Dual labor market, inflation, and aggregate demand in an agent-based model of the Japanese macroeconomy

This paper presents a stock-flow-consistent agent-based model calibrated on Japanese
data. The goal is to investigate the effects on the joint dynamics aggregate demand and
price of the use by Japanese firms of secondary employees (temporary, part-time, or
agency). Empirical evidence point to financial distress and market uncertainty as factors
affecting firms' hiring decisions, but their connections with inflation and its sensitivity to
employment and output are still under-investigated. In particular, the hiring of secondary
workers with lower wages can result in sluggish inflation even during boom periods. The
paper aims to provide three main contributions. The first is to identify and test a possible
cause of deflation, which is related to firm-level financial distress and uncertain business
environment. The study of firms' hiring policies can also shed light on the modifications
in the relationship between wage and employment dynamics testified by the flattening of
the Phillips curve. The second contribution is the analysis of a range of possible
countervailing policies, alternative or complementary to the conventional interest rate
policy pursued by the monetary authority. Finally, the paper contributes to the recent
developments in the estimation of agent-based models by presenting an original
technique, which relies on the identification and optimization of meta-models. The
numerical results of the model are quantitatively comparable to the main features of the
Japanese economy in the last twenty years. The flattening of the Phillips curve appears
to be mostly due to the use of secondary employment as a buffer to reduce financial
distress in an uncertain business climate. In terms of policy indications, a strong
indexation of minimum wage emerges as the most effective policy to increase inflation.
The sensitivity analysis also sheds light on possible reasons why monetary policy may
have uncertain effects on inflation.