Is Japan ready for ‘equal pay for equal work’?

New! First published by Toyo Keizai

‘Equal pay for equal work’ is scheduled to be introduced by government in fiscal 2019. Will Japanese embrace it? Keio University Professor Shigeo Kashiwagi isn’t sure. He teaches economic policy and international finance at Keio Graduate School of Business and Commerce. Previously, the Princeton educated professor worked at the Ministry of Finance for 34 years. Labor reform is needed if Japan is going to compete in a world that is speedier, more global and innovative.

To highlight the problem, Japan lags in the race to develop artificial intelligence. One reason is that middle-aged managers drive AI innovation, rather than tech-savvy new graduates as in other countries. Under Japan’s seniority based system, the potential of youth gets squandered in kenshu (long period of training). A more flexible and meritocratic labor system holds the promise to unshackle Japan’s human capital, by reallocating workers to jobs they do best.

Prof. Shigeo Kashiwagi, Keio University

Some scholars believe that Japanese will readily accept labor reforms. Seventy years ago Japan was a meritocracy. Productive workers earned more. The slothful and uneducated were treated as an underclass. Entrepreneurship thrived. People accepted inequality as the norm.

That changed when democracy was introduced after WWII. The Imperial family, previously treated as Gods, became human. Noble families and Zaibatsu (family controlled monopolies) were abolished. The idea that people should be treated equally spread. Then, Japan needed to rebuild itself. Manufacturers required an army of workers who obeyed instructions and did not think creatively, to man their expanding assembly lines.

Schools obliged. They taught students to memorize correct answers. Those who answered or acted differently were punished. Everybody was required to do everything in the same way, even wear the same style clothing. The postwar education system, which produced quiet and obedient graduates, hasn’t changed much. “Most school education is still conducted this way,” says Kashiwagi.

Today, big corporations aren’t much interested in what students learn at universities, because they plan to train them. The courses taken, skills acquired, and grades received are not considered relevant. The typical personnel manager is interested only in knowing whether a job candidate was accepted into a respected university, suggesting a student is a fast learner with good memory. Extracurricular activities are also important, as they reflect good social skills

Good behavior results in obedient students getting good grades and secure jobs at prestigious companies. New hires are promoted in the same manner along with their classmates. “Basically, everybody gets the same wages. ‘Equal pay for equal work’ doesn’t exist. What exists is equal pay among classmates, regardless of performance,” says Kashiwagi.

Explaining the phenomena, Kashiwagi argues that Japanese compete to conform. High school students compete to get into good schools. Once accepted, everyone is on the same footing. Nobody wants to stand out. Students go on to compete for the status of a good job at a reputable company. Once employed, they are happy to receive the same promotion as their classmates for much of the way up to the top. There is no need to compete against each other, as classmates get the same pay regardless of performance for much of their careers.

In the US, a better performing employee from the same graduating class might receive a 100% pay increase, while his peer receives none. “Here that’s unthinkable,” says Kashiwagi. In Japan, there is a belief that people within the same group should be treated equally. Gaining social acceptance by conforming takes precedence over showing off one’s individual skills and abilities. “That mentality needs to change,” he says. “Whether Japan’s collective orientation will allow for that is another matter.”

How did Japan’s collective orientation arise? Japan is a small Far East island nation that is relatively isolated from the rest of the world. Its homogeneous people are subject to recurring natural disasters, but not to foreign invasions. Historically, communities fought one another, but being of the same origins they lived in comparative peace. Elsewhere, conquerors imposed their culture onto other nations, only to find their own absorbed or obliterated by subsequent victors. Left undisturbed, Japan evolved with its cultural roots intact. A sense of community developed over the millennia. “When disaster strikes, Japanese unite. There is an instinct to cooperate. Everyone does their job within the community to overcome the difficulty,” notes Kashiwagi. “It’s not something the Emperor or noble leaders have asked or ordered us to do. It’s built into our culture.”

Today, Japan faces an external threat against speedier, more innovative and global Western firms. Labor reform, designed to raise competitiveness, is likely to disrupt existing social harmony. Workers who have earned promotions over the years based on age and not ability will lose out under labor reforms, unless their vested labor rights are ‘grandfathered’. However, grandfathering disadvantages new hires. As the social contract between employer and employee gets redrafted, the nation must ask itself, “Which is more important: Global competitiveness or social stability?”

Kashiwagi compares modern day Japan to the isolated farming village portrayed in Kurosawa’s movie, ‘The Seven Samurai’. In the movie, poor but content farmers face crisis in 1586 when they learn heavily armed bandits plan to steal their crops. There is no organized government to protect them. The farmers have at most a wise elder to turn to for advice. They decide to protect themselves. Some are sent to a nearby village to hire out-of-work samurai. Seven samurai agree to take up the challenge. Some die trying. In the end, the rural villagers return to living their poor but peaceful farm life.

Today’s Japan can no longer live isolated with a much reduced GDP, like the village in the movie. Before the proverbial frog gets cooked, Kashiwagi suggests, “There is an urgent need to strike a better balance between competitiveness and stability.”

We believe Japan will eventually regain that balance. The nation can make rapid changes. It has done so in the past and will do so again. We hope that many kinder aspects of Japan’s inclusive form of capitalism will be retained. Ultimately, the trade-offs between competitiveness and stability are for the Japanese people to decide.

It is unclear when or how a new balance will be struck. For two decades, Japan has experienced a deflationary and lackluster economy during which the national debt has soared. Nobody wants to face the reality that Japanese live beyond their means.

Those with vested interests are content with the status quo. Senior citizens are especially happy. They own two-thirds of household net financial assets, while younger people aged 40 and below own only 2.5%. They represent 44% of the voting majority, while those in their 20s hold just 13%. Why should the elderly willingly give up their pensions, currently paid for by those of working age? Why too should full-time workers with vested rights willingly negate them? They will not—unless the common good of doing so is staring them in the face. Until then, disadvantaged groups with little bargaining power suffer quietly, in a nation divided by age and wealth.

Without the overwhelming support of all people, government will likely continue to kick the reform can down the road, as it has so far done under Abenomics. Piecemeal compromise reform measures which fail to offer comprehensive solutions will likely arrive too little and too late. Should that be the case, ‘Equal pay for equal work’ will turn out to be another good-intentioned reform policy that fails to hit its mark.

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