TFP Decline and Japanese Unemployment in the …econseminar/Old/Esteban-Pretel...Ryuichi Tanaka 東京大学 Tokyo, June 27, 2008 Julen Esteban-Pretel 筑波大学 GRIPS Ryo Nakajima

Ryuichi Tanaka東京大学

Tokyo, June 27, 2008

Julen Esteban-Pretel筑波大学

GRIPS

Ryo Nakajima東京工業大学

TFP Decline and Japanese Unemployment in the 1990s

Motivation Model Parameterization Results Conclusions

Japan in the 1990s

“The performance of the Japanese economy in the 1990s was less than stellar”

Hayashi, F. and E. C. Prescott, 2002 “1990s in Japan: a lost decade” Review of Economic Dynamics 5 (1), 206-235.

2


The 1990s: Output

Average annual growth rate of GNP per capita 1991-2000• Japan: 0.5%• U.S.: 2.6%

3

-0.8

-0.6

-0.4

-0.2

0

0.2

1960/Q1 1964/Q1 1968/Q1 1972/Q1 1976/Q1 1980/Q1 1984/Q1 1988/Q1 1992/Q1 1996/Q1 2000/Q1

Log of Real GNP (1990=1)

U.S.Japan


80

85

90

95

100

105

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Detrended Real GNP

The 1990s: Detrended Output

1980s: Economy grows more than the benchmark 2%. 1990s: Trend reversal. 2003 is 90% of that of 1990 had it grown at

a 2% rate per year.

4


The 1990s: Unemployment

1980s: 2.5% unemployment rate. 1990s: Big increase in unemployment. 5.4% unemp. rate. in 2002.

5

0

1.5

3.0

4.5

6.0

1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Unemployment Rate

Perc

ent


Forces Behind Unemployment Increase

6

ntut

Creation

Destruction


Probability of Finding Job

1990: 40% of unemployed workers found job within 1 quarter. 2000: Probability reduced to 30%.

7

25

30

35

40

45

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Quarterly Prob. of Finding Job

Perc

ent


Probability of Losing Job

1990: 0.8% of workers lost job every quarter. 2000: Probability increased to 1.8%.

8

0

0.5

1.0

1.5

2.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Quarterly Prob. of Losing Job

Perc

ent


Number of Jobs Created and Destroyed

Over the 1990s creation and destruction increased. Destruction was higher than creation.

9

0.5

1.0

1.5

2.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Jobs Created and Destroyed as Fraction of Labor Force

Perc

ent

of L

abor

For

ce

DestructionCreation


Lost Decade Labor Market Facts

Detrended output decreased.

Unemployment increased.

• Increase in destruction.

• Increase in creation, but lower than destruction.

Hours of work decreased.

Detrended wages decreased.

10


What Drove the Lost Decade?

Possible explanations: Krugman (1998), Caballero et al. (2007)

• Bad fiscal policy.• Liquidity trap.• Depressed investment (over-investment during bubble period).• Credit constraints.

Hayashi and Prescott (2002)

• TFP slowdown.

11


TFP

12

0.006

0.008

0.010

0.012

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Total Factor Productivity

where!t = !1!!!!t!1e

"tAt = !tzt

zt = zt!1e!


TFP Growth ( )

13

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

TFP Growth

1970-1990: 2.1% growth.

1991-2000: 0.2% growth. 1998-2003: 1.2% growth.

!


Detrended TFP (φ)

14

85

90

95

100

105

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Detrended TFP

Detrended TFP drops below 90% of the 1990 level.


This Paper

Can the decline in detrended TFP generate the increase in unemployment

observed in Japan over the 1990s?

15


What We Do

We build:• Neo-Classical growth model with search frictions in the labor

market.

Calibrate it to match the Japanese economy in 1990.

Simulate it using TFP data and compare results with data.

16


Model Model

• General structure

• Main equations

Outline

17

Parameterization

Results

Conclusions


General Structure

Cass-Koopmans type model with labor market search frictions. Two types of agents:

• Households: - Consume.• - Save.• - Supply labor to firms.

• Firms: - Hire labor and rent capital to produce output.• - Atf(kt), where At : TFP.• kt : Detrended capital per worker.

