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Reforming Japan’s dual labour market

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Workers inspect a wall at a construction site in central Tokyo, Japan, 18 March 18 2016 (Photo: Reuters/Thomas Peter)

In Brief

The labour market duality between regular and irregular workers has been deepening in Japan. The number of non-regular workers, including part-time, temporary and contract workers, has increased significantly in the last three decades. In 1984, irregular employees accounted for about 15 per cent of all employees.


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This has now increased to nearly 40 per cent. While irregular employment has the merit of being more flexible than regular employment, about 20 per cent of irregular workers in Japan report that they would prefer a regular or full-time position.

There is a large gap in wages and job stability between irregular and regular employees. According to government statistics in 2015, the average wage for irregular workers remains only about 60 per cent of that of regular employees. This is lower than in European countries where non-regular workers get paid about 80 per cent of regular workers’ wages. In addition, irregular employees are disadvantaged relative to full-time employees in terms of employee benefit programs and education and training opportunities.

In order to improve the conditions of irregular employment, the Abe administration compiled a set of guidelines to ensure that irregular workers receive the same base pay as regular workers for the same work.

Currently, labour remunerations and conditions are determined not based on the achievement or quality of the labour services but on the status of workers. Under the seniority-based wage system, a worker’s wage increases with each year of consecutive employment, so workers’ wages and productivity tend to deviate toward the end of their career.

Japan should introduce the principle of ‘equal pay for equal work’ into the labour market. If this principle is realised then wages and workers’ productivity will be directly linked, which would make it easier for companies to hire new employees. Introducing the principle of ‘equal pay for equal work’ may reduce the gap between wages and productivity among elderly workers and encourage companies to better utilise the elderly labour force. This will be crucial for Japan going forward as the labour force is declining due to the low birth rate and ageing population.

But introducing the principle of ‘equal pay for equal work’ will be challenging for Japan. Achieving this principle will require employers to evaluate labour services objectively and fairly. Changing the way employers evaluate labour services will create costs for both employers and employees. Labour services are diverse and evaluating workers is not always straightforward, especially in the service industry. Therefore, it is appreciated that the government sets the guidelines and shows the future direction.

The government should avoid regulations that force companies to reduce the gap between irregular and regular employees by improving the conditions for irregular employees. This is because if the government tries to protect irregular workers in unstable employment conditions, it may conversely harm these workers’ future employment prospects by reducing the incentives for companies to hire them.

The increase in irregular employment over the past 30 years is a result of companies’ rational behaviour. In response to the long-term stagnation of Japan’s economy, companies have shifted towards an irregular employment model to reduce labour costs and deal with uncertainty regarding future demand for their products. If the government simply forces companies to pay irregular employees the same wages as regular employees, it may increase labour costs and end up reducing opportunities for irregular employment.

The deepening of the labour market duality is a result of Japan’s dysfunctional employment practices, particularly the life-long employment and seniority-based wages systems. Japanese employment practices were established, and prevailed, thanks to rapid economic growth and a large young population in the 1960s and 1970s. In that period, the model worked well and contributed to low unemployment and sustained economic growth. But it stopped working due to the prolonged recession, the declining birth rate and the ageing population in the following decades. Companies therefore shifted their hiring practices towards irregular employees who are relatively inexpensive and can be hired and fired easily.

Drastic labour market reforms are needed to improve conditions for irregular workers. Japan must construct a flexible labour market where workers are able to change jobs smoothly. In a flexible labour market, labour resources are allocated efficiently, employers are better able to secure the right person for the right position and wages are determined in the market according to workers’ productivity. Enhancing flexibility in the labour market benefits workers.

As the population greys, Japan needs to better utilise the scarce labour force and raise its productivity. This will require better accommodating the varied needs and career choices of workers and moving towards a merit-based wage system. Japan should further expand the safety net for workers and develop labour market policies that support personal career formation and improve work–life balance. The government could considers improved matching between employers and employees by enhancing employment information and introducing tax incentives to encourage self-development. It also would be necessary to set explicit rules surrounding dismissal.

The Abe administration should take advantage of its strong political position and tackle drastic labour market reforms. Japan must build a labour market that suits the current economic environment so that all workers can have a sense of security and hope for the future.

Hiroaki Miyamoto is Associate Professor at the Graduate School of Public Policy, The University of Tokyo.

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