Introduction

Since the end of the 1970s, high (10% and more) and persistent unemployment has been a major issue in Europe. During the same period, Japanese unemployment increased from a very low 2% level to a temporary peak of 3% in the first half of 1987 (after the ‘endaka’ shock). This very low unemployment rate, accompanied with some specific features of the Japanese labour market such as the bonus system and the large size of the secondary sector, has induced many observers to consider Japan as a ‘no problem’ country, at least as far as unemployment is concerned.

This emphasis on the low level of unemployment (and the possible measurement issues involved) overlooks the fact that Japan, despite wage flexibility, the bonus system and the procyclical labour supply, which have all helped reduce the impact of exogenous shocks on the unemployment rate, has witnessed during the past ten years or so a significant increase in the NAIRU (see Hamada and Kurosaka, 1986 and the references therein), with unemployment showing the same sort of persistency exhibited by the major European economies (see Brunello, 1989 and the references therein).

Economic theory offers two main explanations of the current increase in the NAIRU in most developed countries (for the United States see Summers, 1986 and Topel and Murphy, 1987).