Dual labor market, financial fragility, and deflation in an agent-based model of the Japanese macroeconomy

The paper presents a stock-flow-consistent hybrid macro-agent-based model estimated on Japanese data to study the interdependency among the dual labor market, output, and wage dynamics. By modeling the use of secondary workers as a financial buffer for non-financial firms, the paper investigates the possible impact of uncertainty and financial fragility on inflation and the weakening of the trade off between inflation and unemployment. The paper also 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 surrogate models. The numerical results show that the elasticity of firms’ hiring choices to volatility in demand is the main behavioral factor affecting both inflation and the Phillips curve, revealing that uncertainty can have consequences also on prices and not only on real variables as already discussed by the literature. Inflation and Phillips curve are also influenced by the bargaining power of workers and by the indexation of minimum wages, while conventional monetary policy and fiscal policy have limited effects. Unconventional monetary policy can have unintended deflationary consequences, by allowing financially distressed firms, which are more likely to resort to secondary workers, to survive.