Chapter 8: the japanese labor market (Written 1989; Revised 2006) Introduction

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Chapter 8: THE JAPANESE LABOR MARKET (Written 1989; Revised 2006)
Many people have argued that there is a unique system of industrial relations in Japan and that this system contributed greatly to Japan’s high rates of economic growth. Chapter 8 will consider this argument by examining the various aspects of Japan’s system of industrial relations. We will compare the Japanese system of industrial relations with that of the United States. The first section will consider “seniority wages”, whereby male workers in large companies receive regular increases in wages as their tenure with the company increases. We will evaluate the relative importance of seniority and merit in the determination of a worker’s pay. And we will consider the relation of the seniority wage system to the ways work is organized in Japanese large companies. The second section will analyze arguments concerning the existence of a dual labor market in Japan. The argument is that Japanese “regular” workers obtain “seniority wages” and “permanent employment” at the expense of other workers, particularly those in small companies. We will evaluate this argument. We will also consider the labor market for small companies and the labor market for women. The third section will discuss “permanent employment”, meaning that a worker begins employment with a company directly after completing school and expects to continue employment with that same company until a mandatory retirement age of 60. We will determine to what extent this exists in Japan. We will also evaluate the labor market for older males as well as the responses of Japanese corporations to recessions. The fourth section will discuss enterprise unions, meaning that the unit that collectively bargains with the management is restricted to all workers who work in the enterprise. We will examine the structure of Japanese unions, the way that collective bargaining takes place in Japan, the role of joint labor-management consultation and quality circles, and the effects of Japanese unions on wages. We will also evaluate the ability of Japanese unions to represent their workers effectively. The fifth section will discuss the argument that the Japanese system of industrial relations enhances flexibility in both wages and hours worked. This flexibility allows Japan to maintain low unemployment rates. In all the sections, we will evaluate how well the Japanese system of industrial relations adapted to the economic slowdown that has existed since 1990. The last section will present a summary of the basic points and some conclusions.
(1) Seniority Wages
For Japanese male blue-collar workers, real wages (adjusted for inflation) rise continuously as the worker ages until peaking at about age 50. Having real wages increase as one gets older is known as “seniority wages”. And in Japanese companies, the growth of wages between the beginning of employment and the year of peak earnings is greater than in similar American companies. In contrast, for American and European blue-collar workers, real wages peak in one’s thirties. The rise of wages of Japanese blue-collar male workers over their lifetimes is similar to that found for white-collar workers in the United States or Europe. But real wages for blue collar workers decline after age 50 in Japan which they do not do in the United States or Europe.
(a) How Are Wages Determined?
Unlike American blue-collar workers, Japanese blue-collar workers are paid on a monthly salary basis. Typically, about three-fourths of this salary is a basic wage, which includes starting pay, annual increases usually tied to seniority, and an across-the-board increase negotiated in the “Spring Offensive” by the enterprise union (see below). About 2% involves incentive pay, with group incentives more common than individual incentives. The rest comes from various allowances—for commuting, for supervisor positions, for special skills, and so forth.

In Japan, experience within the company is much more important than outside experience. A man hired at age 17 and staying with the same company would (on average) have his pay triple by age 40. And those with more education start with higher pay and also experience faster increases in pay as they gain experience with the company.

Since the early 1960s, there has been considerable conflict between workers and managers over the criteria to be used in determining the basic wage. The workers desired to keep the system whereby the basic wage was determined exclusively by age, experience, and education. Management desired changing the system so that job-related characteristics (occupation, job skills, and so forth) and individual merit would be more important. It would appear that employers have at least partially prevailed; today, most employers rely more on job related factors and individual merit (see below). However, age, education, and experience are more important in determining the pay of blue collar workers in Japan than in the United States.

