Bonus Payments, on-the-Job Training, and Lifetime Employment in Japan

The prevalence in Japan of flexible wages in the form of bonus payments is explained by a high profitability of investment in specific human capital together with the low costs of transactions facing the employer and the worker in assessing fluctuations in productivities. A model of on-the-job training is developed to analyze the determination of the amounts and the sharing of investment in specific human capital. The model predicts that increased profitability of investment leads to an increased bonus-earnings ratio. Evidence indicates that education and firm size, which are often said to be positively associated with the profitability of on-the-job training in Japan, as well as years of experience in the current firm, have significant positive associations with the bonus-earnings ratio. An observed positive association between the cyclical sensitivities in a production index and in the bonus-earnings ratio also supports the theory.