Labor market: • Search and Matching.

• Endogenous destruction.

18


Household’s Problem

Economy composed by a big family – perfect self insurance. Firms are own by the Family. The Family chooses to max

FOC:

19

{Ct+i,Kt+i+1}!i=0

s.t Ct+i + Kt+i+1 =Wt+i+!t+i + (1+ rt+i ! !)Kt+i + (1! nt+i) bzt+i

C!1t = !Et

!(1+ rt+1 ! ") C!1t+1

"

Et

!!

i=0

! i log (Ct+i)


Labor Market

Search and matching labor market. Unemployed workers and vacancies meet randomly according to

CRS matching function m(ut,vt)= m(θt)ut, where θt = vt/ut.

• Prob. for an unemp. worker to match with a firm: qt = m(θt)/θt.

• Prob. for firm to match with unemp. worker: pt = m(θt).

Production function: At ktα .

• At : TFP - At =φtzt , zt = zt-1eγ ,

- γ ≡ Growth rate of TFP, φ ≡ SS detrended TFP.

Idiosyncratic cost, xt , - i.i.d with dist. fn: G : [0,xmax]→[0,1]. Endogenous destruction: depends on value of xt . Free entry of firms. Nash bargaining for wages.

20

!t = !1!!!!t!1e"t


Problem of the Firm

Value of a vacancy:

Value of filled job:

• Optimal capital:

21

Vt = !!zt + "!qtmax

"EtJt+1, Vt+1

#+ (1! qt) Vt+1

$

Vt = !!zt + Et"t

!

"#qt

xt+1$

0

Jt+1 (xt+1) dG (xt+1) + (1! qtG (xt+1)) Vt+1

%

&'

0 = !!zt + Et"tqt

xt+1!

0

Jt+1 (xt+1) dG (xt+1)

Jt (xt) = Atf (kt)! rtztkt ! xtzt ! wt (xt) + !tmax!EtJt+1, Vt+1

"

rt = f ! (kt)

Jt (xt) = Atf (kt)! rtztkt ! xtzt ! wt (xt) + Et!t

xt!

0

Jt+1 (xt+1) dG (xt+1)


Problem of the Worker

22

Value of unemployment:

Value of employment:

Nt (xt) = wt (xt) + !max {EtNt+1,Ut+1}

Ut = bzt + !t [ptmax {EtNt+1,Ut+1}+ (1! pt)Ut+1]

Ut = bzt + Et!t

!

"#pt

xt+1$

0

Nt+1 (xt+1) dG (xt+1) + (1! ptG (xt+1))Ut+1

%

&'

Nt (xt)wt (xt) + Et!t

!

"#

xt+1$

0

Nt+1 (xt+1) dG (xt+1) + (1! G (xt+1))Ut+1

%

&'


Wage, Surplus and Threshold

Wages are determined as the Nash solution to a bargaining problem, where η is the bargaining power of the worker.

This problem delivers:

where

Wage:

Destruction threshold:

23

maxwt(xt)

(Nt (xt)! Ut)! (Jt (xt)! Vt)1!!

Nt (xt)! Ut = !St (xt) Jt (xt) = (1! !) St (xt)

St (xt) = Jt (xt) + Nt (xt)! Ut

St (xt) = 0

wt (xt) = ! [Atf (kt)! ztrtkt ! xtzt + "zt#t] + (1! !) bzt


Flows:

Flows and Timing

24

t - 1t

t + 1ut Matching

At+1 , xt+1 Destruction of jobs Production

ut+1

nt+1nt

ntut

1 = nt + ut

ut =!1! pt!1G (xt)

"ut!1 + [1! G (xt)] nt!1

[1! G (xt+1)]

ptG (xt+1)


Aggregation

Aggregate output:

Aggregate capital (capital market clearing condition):

Economy resource constraint:

25

Yt = ntAtk!t

Kt = ntAtkt

Yt + (1! nt) bzt = Ct + Kt+1 ! (1! !)Kt + "ztvt + nt!xtzt


Stationary Competitive Equilibrium

A stationary competitive equilibrium in this economy is a set of:• unemployment rate, employment rate and vacancies, ut, nt, vt;• value for the firms and workers, Jt(xt), Nt(xt),Ut;

• wages, wt(xt);• intermediate input cost threshold,• interest rate, and detrended cons., output and capital (agg. and per

worker), which satisfy:

• flow equations of the labor market;• optimal values for firms and workers, and optimal capital condition; • Nash bargaining for wage determination;• zero surplus condition;• households optimization condition;• economy resource constraint, capital market clearing condition.

