The link between unemployment and labor force participation rates in Japan: A regional perspective

- The link between unemployment and labor force participation in Japan is explored.
- A panel cointegration test support for a link between the two variables across regions.
- A nationally orientated policy might be preferred over a region-specific policy in Japan.

This paper explores the co-integrating relationship between unemployment and the labor force participation rate in Japan from a regional perspective. The univariate co-integration tests indicate that the “no co-integration” hypothesis cannot be rejected in Northern-Kanto, Hokuriku and Kyusyu. Because the univariate co-integration approach might suffer from low power we employed a panel version of the co-integration test recently developed by Westerlund (2006) that also considers the possibility of multiple structural breaks in the level of individual co-integrating equations. The test results lend support for an overwhelmingly long-run relationship between the two variables across regions. Accordingly, this finding is not in line with the unemployment invariance hypothesis. As a result a nationally orientated employment policy aimed at improving the unemployment and labor force participation rates might be preferred over a region-specific employment policy in Japan.