Does revamping Japan's dual labor market matter?

- We study Japan's excessive labor market duality and its negative effect on TFP.
- The main finding is that the level of employment protection affects duality.
- A higher level of employment protection of regular workers increases duality.
- Increasing protection of temporary workers reduces duality.
- We also discuss some options to reform duality in Japan, such as contract reform.

This paper argues that Japan's excessive labor market duality can reduce Total Factor Productivity (TFP) due to a negative impact on non-regular workers' effort and on firms' incentives to train them. The paper then empirically studies the determinants of labor market duality. The main result of the paper is that the level of employment protection affects duality. In particular, a higher level of employment protection of regular workers increases duality, while a higher level of protection of temporary workers reduces it. On the basis of this result, the paper also discusses some reform options to address Japan's labor market duality.