Problems with employment

The Japanese economy has now enjoyed six years of continuous growth—an expansion that the US subprime mortgage crisis threatens to bring to a halt. But the latest economic upswing has offered the typical Japanese household remarkably little to cheer about. The expansion that began in 2002 has been characterized by three striking features: First, growth in gross domestic product has been slower—whether viewed in real or nominal terms—than during previous upswings. Second, while total pretax business profits in all industries have risen continuously, from about ¥33 trillion in 2002 to around ¥58 trillion in 2006 (Ministry of Finance figures), average monthly wages have actually declined, from around ¥340,000 in 2002 to around ¥330,000 in 2006 (Ministry of Health, Labor, and Welfare figures for pretax compensation among companies with five employees or more). And the lack of income growth has naturally inhibited consumer spending as well. Third, the contribution of exports to growth in GDP has risen. In calendar year 2007, economic growth was 2.1%, and exports accounted for 1.4%, a full 67% of this expansion.

Of particular interest to us here is the lack of growth in personal income despite six straight years of economic expansion—a situation reflected in the sharp drop in labor’s share of income. According to estimates by the Japan Research Institute, labor’s average share for all Japanese businesses fell from 70% in 2002 to 64% in 2007.

There are a number of explanations for this drop. The first is that globalization is depressing wages, suggesting that something economists refer to as the "factor price equilibrium theorem" has become a reality. The emerging Chinese and Indian economies have dramatically expanded the global supply of high-quality, low-cost products in the service sector as well as in manufacturing. For the industrially advanced nations, this has meant fewer jobs and lower pay in industries hard hit by that competition.

Another explanation is that pension costs are keeping wages down in Japan. As baby boomers reach retirement age, the rising burden of retirement allowances and social insurance contributions is causing businesses’ labor costs to climb, and this also applies downward pressure on wages.

A third explanation is the rising number of temporary and part-time employees. In fact, the single biggest distinguishing feature of the recent economic expansion has been the tendency of businesses to rely on a growing complement of cheap part-time and temporary workers instead of recruiting regular employees, even while maintaining wage levels for the regular employees already on their payrolls. Between 2000 and 2007 the number of regular employees fell by about 1.9 million, while nonregular workers increased by about 4.5 million. This shift has led to an overall decline in labor’s share of income.

Each of these explanations has merit, but the last of them is most pertinent to the topic of this section. Here I would like to briefly discuss the economic disparities between regular and nonregular employees in Japan as an important key to the frustrations expressed by many young people who could not find regular jobs when they left school—the so-called lost generation.

Today nonregular employees account for more than 30% of the Japanese labor force. According to MHLW figures, there were 34.18 million regular employees in Japan at the end of 2007 (average for October–December), while nonregular employees numbered 17.38 million, or 33.7% of the total. The number of regular hires fell between 2002 and 2005, and while there were signs that regular employment was picking up in 2006, nonregular hires increased at an even more rapid rate, and as a result the latter’s share of the total continued to rise.

The use of temporary labor from staffing agencies first began to increase with the loosening of employment regulations under the 1985 Worker Dispatch Law. However, the real turning point came in 1999 with the relaxation of rules governing the temporary staffing industry. As a result of these changes the temporary staffing industry expanded rapidly: Sales hit ¥2 trillion in fiscal 2002 and subsequently grew at an annual rate of roughly ¥1 trillion to surpass ¥5 trillion in fiscal 2006. In the same year the number of temporary staffers hit 3.3 million.

According to the results of a 2005 MHLW questionnaire survey on labor supply and demand, businesses’ main motives for hiring temporary workers are to "quickly secure needed personnel to fill vacant positions, etc." and to "cut costs." The reasons employees most often give for choosing temporary work are that they "can choose the type of work" and that they "would like to be hired as a regular company employee but have not been able to find a position."

Amid these trends, labor unions and other labor advocates have argued that employment deregulation and the resulting increase in temporary staffing have fostered an ever-widening income gap in Japanese society.

Figures for 2006 from the annual Labor Force Survey carried out by the Ministry of Internal Affairs and Communications reveal that while the income distribution for regular employees peaks in the ¥3 million to ¥7 million range, the peak distribution for part-time or seasonal employees was only ¥1 million. That for temporary staff and contract employees was about ¥2 million. The wage differential is especially glaring for men: In 2005, hourly pay for regular male employees was about twice that for nonregular male employees on average. In corporations one sees an emerging pattern of conflict between the regular employees, who have taken on the character of a vested interest, and the exploited temporary employees.

Some have argued that, since the growing gap between regular and nonregular workers is a consequence of deregulation, the solution is to tighten regulation again and target the Worker Dispatch Law more narrowly. However, this would only deprive nonregular employees of job opportunities. Others argue that the best way to improve the conditions of nonregular workers is to reconsider the treatment traditionally enjoyed by regular employees.

The long hiring slump popularly known in Japan as the "employment ice age" spanned the period from 1994 to 2004. Many of those who completed their education and entered the labor market during this period were unable to find permanent, regular positions and ended up joining the growing ranks of furîtâ, or "freeters," young people making their living as temporary or part-time workers. The members of this cohort, now between 26 and 36 years of age, are now sometimes called the "lost generation." The plight and the mind-set of this age group is the focus of the two articles in this section.

Now that the overall employment picture has improved, many of these people have begun seeking regular employment as midcareer hires. However, while a few succeed in landing such positions, most Japanese corporations are heavily biased toward young recruits fresh out of school. According to the above-mentioned Labor Force Survey, the ranks of freeters in the 15–24 age group fell by 240,000 between 2003 and 2006, from 1,190,000 to 950,000. In the 25–34 age group, however, the number declined by only 60,000 during the same period, from around 980,000 to approximately 920,000. Also during that time, the ratio of regular employees to the total rose by 1.1 percentage points among the 15–24 crowd while dropping by 0.7 points among people between 25 and 34 years of age. This tells us that despite the overall improvement in job conditions, the members of the lost generation are continuing to get the short end of the stick in terms of securing regular employment.

A few companies, however, are working proactively to put the human resources of the lost generation to work. In April 2007, the casual-clothing firm Uniqlo instituted a system for upgrading nonregular employees to "regional regular employees" (regular employees who are not subject to transfer). Under this system, about 2,000 nonregular employees have secured regular status.

The lost generation is not the only underutilized group in Japanese society; the elderly represent another "sleeping workforce" within the population. With Japan’s falling fertility rate setting the stage for an acute labor shortage in the years to come, the nation needs creative employment solutions that cut labor costs while offering workers a wider choice of work styles and employment patterns. The current legal framework for employment and labor is showing signs of system fatigue. One possibility for reform would be to legislate equal pay for equal work. The gap between regular and nonregular employees should be approached within the context of the larger structural problems afflicting the Japanese employment system. (Nariai Osamu, Professor, Reitaku University)

© 2008 Japan Echo Inc.