(Macroeconomics) Japan’s jobless rate falls to 24-year low of 2.4% in January

KYODO

Japan’s unemployment rate fell to 2.4 percent in January, the lowest in over 24 years, and job availability remained at a four-decade high, government data showed Friday.

The figures suggest companies are facing intensifying competition to secure workers as the economy enjoys its second - longest postwar economic expansion cycle.

Tightness in the job market, however, has yet to fully translate into robust wage growth — a headache for policymakers grappling with pulling the economy out of deflation.

The unemployment rate fell 0.3 percentage point from December to the lowest level since April 1993. It has stayed below 3 percent since June 2017, Internal Affairs and Communications Ministry data showed.

The jobs - to - applicants ratio stood at 1.59 in January, unchanged from December and staying at its highest level since January 1974, according to the Health, Labor and Welfare Ministry. This means there were 159 job openings for every 100 workers.

“Japan’s employment conditions have been steadily improving,” an internal affairs ministry official said.

The administration of Prime Minister Shinzo Abe has been encouraging women and the elderly to join the workforce as the country’s rapidly aging working population is expected to shrink in the years ahead.

Unemployment among women dropped 0.5 point from December to 2.2 percent, the lowest since October 1992, while the jobless rate for men fell 0.3 point to 2.5 percent, a level unseen since September 1993. The number of unemployed people slipped a seasonally adjusted 12.6 percent to 1.6 million.

As global economic growth gains traction, business sentiment has been improving at domestic firms. But small and midsize companies are seen facing severer labor shortages.

“It’s a situation where people can find jobs if they are not particular about job types and pay,” said Yasutoshi Nagai, chief economist at Daiwa Securities Co.

“The data came ahead of the spring wage talks, which may be positive (for pay hikes). That being said, the recent falls in share prices and the yen’s appreciation are worrying,” as they could hurt the outlook for corporate earnings, Nagai said.

Abe has been asking companies to raise pay by 3 percent during annual wage negotiations between management and labor unions, which will shift into full gear toward mid - March.

Still, many economists say 3 percent could be a tall order given that companies remain cautious about their business prospects.

Strength in domestic demand — such as private consumption and capital expenditure — is seen as vital for the world’s third-largest economy to maintain its recent growth momentum.

One of the macroeconomic goals for an economy is a low level of unemployment. Unemployment is a phenomenon concerning people of working age who are without a job, available to work, and actively seeking work. The recent fall in “the unemployment rate [by] 0.3 percentage point from December” (paragraph 4) to “2.4 percent” shows that the Japanese economy is working well towards reaching this goal and maintaining a strong economy.

At output level Y_e, real GDP is equal to potential GDP, a point where there is unemployment equal to the natural rate (the sum of seasonal, frictional and structural unemployment), and where cyclical unemployment is equal to zero. Currently, Japan’s economy finds itself to the left part of the diagram (Y_p), because it is in an inflationary gap where unemployment is smaller than the natural rate of unemployment. This means that real GDP is greater than potential GDP. This is because Aggregate Demand, which is the sum of all spending on goods and services in the economy in a certain time at a particular price level, is increasing, since, due to greater business confidence, there is too much total demand in the economy.

Since the quantity of GDP that the four factors of production want to buy at the price level Ple is greater than the economy’s potential output, firms need to increase the quantity of their labour force, hence unemployment decreases: “there were 159 job openings for every 100 workers.”. Ultimately, this means that a number of structurally, frictionally or seasonally unemployed find jobs, although these are probably of short duration: ““It’s a situation where people can find jobs if they are not particular about job types and pay””.

Because of the instability of these jobs, the Japanese government could adopt interventionist supply- side policies that bring the economy back the point Ye. These may include direct government hiring as well as improvements in the provision of information on jobs available to workers. This would lead to less unemployment, although there would be negative impacts on government budget and opportunity costs of government spending. Alternatively, the Japanese government could use market- based supply-side policies such as labour market reforms, which increase labour flexibility, combating the “Tightness in the job market” (paragraph 3). The disadvantage of this is that they might lead to a loss of protection for low-income workers.

The Japanese government is intending to increase the labour force (the number of people who are working) by “encouraging women and the elderly to join the workforce”. They are doing this because since the population of Japan is shrinking, there would be more people retiring than there would be entering the labour market. This would entail that the government would have to pay a greater number of pension salaries, losing money.

From the article it emerges that the Japanese are in a period of recovery: “the economy enjoys its second-longest post-war economic expansion cycle” (paragraph 2), leading towards an economic boom according to the business cycle, shown below in Diagram 2.

The business cycle is a series of economic fluctuations, alternating between an expansion and a contraction of the economy.

The solid line represents actual GDP. The dashed line represents the long-term growth trend, where unemployment equals the natural rate of unemployment.

Japan currently finds itself at the point indicated by the ‘expansion’ arrow, meaning that unemployment is falling.

In order for the expansion to continue, the Japanese economy has to strengthen its Aggregate Demand, thus increasing its real GDP – hence why “strength in domestic demand [...] is seen as vital for the world’s third-largest economy” (paragraph 14).

Abe’s request “to raise pay by 3 percent” is a double-edged sword. On one hand, it may provide an incentive for current workers and for people seeking jobs. This is especially true for “small and midsize companies [...] facing severer labour shortages”, since they could encourage workers to stay, as well as invite people seeking jobs to work for them. On the other hand, it may be unwarranted. This is because if “companies remain cautious about their business prospects.”, then a potential downturn in the economy would be aggravated by the greater payments given by firms, who would then need to cut down on workers, and which would have effectively lost money. It might be better to lower this figure, so as to minimise risks as the Japanese economy steadily improves.