Prequel:
Why unemployment does not decrease although GDP (gross domestic product) level and the stock price rise? This phenomenon has been explained by many macroeconomists since the major world great depression occurred in 1929. During this depression, although the aggregate product level of major developed nations itself was high there was a major excess supply of product which was not consumed by consumers. The reason was explained by John Maynard Keynes. The lack of aggregate demand (AD), which means the ability to consume of total population, created a huge gap between a level of aggregate product and the ability to consume. The similar phenomenon in 1929 occurred in current Japanese economic situation. By means of the major market liberalisation conducted by former prime minister Koizumi’s structural reformation, the GDP level has recovered after a decade depression period however the unemployment level still remains high, especially among youth population. Furthermore, some macroeconomists suspect this economic recovery is temporary and the business cycle comes back to recession. These reasons are underling the fact that the price level does not rise with the GDP growth. The high level of unemployment rate is related to the “real wage” level related to this stagnation in price rise. In order to solve this problem related to the relation between the price inflation level and the real wage level, a reformation in the fiscal policy and the labour law is required according to some macroeconomists. However, an excess intervention of the fiscal policy into market, mostly pronounced by Japanese Communist party, should be prevented. All in all, this essay indicates key solutions with a reformation of the labour market and the moderate balance in monetary and fiscal policy.
The graph above explains why the previous mentioned negative paradox occurs. In fact thanks to the market liberalisation and the adaptation to the global market AD shifted to right. However, as the supply-side factors has been only considered the demand-side, which implies the ability of total population to consume, has been ignored. The increase in ΔM based on the Zero-Interest-rate policy could not stimulate individual enterprises and consumers to borrow despite of the expectation. This cause is underlining on the fact Japanese are unsecured to borrow cash due to the negative prediction of Japanese market and also the Japanese tend to save their income far more than other nationalities. This aspect indicates although the investment into entrepreneurs has been encouraged the average consumption level has been still stagnated. Therefore, the demand of goods and services has not been stimulated enough to rise the price level. Furthermore, the current Japanese labour market is reformed to allow employers to hold a strong control over labour contract and lowered individual rights of labourers. This situation is based on two following reasons. The first reason is that the market for entrepreneurship is less competitive such as less venture business industries are born so that the market is fully monoplised by traditional huge enterprises and transnational enterprises mainly coming from USA. This fact has also shifted SRAS to the right as shown in the graph above because entrepreneurs have become willing to supply their product with the more flexible condition to exploit the factors of production. The second reason is that this situation allows entrepreneurs to employ labourers with fixed contract with lower wage and longer working hours. All in all, this overall Japanese current economic situation has stagnated the price inflation level meanwhile economic grow might be supposed to be faster than the stable level; this implies ΔY>ΔY*. Thus, it has also shifted SRAS to the right as shown in the graph above because entrepreneurs have become willing to supply their product with the more flexible condition to exploit the factors of production.
Speaking of the unemployment rate which remains still significantly high, this case also indicates that as ΔW is a fixed valuable and ΔP is a flexible valuable ΔP is required to (ΔW -ΔP) becomes equal to ΔY* in order to avoid the economic growth grows excessively faster. This reason is based on the attempt to stabilise the real wage level (W/P) as observing to the graph below.
Focusing on the graph above, the deflation is the type of recession which lowers both price and growth level so that the price and growth level is below the stable level, which means an economic activity level is well below under their capacity. During such a deflation, as the price level is always dropping the wage level is as such. The motivation of labourers thus goes down, and then the aggregate productivity level goes down simultaneously. Therefore, the price level goes down by means of the lack of aggregate productivity. This situation is called “deflation spiral” which Japanese economy has been suffering from in 1990s. In order to surmount a deflation, either an exogenous technological advance, for example a new invention or an importation of a foreign technique, should be expected, a central bank should lower the interest rate and increase the money supply into market, public sectors should recruit unemployed individuals more, or a government increase investment level into private sectors. The previous two actions rely on a spontaneous recovery by means of private sector’s own efforts, which is called Supply-side policy. The supply side factor implies producers’ ability to produce and the spontaneous effort to surmount economic recession. The second action is based on the monetary policy creating an excess money supply level. The last two actions are operated by the government intervention into a private market by means of the fiscal policy. The monetary policy exploits the money supply level (ΔM) to pushes the aggregate demand (AD) along the sort-run aggregate supply (SRAS), which is related to the nominal wage level (ΔW) and the growth level (ΔY), which means both the wage level and growth catch up a rise in the price level stimulated by the monetary policy. The fiscal policy on the other hand operates the planned efforts to surmount economic recession, which leads ΔP to artificially rise regardless of ΔM and ΔW by means of increasing a number of jobs in the public sector and/or investing for private sectors with tax revenue. Furthermore, in terms of this dynamic economics theory ΔW is assumed to be fixed unlike other variables such as ΔP and ΔM because in the real world nominal wage is generally determined by labour contracts with employer rather than the current price change or a daily change in economic growth.
Former Prime Minister Junichiro Koizumi promoted his structural reformation which cut government expenditure and alternated Japanese market structure in order to adapt the global market and encourage foreign investment. This structural reformation permitted M&A, deregulation of merge and monopoly, and also highly deregulated labour market. Under Koizumi’s structural reformation Japanese Central Bank installed the Zero-Interest-rate policy in order to encourage private industries to borrow cash to stimulate their economic activity. This structural reformation opted to highly rely on the monetary policy and exaggerates the supply-side effort to surmount the decade economic recession and sacrifices the fiscal intervention and ignores the fact that some labourers can be more exploited under a lower wage and the involuntary unemployment rate may increase further. As a matter of fact, owing to the market liberalisation led by this structural reformation the foreign investment has been encouraged and more transnational corporations access to the Japanese market. Furthermore, major Japanese enterprises started to put priority on global competition rather than domestic one. Giant enterprises such as Japanese car making companies are encouraged to gain much power to create extra profit by forming monopoly in the domestic market, which has enabled these enterprises to transfer a part of their profit into further investment plan to explore their brunches in the global market. Some middle sided enterprises tried to merge with even a former rival company; for example the game soft companies Square and Enix merged together. Nonetheless, there is an unexpected paradox which is the fact although the Japanese stock price and the GDP level have rose the commodity price level hardly rises, the average quality of life of Japanese individuals has not been improved, and the unemployment rate is still remained significantly high.
The real wage level (W/P) denotes how valuable the nominal wage rate is with comparison to the price inflation level (ΔP). So as ΔP is lower, it sounds better for wage earners as it sounds like they are able to purchase commodities with cheaper price however the fact is totally depressing. As it has clarified that the nominal wage inflation ΔW is fixed due to the real world fact the wage contract can only be changed after several years if ΔP is well higher than ΔW employers attempt to employ less labourers. This is because the sales price is lower so the revenue is too low to cover the cost including wage for labourers and to make a desirable amount of profit. Therefore, employers consequently cut the number of labourers employed in attempt to cut the cost. Then as shown in the graph above the unemployment rate becomes exceeding the natural rate of unemployment level. Furthermore, continuously lowering ΔP cause to decrease ΔW in a longer length of time unless labourers, government, or something else coming exogenously intervenes. As the unemployment rate rises, the employer may find it is feasible to lower the nominal wage level to employee labourers with the much lower cost. This causes labourers to lose purchasing ability further and thus to lower ΔP further.
* To be continued!!