Comment on “The Normalization of Wage Dynamics”

Abstract

Since the mid-1990s, the Japanese economy has experienced stagnation in both prices and wages. This stickiness in prices and wages has been considered a key factor behind Japan's three decades of economic stagnation. Consequently, Japanese policymakers have aimed to stimulate price and wage inflation since the early 2010s. Identifying the sources of this stagnation has long been a critical objective for effective policy design.

The current paper, Hoshi and Kashyap (2025), is a follow-up to Hoshi and Kashyap (2021), which examines the causes of wage stagnation. In their earlier work, Hoshi and Kashyap report that wage stagnation was because of the weakened link between labor market tightness—measured by the unemployment rate—and wage growth. Regardless of the level of unemployment, wage growth remained stagnant, a phenomenon described as a flattening of the Phillips curve. With a flattened Phillips curve, labor market tightness no longer translates into wage inflation.

Hoshi and Kashyap (2021) identify two key factors contributing to this phenomenon. The first was surplus employment generated by firms' labor hoarding behavior. When firms experience positive shocks, they utilize their hoarded labor instead of raising wages to attract new workers. The second factor was the elastic labor supply of women. Since the mid-1980s, middle-aged married women, who traditionally remained outside the labor force, have increasingly joined the workforce. This additional labor supply has flattened the labor supply curve and suppressed wage growth. Hoshi and Kashyap's (2021) main conclusion is straightforward: Until surplus labor, both within firms and in the labor market, is exhausted, wage growth will not materialize.

Hoshi and Kashyap (2025) now report that wage growth has become more responsive to changes in labor market tightness, based on data from 2019 to 2023. They argue that this normalization of the Phillips curve is because of the depletion of hoarded labor within firms and the stabilization of women's labor force participation. Their claim is supported by firm responses to the government's Survey of Labour Economy Trends, which indicate a decline in surplus labor within firms, as well as the plateauing of middle-aged women's labor force participation rates.

Hoshi and Kashyap (2025) is a logical, straightforward, and convincing paper on an undoubtedly important issue. The findings are highly relevant to policymakers, providing a positive outlook on achieving a virtuous cycle of wage and price inflation—a central principle guiding the economic policies of both the former Kishida administration and the current Ishiba administration.

With that said, I would like to highlight the following points that are not addressed in the current paper: The impact of population decline and the declining importance of bonus payments.

Japan's working-age population has been shrinking since the mid-2000s, which should, in theory, exert upward pressure on wages. The coexistence of long-term population decline and wage stagnation has been puzzling, but the presence of surplus labor within firms and the broader market helps explain this paradox. Now that this slack labor has largely disappeared, the shrinking labor force is likely to become a binding constraint, leading to sustained wage growth.

Existing studies indicate that the share of bonus payments in total compensation has declined since the mid-1990s. Because bonuses are more sensitive to labor market conditions than base salaries, this decline has made total compensation less responsive to labor market tightness.

These two points should be examined in future research.