The Changing Reality of the
Japanese-Style Employment System

by Yasuko Niimura

For the past five years, the Japanese economy has endured one of the worst and most prolonged recessions in its postwar history. From 1991 to 1995, its average growth rate dropped to just 1%, down dramatically from the 4% rate during the 1980s. Signs of recovery still remain modest in 1996.

The protraction of this recession is a result of the reaction to the excesses of the "bubble" economy of the late 1980s. Though this cyclic factor is important, serious structural factors were also at work in the background, including the collapse of the myth of ever-rising land prices, long held as a given in Japan, and the primary cause of the bad debt problems of many Japanese financial institutions.

Under these conditions, unemployment in May of this year reached record high of 3.5%. Employment opportunities for new graduates are currently very limited, particularly for female graduates (pundits have dubbed it "the ice age"). The increase rate of wages, negotiated between employees and labor unions during the "spring labor offensive," has dropped every year for the past five years. It is feared that anxiety about future income may influence personal consumption. Fortunately, no serious social unrest has erupted as a result of these severe employment conditions.

Unemployment is now a hot issue in many advanced economies. Recent rates in Europe have been very high: 7.8% in the UK, 10.3% in Germany, and 11.9% in France as of March of this year. The OECD's 1994 Jobs Study cites high, non-wage personnel costs like fringe benefits and a shortened workday as sources of these high rates. Unemployment is now higher than average among the younger generation, and has led to serious social unrest in Europe.

Since 1994, employment in the United States has increased: in April of this year, the unemployment rate hit a historical low of just 5.4%. Wages remain stable, and unit labor costs remain at excellent levels. The problem in the US labor market is the widening disparity in household earnings.

In contrast, Japan's employment situation has performed better. Although current unemployment is at a historical high of 3.5%, it is still much lower than in other advanced industrial countries. Moreover, earnings inequality among income strata is declining. The social unrest that might arise under severe unemployment conditions is far less serious in Japan, but the labor market problem is a different story, and may be as serious as it is in Europe and the United States.

Japan's employment and management systems are often praised for maintaining low unemployment rates and ensuring stable employment. There are few objections to Japan's management system in terms of sheer economic performance. It was this system that secured stable employment during the postwar rapid-growth period and supported growth of the corporations. While these methods may have been economically rational, they created various stresses, including long working hours, company people highly dependent on corporations, the tendency of young people to be in favor of large corporations, and an education system that will to satisfy their requirements.

In general, Japan's employment structure may be characterized by a seniority wage system, in-house unions, a lifetime employment system, collective employment of new graduates, and on-the-job training. The system also supports job rotation within the company, with the aim of creating nonspecialist, all-purpose employees.

These Japanese-style structures were established under and supported by the rapid growth of corporations, by a few highly educated people, by the existence of full-time housewives who assumed the responsibilities of the entire household, by the large number of self-employed people, and by the small and mid-sized companies that characterized postwar Japanese society.

Strong Yen, High-cost Economy

Fifty years have passed since the end of World War II, and these conditions have changed. The elderly comprise an ever-increasing share of the population, and women continue to have fewer children. Moreover, economic growth rates have dropped with rises in income; this, in turn, has dampened overall business opportunities. More and more young people are attending universities and colleges, and the employment rate of women is increasing partly as a result of the Equal Employment Opportunity Law between Men and Women. This means that the number of career workersé—which formerly consisted mostly of a rather small number of male graduatesé—is increasing dramatically. Moreover, the number of full-time housewives is decreasing; the idea of a household that, in the past, had been a place to support corporate warriors after their battles, is changing significantly. Furthermore, changes in the industrial structure have brought about a decrease in the number of self-employed people; as a result, most people became, in substance, salaried workers for life.

Under these conditions, a more distinct change is taking place: the changing consciousness of (especially) young people. In the past, men were considered the main working force in a family. Many people é—especially the younger generationsé—now give equal importance to jobs and leisure. Priority is being placed on free time; extended overtime work is being avoided. A life entirely devoted to the good of the company is being challenged by a tendency toward work that is based on and compensated by ability. Young people are less reluctant to change jobs. This shifting consciousness is also influencing employer loyalty.

The increase of working women is another important factor contributing to these changes. Their consciousness toward jobs is changing from a supplement to the household income to something more: a measure to become independent and self-accomplished. More women with small children continue to work. This tendency makes it difficult to preserve the work style of the past, heretofore supported by full-time housewives.

