This paper provides a detailed portrait of the micro-economic adjustment behaviour of Japanese
establishments to labour demand shocks which provides the following key insights. First, Japanese
employers rely to a very large extent on adjusting average hours changes. This is particularly important
in the context of small labour demand shocks, but average hours adjustment remains sizeable
also in the context of large total hours changes. Average hours changes account for about 80% of total
hours adjustment in establishments reducing total hours worked by 5% and slightly more than half of
total hours adjustment in establishments that reduce total hours worked by 50%. Second, the incidence
of non-standard work has increased considerably in recent years, worker turnover is much
higher among non-standard workers than standard workers and the importance of working time
adjustments tends to be less for non-standard workers. Taken together, this suggests that increased
incidence of non-standard work should be associated with a stronger role for employment in labour
input adjustment and higher levels of worker turnover.
Comparing the labour market experience during the global financial crisis with that observed during
the 1997 crisis suggests that the employment response was relatively small despite the increase in
the incidence of non-standard work and that worker turnover was very high. The limited employment
response may reflect the temporary nature of the global financial crisis, an aspect that could not be
explicitly controlled for in the present framework. While both crisis episodes were triggered by events
outside Japan, the 1997 crisis revealed major structural problems necessitating making permanent
adjustments, whereas impact of the global financial crisis was largely expected to be temporary,
increasing incentives for labour hoarding by temporarily reducing working time. However, it is also
possible that the subdued employment response may reflect the so-called ‘‘honeymoon effect” in
the transitional period following the liberalisation of the market for temporary work. Differentiating
between these two explanations is not straightforward within the largely descriptive framework used
in this paper and is left for future work.
While the temporary nature of the global financial crisis is likely to account for a substantial part of
the adjustment behaviour of Japanese establishments, this is not to say the changes in the composition
of workers and establishments do not play an important role. Indeed, counterfactual simulations suggest
that the employment response during the global financial crisis would have been even smaller
had the incidence of non-standard work remained at the level observed during the 1997 crisis. This