Stagnant wages in the dual labor markets

Japan’s wages have remained stagnant despite improvements in productivity. This paper studies why wages have diverged from productivity by developing a search and matching model with heterogeneous workers: regular and non-regular. The simulated model accounts for a substantial part of the wage stagnation relative to productivity observed in Japan from 1996 to 2016. The results highlight labor market frictions that impede smooth transitions from regular to non-regular jobs. Over the past two decades, non-regular jobs have contributed more to output, but these frictions have distorted labor allocation. As a result, job seekers are heavily concentrated on non-regular positions, leading to a lack of wage growth for both regular and non-regular workers.