Throughout the 1990s, and particularly in the mid- to late-1990s, the Japanese employment
situation went from bad to worse. We investigate the causes of rising unemployment
in Japan, using data on individual workers from the Special Survey of the Labor Force
between 1988 and 1999. This research focuses on the effect of labor market segmentation
by industry on labor flows. Our findings reveal that unemployment in the construction
industry and, more recently, in the service industry has contributed greatly to the
national unemployment rate. We also find that most successful job transfers occur
within the same industry, even though workers may experience some periods of unemployment.
Finally, our results show that labor market conditions in each industry affect the
probability that a worker will fall into unemployment as well as the probability
that an unemployed worker will find new employment. These findings suggest that the
Japanese labor market is segmented by industry and this segmentation contributed
to the worsening unemployment in Japan.