Internal labor markets in Japanese firms.

Abstract

While there have been many changes recently in the compensation and employment practices of large firms in Japan, what have become known as traditional Japanese institutions such as permanent employment and tenure-based wages and promotion remain strongly entrenched. Chapter I presents evidence to support this view and introduces the need for a new model of internal labor markets based on asymmetric information as the theme of this dissertation. Chapter II offers a game-theoretic model of tenure-based promotions and compensation as a solution to moral hazard in the context of asymmetric information between current employers and rival employers. Current employers may exploit the asymmetry by promoting only the best workers, thereby lowering the market wage through a lemons effect. Two solutions to the problem are modeled as different equilibria of the game, one involving reputation and the other self-selection. Many differences between the U.S. and Japan in terms of compensation and employment patterns are explored by comparing these solutions. Chapter III tests the model developed in chapter II by examining whether the promotion strategies of firms in Japan affect relative popularity rankings. First, the reputation device from chapter II is extended to the case where firms differ ex ante in their wage offers and workers differ ex ante in their preferences for firms. The empirical test employs rankings from an annual survey of new university graduates and measures of cheating are developed from panel data on firms. Chapter IV looks at changes in the rule determining wages in Japan. A theoretical model based on asymmetric information is used to show that systems of tenure-based wages and performance-based wages can be viewed as alternate equilibria of the same game. The conditions that determine which equilibrium prevails are derived and examined. The model predicts that workers at higher levels of promotion should have wages determined more by performance than their lower level colleagues and this is tested using data from the Basic Wage Survey.