26

xt;

rt,!Ct,!Yt, !Kt, yt, kt.


Parameterization Parameterization

Model

Outline

27

Results

Conclusions

• Choose functional forms.

• Fix a set of parameters exogenously.

• Calibrate other parameters to match Japanese data in 1990.

Model


Functional Forms

Matching function: m(u,v) = µ uξ v1-ξ

Idiosyncratic productivity distribution:

• Exponential: - mean: µn

28


Exogenous Parameters

A subset of parameters are fixed using values in other studies or in an ad-hoc manner.

29

Exogenously fixed parameters

Discount factor β = 0.98Elasticity of matching with respect to unemp. ξ = 0.5

Bargaining power of the worker η = 0.5

Exponent of capital in prod. function α = 0.365

Capital depreciation δ = 0.022


Calibrated Parameters

Calibration is done to match the Japanese economy in 1990.

30

Calibrated parameters

Parameters (4) Moments Matched (4) Source

ϕ : Cost of posting vacancy Unemployment rate (1990)

2.1%

総務省統計局「労働力調査年報」

b : Flow value of unemp. Prob. of leaving unemp. (1990)

0.42

Kuroda (2003)

µ : Scaling param in match. fn Ratio of unemp. benefit to output 0.4

Shimer (2004)

µn : Mean of G( ) Market tightness, θ, set to 1 Shimer (2004)


• Feed detrended FTP from the data.

• Terminal detrended TFP is 88% that of 1990.

• Compare the changes between steady states.

• Simulate path to new SS using perfect foresight shooting algorithm.

Parameterization Parameterization

Results Results

Outline

Model

31

Conclusions


Detrended TFP

32

1990: 100. 2003: 88.

85

90

95

100

105

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Detrended TFP


Changes in SS of Output & Unemployment

33

Unemployment:• Data: 1990 - 2.1% 2003 - 5.2%

• Model: 1990 - 2.1% 2003 - 4.7%

Output (detrended):• Data: 1990 - 100 2003 - 87

• Model: 1990 - 100 2003 - 83


Unemployment

Path of Unemployment to the new SS

34

5.2%

4.7%

0

1.5

3.0

4.5

6.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Perc

ent

2.1%

Data Model


Detrended Output

Path of Output to the new SS

35

90

83

75

80

85

90

95

100

105

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

100

Data Model


Total Jobs Destroyed per Quarter

Destruction of Jobs

36

1.8

1.3

0.5

0.8

1.1

1.4

1.7

2.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Perc

ent

of L

abor

For

ce

0.8

Data Model


Total Jobs Created per Quarter

Creation of Jobs

37

1.4

1.25

0.7

0.9

1.1

1.3

1.5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Perc

ent

of L

abor

For

ce

0.88

Data Model


Total Jobs Destroyed and Created per Quarter

Destruction vs Creation of Jobs

38

0.7

0.9

1.1

1.3

1.5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Perc

ent

of L

abor

For

ce

Destruction Creation


Detrended Wages

Detrended Wages

39

81.5

75

80

85

90

95

100

105

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

100

Data Model

81.7


Conclusions

We build a Neo-Classical Growth Model with search frictions in the labor market.

We show that decreases in detrended TFP can account for a big part of the behavior over the 1990s of:

• Output. • Unemployment.• Creation and destruction of jobs.

• Wages. Future work:

• Add hours of work.• Add government expenditure.

40

TFP Decline and Japanese Unemployment in the …econseminar/Old/Esteban-Pretel...Ryuichi Tanaka 東京大学 Tokyo, June 27, 2008 Julen Esteban-Pretel 筑波大学 GRIPS Ryo Nakajima

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