Corporate strategies, designed under the premise that rapid economic growth will continue, are now forced to reform. When Japan was "catching up" with the advanced economies, it succeeded in achieving development through transforming and reforming businesses, largely by measures that had already been taken in Europe and the United States. The Japanese economy can no longer grow according to this model; it has inexorably "caught up," and has set out on a road with few markers. Creative personnel are also now necessary in Japan. Workers who were promoted by mastering in-house information through in-house education are not necessarily suitable for creating and developing new business opportunities.

In the past, Japanese corporations could have advanced into new sectors while preserving the existing sectors. However, because of the drop in overall growth, it became impossible for them to advance into new sectors unless the unprofitable sectors were reduced as a countermeasure. It also demanded that the workers be knowledgeable about issues concerning completely different specialties. Technologies are changing at lightning speed, and it is difficult to adapt to these drastic changes simply by in-house education or job rotations; the domestic labor market does not function well under these conditions. Under the seniority wage system, the increase of middle-aged and elderly workers and the decrease of young workers will result in an increased average wage and thus bring on higher labor costs.

The economic power of the Asian NIEs has transformed Japan's position from a nation that follows to a nation that is followed. For Japan, winning the competition against Europe and the United States with low wages is no longer an option: it is now suffering from a decline in international competitive power due to the high labor costs caused by the rise of income. These changing conditions have forced Japan to reexamine its high-cost character. They are also pressing Japan to reform its employment system.

Mobilization of the Japanese-Style Employment System

So far, the socioeconomic institutions and customs surrounding employment have been based on the Japanese-style employment system, described above. They have also maintained and reinforced it. These social systems are composed of the retirement allowance system, which heavily depends on the seniority system and its preferential tax credits; corporate benefits; welfare programs, which cover housing, leisure, and the taxation system to support them; spouse allowances; the pension and health insurance systems, which offer preferential treatment to full-time housewives, and marital tax exemptions. These institutions and customs have worked to promote economic growth.

At present, with more than half the married women in Japan working, many have a strong sense of inequality toward such traditional systems. In addition, these systems often conflict with the desire to have a career; women are often forced to stop working because of childbirth and child care. A gap also exists between contemporary values of young people and corporate welfare programs.

To survive in this rather severe postbubble situation amid stagnant domestic demand, a decrease in exports, and an increase of imports, Japanese corporations have finally started reforming traditional practices concerning employment. These reforms include the introduction of an annual salary system, the abolition of a regular annual raise in the basic wage rate, the reduction of simultaneous recruiting of new graduates, and the increase of mid-career hiring. According to a survey on corporate activities conducted by the Economic Planning Agency in January 1996, 90% of the listed companies felt a need to reduce labor costs. To this end, nearly half the companies answered that, in the future, they will review the wage system based on seniority. They also listed deemphasizing the recruitment of new graduates, the reduction of overtime work, and the restraint of a raise in the basic wage rate as necessary steps to be taken.

Concerning the education system, the Federation of Economic Organizations published a proposal in March this year that emphasized the importance of corporate initiatives, along with the traditional request of fostering creative people. The proposal also stressed the development of an open employment system that welcomes people with various talents, the clarification of human resources wanted by each company, the appropriate evaluation of talent in employment, a shift to recruitment throughout the year, an increase of mid-career hiring, a multitrack employment system, and ability evaluations. This proposal at least partially shows the sense of crisis that many Japanese companies feel.

A New Employment System

Under the pressure of a rapidly aging society and a decreasing population, the Japanese economy must continue to grow if living standards are to remain affluent and comfortable. To this end, it is necessary to create a socioeconomic system in which people can fully use their talents and entrepreneurship. It is also necessary to increase the employment of female and senior workers, and to establish an employment system in which these people can be productive. Moreover, companies will be required to place their human resources more appropriately.

The traditional labor market is not enough to satisfy these demands; an external labor market for white-collar workers and executives is also required. Other necessary reforms include making company pensions and retirement allowance systems portable, reviewing tax incentive benefits, assessing welfare programs, abolishing simultaneous recruitment of new graduates, treating newly hired mid-career workers appropriately, and creating personnel rating and wage systems that reflect the abilities of employees. Workers need to invest in themselves to acquire skills the market demands. They can no longer depend on in-house training to develop their abilities. Through efforts like these Japan can avoid the employment problems faced by Europe and the United States.

Yasuko Niimura is Chief Economist at the Sumitomo-Life Research Institute in Tokyo.