considered
as a collateral effect
• The ambiguous effect of the deregulation
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Conclusions (3)
• Improvements for further researches
- To better separate the effects of
deregulation and the effects of market
dynamics. Access to the extension of JIP
database
- 1981-2004
- In more details, within manufacturing;
beyond manufacturing
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References
•
•
•
•
•
•
•
•
•
•
BAIG Taimur (2003), “Understanding the Costs of Deflation in the Japanese Context”, IMF
Working Paper 03-215.
BANERJEE Anindya & RUSSELL Bill (2005), “Inflation and measures of the markup”, Journal of
Macroeconomics, 27, pp 289-306.
BLANCHARD O.-J. et GIAVAZZI. F. [2003], “Macroeconomic Effects of Regulation and
Deregulation in Goods and Labor Markets”, Quarterly Journal of Economics, Vol. 118, n° 3, p.
879-907.
HARADA Yutaka & NAKATA Kazuyoshi (2003), “Can Economics Explain Deflation in Japan?”,
ESRI Discussion Paper n°79.
KOBAYASHI Keichiro (2004), “Conflicting thought on Eradicating Deflation”, Ekonomisuto, 12 avril
(in Japanese).
MARTINS Joaquim Oliveira, SCARPETTA Stefano & PILAT Dirk (1996), “Mark-up Ratios in
Manufacturing Industries. Estimates for 14 OECD Countries”, OECD, Economics Department
Working Papers n°162.
NISHIMURA Kiyohiko G., OHKUSA Y. & ARIGA K. (1999), “Determinants of Individual-Firm Markup in Japan: Market Concentration, Market Share and FTC Regulations”, Journal of the Japanese
and International Economies, Vol. 13, issue 4, pages 424-450.
OECD (various years), “Japan”, OECD Economic Studies.
OECD (2000): “Enhancing Market Openness through Regulatory Reform in Japan”.
SBORDONE Argia M. (2002), Prices and unit labor costs: a new test of price stickiness, Journal of
Monetary Economics, 49, 265-292.
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