Looking beyond work-style reform

Professor Munetomo Ando, Nihon University

First published by The Japan Times

Enactment of the government’s work-style reform legislation by the Diet in June heralds the start of labor reform. The bill is part of a wider work-style action plan that includes measures encouraging people to design their own careers, redirect human capital to where it is best used and revitalize Japan’s economy.

What are the unintended consequences of rising workforce mobility? Labor economist Munetomo Ando, a professor at Nihon University, helps answer the question.

Few people realize that today’s inflexible markets result from severe labor shortages existing in postwar Japan, Ando explains. The unemployment rate during the 1960s was well below today’s 2.4 percent, reaching a record low of 1 percent in November 1968. To attract and keep staff, firms offered school-leavers lifelong jobs. Young inexperienced workers landed jobs that provided training, while skilled workers enjoyed job security they craved. Unemployment fell to low rates compared with other OECD nations.

Most workers were happy, but they worked extra hard. In exchange for job security, firms demanded higher loyalty from employees than is typically required elsewhere. Then as now, salarymen must do the jobs Japanese firms decide, in the locations they choose and at times they determine. Sometimes, workers must transfer to offices in far-flung cities without their spouses or children. They are expected to put in long hours, as in the much-cited case of the 24-year-old Dentsu Inc. employee who committed suicide on Christmas Day in 2015, after working more than 100 hours of overtime a month before suffering from depression.

Talented salarymen are also underpaid compared with their peers working at non-Japanese companies. Under the seniority-based wage system, recruits hired from each batch of school-leavers are promoted together once yearly during their first 15 years or so at the firm. Early in their careers, when workers are gaining productive skills through on-the-job training, marginal contribution is negative. Between the ages of 30 to 50, marginal contribution is high, but wages are low compared with global standards. The difference between what productive workers contribute and what they earn is deferred compensation.

Productive workers want to earn the same amounts as their peers in other countries, but they cannot. The only way to earn the deferred amounts is to remain employed by their current company through retirement. Those who want greater opportunities have few good alternatives.

Firms rarely hire full-time experienced staff from other companies. A two-tiered employment system — one for regular employees and a second for nonregular workers lacking the same pay, learning opportunities and job security — prevents regular workers from easily changing employers. Japan’s labor market is like a two-floored house. Descend from regular into nonregular employment, perhaps to care for an elderly parent, and it becomes almost impossible to get another regular job.

Today, big firms under pressure to raise short-term performance by any means have broken from tradition to employ increasing numbers of nonregular staff. They struggle to compete against non-Japanese firms already operating in more flexible labor markets. The most profitable fast-track small numbers of top talent — often young graduates from tech schools versed in the latest technologies — into leadership roles at innovative firms like Google, Facebook and Amazon. When managers don’t perform to expectation, they are fired. Meanwhile, large Japanese firms continue to hire each new crop of school-leavers without knowing how they will later perform. Once employed, they cannot easily terminate under-performers, as job reinstatement remains the primary remedy for dismissal in Japan.

Almost 40 percent of Japanese workers are nonregular employees. Not all hold dead-end low-paying manual jobs. Some are highly qualified and highly paid consultants working on specialized short-term assignments. Others prefer part-time jobs because they have babies to attend to. It’s a diverse group. Perhaps 14 percent of all nonregular workers hold involuntary jobs they do not prefer to but need to survive. Importantly, students can no longer count on landing a regular job on graduation. Many wonder if they will ever be able to get one or to earn enough money to raise a family.

Policymakers aim to correct any existing injustices by removing gaps in working conditions between regular and nonregular workers through work-style reform. Reform measures include “equal pay for equal work,” a regulatory limit on overtime and a flexible work-style policy to encourage women, the young, the elderly and foreign workers to join the workforce. More measures are necessary. As a next step, workers need recourse beyond job reinstatement when their employers dismiss them, says Ando. Current Japanese law does not include the concept of severance pay. “That has to change,” he says.

What would happen if labor mobility reached Western levels? Underpaid productive workers would likely find higher paying jobs elsewhere. Firms would cut back employing unproductive older workers, either by firing them or forcing them to take pay cuts. Youth unemployment would also rise as firms shift to hiring experienced workers instead of school-leavers. How high unemployment levels might reach depends on the future employment practices that firms adopt.

Youth unemployment is roughly 4 percent in Japan, 9 percent in the United States and 19 percent in Europe. If Japan were to allow firms to dismiss workers in return for large severance payments as in Europe, this author believes youth unemployment could rise to painfully high levels.

Much also depends on the impact of future jobs automation. Experts believe almost half of all jobs could be lost through office automation within two decades. Workers in future buggy-whip industries — for example, taxi drivers whose jobs will likely be replaced by autonomous vehicles — could have difficulties finding new jobs as they lack 21st century skill sets. Re-skilling the technologically unemployed for tomorrow’s jobs may consume more time and money than they can personally afford. It is doubtful Japan’s heavily indebted government can significantly help those unable to help themselves. It has neither the budget nor historical inclination to provide a robust unemployment social safety net.

Some experts argue this is not a problem. Firms will rehire, retain and retrain the technologically unemployed because labor will be scarce. Japan is projected to lose one-third of its workforce by 2065 because of demographics. Already employers complain they cannot find skilled workers to fill available jobs. Other experts, Ando included, disagree. “Those people who believe that labor shortage caused by a shrinking workforce will address technological unemployment are wrong,” he says.

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