With its tradition of a job for life for most citizens, Japan once had a much lo

Question

With its tradition of a job for life for most citizens, Japan once had a much lower unemployment rate than that of the United States; from 1960 to 1995, the unemployment rate in Japan exceeded 3% only once. However, since the crash of Its stock market in 1989 and slow economic growth in the 1990s, the job-for-life system has broken down and unemployment rose to more than 5% in 2003. Explain the likely effect of the breakdown of the job-for-life system in Japan on the Japanese natural rate of unemployment. As the accompanying diagram shows, the rate of growth of real GDP has picked up in Japan after 2001 and before the global economic crisis of 2007-2009. Explain the likely effect of this increase in real GDP growth on the unemployment rate. Is the likely cause of the change in the unemployment rate during this period a change in the natural rate of unemployment or a change in the cyclical unemployment rate?

Explanation / Answer

Of late, it has been observed the previous system of the job-for –life as it used to prevail in Japan has changed and there are more instances of people switching their jobs. This has been the case because people have started venturing into different industries with better and different opportunities after leaving a particular job which gives them better prospects in terms of professional engagement. It can be argued that with such mobility, the natural rate of unemployment prevailing in the economy has decreased with more ventures rising and workers having more options to discover. The likely effect of the rise in the real GDP in Japan would be to decrease the unemployment rate in the economy. With a higher rate of economic growth, there are more opportunities and demand in the economy due to which there will be a higher rate of employment and thus the existing rate of unemployment will decrease. The change in the unemployment rate during this period is a result of both, the change in the natural unemployment rate during the period as well as a change in the cyclical unemployment rate that prevails in the economy. This is because the change in the real GDP in the economy leads to change in both the factors: the natural rate of unemployment as well as the cyclical rate.

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