Labor Immobility in Japan: Its causes and consequences∗

This paper builds and calibrate a model of competitive search that can reproduce a set of stylized facts concerning major impacts of the decade long stagnation and subsequent changes in the labor market in Japan. We highlight the role played by varying degrees of relation specific investments in forming employment relations. Depending upon the degree of specificity, a job slot can be immediately destructed, or, only the filled jobs survive, or, jobs survive as far as workers with specific training remain in the market. We obtain a rich variety of aggregate labor market responses to a negative productivity shock. By embedding such a system of employment in an economy plagued with limited capital mobility, we can generate upward drift in Beveridge curve, pro-longed periods of labor adjustments, decline in the share of jobs with costly investment in training, and strong cohort effects. We also offer some preliminary results from numerical solutions of the model.