The more things change….?

In preparing for a class on the Japanese economy, I came across a series of articles written in The Economist in 1962 and published the following year as a small book called Consider Japan. Much has obviously changed in the intervening 55 years since its publication–see, e.g., questions about why Japan was not developing an auto industry, or relief that the country’s birth rate had begun to decline. But it is notable how much still strikes a chord.

The book’s discussion of the Japanese labor market remains especially relevant. “The ambition of every young Japanese is to be taken on as a ‘regular worker’ in a reliable firm straight after leaving full-time education…Once taken on, he is set for life…In return he is expected never to leave for a rival firm.” The combination of promised lifetime employment together with a seniority-based wage structure and a focus on building firm-specific skills–meant that “Japanese employers are extraordinarily unwilling to take on new workers after the age of 30.”

Much of this remains true. Average tenure in Japanese firms, some 14 years, remains extremely high by international standards, and the typical regular worker still changes jobs less than once in their lifetime. (Instead, job mobility is internal, with employees changing departments and job descriptions frequently, in some cases annually.)

Is this a problem? While job security and employee loyalty can have important benefits, the idiosyncrasies of the Japanese labor market may be acting as a constraint on the potential effectiveness of Abenomics. In particular, an initial rise in inflation, resulting from both Bank of Japan policies and a hike in the consumption tax rate, have not led to fully offsetting hikes in nominal wages, contributing in turn to a subsequent slowing in demand and a move back toward deflation.

Declining real wages have co-existed with a tight labor market, with unemployment of just 3 percent and a favorable ratio of job openings to applicants. The lack of competition between firms for their best workers is one important reason. Another important factor is rapid growth (since the Koizumi labor market reforms of the mid-2000s) in the share of non-regular workers in the economy. Such workers now make up some 40 percent of the workforce, and they earn lower wages, have less job security  and receive less on-the-job training. The continued shift in the composition of the labor force toward non-regular and part-time workers has tended to drag down the average real wage.

All this suggests that labor market reforms would be key to a more durable take-off in Japan. However, designing reforms to address the key problems may not be so easy. In particular, ending the system of seniority-based promotions and salaries that supports a less-than-dynamic labor market may not be primarily a matter for public policy, but one of changing social norms. Perhaps the government’s role here can be more as a laboratory for better labor policies with its own workers.

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