Labor wedges by sex in Japan

Many economists believe that efficiency and labor wedges are the major factors contributing to the business cycle in Japan. The fact that the female labor supply in Japan is lower than the male supply could also affect the labor wedge. We extend the approach to business cycle accounting of Chari et al. (2007, Econometrica, vol. 75, pp. 781–836) to investigate the importance of these wedges. We first prove that our prototype model with male and female labor supplies corresponds to many detailed models that have frictions on the female labor supply. Next, we apply the business cycle accounting with two labor supplies to the Japanese economy and find that the difference between male and female labor wedges has been decreasing, the female labor wedge is greater than the male wedge, and the male labor wedge is more volatile than the female wedge. Moreover, we conduct a counterfactual experiment in which the female labor wedge is equal to the male wedge. The result shows that consumption and labor supply become more volatile, but welfare increases because the level of consumption increases in the steady state.

The contributions of this paper are as follows. First, we show that the labor wedges by sex achieve the same allocation as frictions in several detailed models. We also examine the difference in marginal tax rates on labor income, discrimination, preferences, and labor productivities. Second, the Japanese female labor wedge is greater than the male wedge, yet the difference has declined recently because the male labor wedge has risen gradually. Third, we conduct a simulation in which we change the female labor wedge to equal the male labor wedge. While we find that female labor supply increases and becomes volatile, we also find that these effects improve the lifetime utility of the household.