Flatter wage profiles and reduced lifetime employment: A simple formalization

Akiomi Kitagawa, Souichi Ohta, Hiroshi Teruyama

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review


This chapter explores the implications of possible bankruptcies of firms for their own wage schemes and the structure of labor market, using a two-period general equilibrium model. The bankruptcy risk flattens a wage profile of each firm, weakening its incentive effect, thereby making room for efficiency wage to be used as a supplementary incentive device. The use of the efficiency wage, in turn, stratifies the labor market into the primary one, in which job rationing is observed, and the secondary one, in which job rationing is not observed. Substantial utility differential emerges between those who have luckily found a job in the primary market and those who have not, although there is no difference in their innate abilities. This differential widens, as bankruptcies become more likely. Moreover, the dual structure of the labor market and the entry decisions of firms render the employment size in the primary market too small to attain a social optimum.

Original languageEnglish
Title of host publicationAdvances in Japanese Business and Economics
Number of pages27
Publication statusPublished - 2018

Publication series

NameAdvances in Japanese Business and Economics
ISSN (Print)2197-8859
ISSN (Electronic)2197-8867


  • Dual labor markets
  • Efficiency wage
  • Job rationing Lifetime employment
  • Severance pay
  • Wage profile


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