Why is the Unemployment Rate so Much Lower in Japan than in the U.S.?

Abstract

It is well known that the unemployment rate in Japan has been the lowest among the DECD countries. Although the U.S. and Japan differ in their statistical definitions of unemployment, this has only a minor effect on the unemployment rates. The purpose of this paper is to measure contributions of economic and sociological factors specific to the Japanese economy as opposed to the U.S. economy. It will be shown that at least half of the U.S.-Japan difference in unemployment rates is accounted for by the differences in layoff practices, youth unemployment, and the relative shares of the agricultural sectors in the economies. One interesting finding which has not been pointed out before is the relatively large contribution of the difference in teenage participation and teenage unemployment between the two countries. About 20 to 25% of the total difference in unemployment rates is due to differences in the behavior of teenagers in the two countries. Fewer and fewer Japanese teenagers are participating in the labor market, due to strict schooling requirements, and lower minimum wages. The unemployment rate of Japanese teenagers is also much lower than that of their American counterparts. A hypothetical U.S. unemployment rate is constructed to adjust for the differences between the U.S. and Japan in the size of the agricultural sector, layoff practices, and teenage participation and unemployment. The hypothetical rate partially explains the differences in Okun's coefficients and the elasticity of employment with respect to GNP between the two countries.