Excess labour and the business cycle: a comparative study of Japan, Germany, the United Kingdom and the United States

Abstract

This article investigates the relative propensity of manufacturing industries in Japan, Germany, Great Britain and the U.S. to hold excess labor over the business cycle. According to the authors the leading economic rationale for the phenomenon of excess labor, or labor hording, derives from the theory of firm-specific human capital. While much has been learned about the phenomenon of excess labor from individual-country studies, there are compelling reasons for undertaking a comparative international analysis that includes Japan. Firm-specific investments give rise to a stream of rent that are shared by the firm and its workforce. Where investments are major and highly profitable, the two parties will be particularly cautious about separating in the event of an unanticipated downturn in product demand. As long as joint rent remain positive, or even if they turn negative in the short run, it may be their mutual interest to maintain a long-term employment relationship. Returns to specific investments are uncertain. Specificity itself implies that the firm endows in its workers a set of specificity associated with any given investment. It will have less than complete information on relative future changes in technological, process and product innovations between itself and its competitors.