Adjustment Costs in the Japanese Banking Sector
2013; Premier Publishing; Volume: 18; Issue: 4 Linguagem: Inglês
ISSN
1083-4346
Autores Tópico(s)Corporate Finance and Governance
ResumoI. INTRODUCTION The recent global financial crisis affected many firms and financial institutions throughout the world, including the Japanese banking sector. Table 1 indicates the data for three megabanks in Japan (Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group). After the financial crisis in 2007, the ordinary profits of the megabanks consistently decreased. The sum of the ordinary profits across the megabanks decreased by approximately 2.5 trillion yen, and its rate of change was -112%. Hence, it seems reasonable to suppose that the recent financial crisis has had a large negative impact on the Japanese banking sector. However, the number of workers in the megabanks hardly changed in this period. As indicated in Table 1, the number of workers did not decrease even when profits were strongly and negatively affected by the financial crisis. Assuming that capital stock is fixed in the short-run, it is likely that employers prefer to decrease the number of workers immediately when their firms are affected by negative shocks such as the financial crisis, since labor demand is decreased by the shocks. However, this theory does not apply to the case of the Japanese banking sector. Therefore, it seems to be important to examine the reasons for this in order to better understand the impact of the financial crisis on the Japanese banking sector. The purpose of this paper is to examine firing costs (i.e., the costs of decreasing the number of workers) in the Japanese banking sector. It is widely accepted that employers must incur costs when adjusting labor inputs (e.g., Hamermesh and Pfann, 1996), and labor adjustment costs include firing costs. For example, employers are usually required to provide severance pay when they fire employees. Furthermore, negotiation costs may arise when employees are fired, since this adjustment implies a reduction in the salaries of employees. Several previous studies find that these firing costs are significantly high (e.g., Azetsu and Fukushige, 2009). When negative shocks lead to a decrease in productivity of firms, a reduction in employment may improve productivity. However, the existence of firing costs prevents this employment adjustment, since a reduction in employment is extremely expensive. Therefore, if hiring costs in the Japanese banking sector are particularly high, the impact of the financial crisis on this sector is not likely to be alleviated quickly. Furthermore, an investigation of firing costs is also useful to assess the effects of government policies that aim to protect the banking sector since the effects depend, at least partly, on how quickly employers adjust labor inputs in response to shocks. However, hiring costs in the Japanese banking sector have not been fully examined econometrically. (1) Therefore, our investigation may provide useful interpretations of the impact of the financial crisis on the Japanese banking sector. An important issue is how to analyze firing costs. As Hamermesh and Pfann (1996) point out, many labor adjustment costs are implicit, and their statistics are usually not available. For example, firing costs include disruptions in production that occur when hired workers spend time negotiating with fired workers. In this paper, we use a simple approach to examine firing costs in the Japanese banking sector. Our approach is based on the theory of dynamic labor demand. Labor adjustment costs--including firing costs--are parameterized in our model. This model has a theoretical foundation since it is derived as the solution to the optimization problem. Furthermore, this model is expressed as a linear regression model. Therefore, in the framework of our model, the size of labor adjustment costs is relatively easy to estimate. This paper is organized as follows: Section II explains our model. Section III describes the data. Section IV reports our findings. …
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