Japan Government: On the Fall of the Employment System

A think tank for Japan's Cabinet, the Economic and Social Research Institute (内閣府 経済社会総合研究所) (ESRI) published a study that quantified the present status of lifetime employment and seniority-based wage (i.e. the Japanese employment system). They used the data (1989-2008) from Basic Survey on Wage Structure (賃金構造基本統計調査) (BSWS) of the Ministry of Health, Labour and Welfare. The empirical results and commentary indicate a rare rebuke of the traditional employment system by the Government.

The study is published here.

One of the results that they quantified was the “wage curve.” This is basically standardized median wages of workers according to the their age. ESRI showed that the wage curve “flattens out” gradually with time. This indicates that when young workers sacrifice some pay for a stable lifestyle in the future, they do not get as much value in the current state of affairs. The following is the graph: (please click to enlarge!)


Now the second result comes from data of the share of lifetime workers for a company. The data shows a significant declining trend in young lifetime workers. This indicates lower retention rates of young workers and older workers staying in their old jobs since it is too risky to find another job. In particular, we see a large dip at year 2004 for the large firms, as that was the year the Government made it possible to use temp. workers in the manufacturing industry. This indicates that the continuance of the status quo may be unsustainable. The following is the graph: (please click to enlarge!)


Blogger, author and business consultant Jo Shigeyuki thinks it is significant that the Government finally admitted to the “collapse” (崩壊) of Japan's employment system. But he is also disgusted with the apathy and the patchwork solutions (like a cap on temp. workers) shown in an attempt to fix the system. Below he warns against a possible misunderstanding of ESRI's results:




By looking at the wage curve, I sometimes hear labor union folks say, “middle-to-old age employee wages are being cut,” but it's more accurate to describe them by saying that they got away in time. In the 90's, the former young workers worked hard only to arrive at a 30% cut relative to their seniors, 20 years later. [meaning, at least it was only a wage cut, instead of no jobs available]

After the bubble burst, if the former young workers were able to adapt to a system that is based more on performance, their lifetime wages may have been better. But it is only the responsibility of those who didn't take the initiative to build a better system for themselves.

Now that there is a whole generation[s] of workers who experienced the degeneration of Japan's employment system, the current 20-somethings need to be careful not to fall into the same trap. So I recommend people to change or get ready to change jobs with an organization that value work.


Blogger, economist Ikeda Nobuo hypothesizes about the reason the Japanese people in general have a tendency to avert risk instead of hedging. The Japanese employment system was just a product of corporations that value stability:




My hypothesis [for Japan's risk-averse tendencies] is that post-17th Century, Japan didn't have a system of limited responsibility like the joint-stock corporations. I believe the biggest factor that brought modern capitalism success were the joint-stock corporations.

In the West, shares of a stock were criticized as methods of speculation, and a cause for bubbles and  financial panics. But when Karl Marx criticized capitalism, stock corporations were highly praised as a system for socializing the production process. Therefore, the risk was spread all over society as a key for unprecedented growth in the West.

However in Japan, joint-stock corporations were seen as brands and the commodity prices were looked at as tools for speculation; before the war, 90% of commodities were futures and the risk was very high. The shares of corporations weren't seen as tools for risk diversification and the companies held an infinite responsibility as they would kill themselves if something went wrong. For households, the only option was to hold extremely high risk stocks or no risk savings, so most of them chose the latter.

Blogger and MIT MBA student, Lilac reminds us of America a couple decades ago also faced similar problems of lowered competitiveness of certain firms (Kodak, Motorola, RCA). She ponders if it is better for large firms to reform itself or to collapse and start from scratch:




[on the collapse of Kodak, etc.] It's not that the management did not understand technology or that the engineers were impotent. A mistake in steering the firm in the wrong direction results in a huge loss in the efforts of the engineers and researchers. Altering and reforming large firms and then adapting to new technologies is exceedingly difficult.

It's not necessarily the case that better ideas and technology wins. The American firms have painfully learned a lesson from striving Japanese and European firms.

For Japanese firms to follow the path of Kodak et al. or the companies that successfully adapted to the conditions (GE, IBM), it all depends on a few decisions from the top that make or break a firm.

Blogger, IT worker elm200 proposes (facetiously) a solution that won't disrupt the vested interests that keep the status quo in Japan — to create an independent city that is the antithesis of the job conditions in Japan:




In essence, this country has tons of people who prefer the status quo. If they're the majority, why would it be necessary to reform the system? Even if a section of the youth tries to disturb the process, the majority (middle, old workers) is satisfied with the current state, so the best option is to leave them be.

Because we're letting them be, it shouldn't be too bothersome of us to have just one selfish request. It won't touch upon the vested interests so the cynical old timers shouldn't have anything to say.

Let's build a Singapore in Japan.

Japan is in a gridlock. To reform the employment process, many people propose higher job mobility, which feeds entrepreneurism. Conversely, entrepreneurism is a decent indicator of job mobility. I wrote an article recently on entrepreneurship rates in Japan and found that it is very low relative to other countries.

Two interesting series that discuss the perils of employment currently in the media:

  1. Nikkei Business: “Cancelled job offers – This is why I was tricked” (「内定取消」-だから私は騙された)
  2. J-cast: “To you, who is 29 years old and working. It's not too late!” (29歳の働く君へ〜いまからでも遅くない!)


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