A worker’s pay can rise over time for three reasons. First, as noted above, there is an across-the-board increase negotiated by the union during the “Spring Offensive” (see the section on unions below). Second, also noted above, there is an annual increase in the basic wage. And third, there is the possibility of promotion. For the second and third of these, merit rating by employers is very important. For the annual increase, at least half depends on merit rating. For promotion, supervisor assessment is also very important; there is no strict seniority system, as there is in the United States. Japanese companies seem to be more concerned with evaluating employees than are American companies. And Japanese evaluations are likely to be very subjective, including items such as “contribution to the enterprise”, ”attitude toward learning after hours”, “relations with others in the workshop”, and so forth. Many Japanese workers do not know on what standard their wages are calculated.
Two other features of a Japanese worker’s wages are worthy of notice. First, a considerable portion of a worker’s pay comes as a semiannual bonus. The bonus depends on the performance of the company, but usually equals about two months’ salary. Up to 1973, bonuses were rising as a percent of total earnings; since then, they have been falling. Second, fringe benefits in Japan typically include company housing, insurance policies, recreational facilities, and so forth. During the period of slow growth after 1973, these fringe benefits were reduced. The bonus payments and these types of fringe benefits are rarely significant in American companies. In Japan, they can be seen as a form of “profit-sharing”—they can be reduced quickly when revenues fall and thus can be used to pass some of the risk of falling revenues on to workers.
(b) Differences in Wages
Wage differentials within a company are narrower in Japan than in the United States, at least for men below age 50. This is true because pay for blue-collar workers in Japan resembles the way white-collar workers are paid in the United States. One group of white-collar workers of special interest is managers. Whether one is a manager is of much more importance to one’s pay in the United States than in Japan—that is, the pay gap between managers and other workers is smaller in Japan. Changes in rank in Japan appear to involve little change in authority, responsibility, or pay. In addition, the symbols of management status are less noticeable in Japan. There are no separate management parking lots, dining rooms, bathrooms, and so forth. All workers are paid a monthly salary. All dress similarly and use informal patterns of speech when communicating. One can conclude that there is greater equality within the Japanese company than within the American company. Japanese management has deliberately sought this as a goal in that it fosters company loyalty. As we will see below, it is a goal that has been realized in part by excluding the lowest paid and least educated workers from the company.

  1. Job Organization

Several aspects of job organization in Japan are different from the United States. First, in most large Japanese companies, there is a widespread practice of job rotation. Workers commonly perform several technologically-related jobs. The training of young workers is done by older workers who work next to them. Use of vocational schools is very limited. Because they are trained in many different tasks, they can adapt to the introduction of new products or new technologies. They are also able to do “unusual operations”—such as repairing broken machinery, eliminating defective products, and so forth — operations that are normally done by specialists in the United States. This allows Japanese companies to get-by with fewer workers. (Also because workers are trained in many different tasks, companies do not have to hire substitutes for those who are absent.)

Second, average working hours per week have been substantially higher in Japan. This difference has existed only since the middle 1970s. About 25% of Japanese workers work six days a week. In all, 75% average more than 5 days. Many work 60 hours a week or more. This is NOT the result of the dedication-of Japanese workers; they report themselves are working more hours than they desire. It would appear that the long workweek results from low growth in real wages combined with very expensive housing (one must work more to make the payments), the inadequacy of recreational facilities (thus, there is less desire for leisure), and the weakness of Japanese labor unions (see below).

Third, absentee rates in Japan are very low. And workers take only 50% to 60% of the paid holidays due them. These facts have been used to argue that Japanese workers must be extremely dedicated. But the explanation would seem to be different. In most companies, sick pay is only 60% of regular pay; this provides a major penalty for workers who are ill. To compensate for this, workers accumulate their vacation days to use when they are ill. And Japanese companies have few workers to serve as substitutes. The workgroup leader must take over the tasks of an ill or vacationing employee in addition to doing his own tasks. This generates considerable workgroup pressure to minimize absences. Finally, as noted above, merit evaluations are very important in Japanese companies; “excessive absence” is an important criterion on which merit is determined. Although one can get a contrary impression from American newspapers and magazines, surveys report lower commitment to the company and lower job satisfaction among Japanese workers than among American workers.

  1. Explanations

There have been many attempts to explain the existence of seniority wages and the Japanese system of skill acquisition. Why are there these differences in work and pay between Japan and the United States? Two economists explained these differences as the result of a production strategy that requires the progressive introduction of technological innovations. Because new technologies are continually being introduced, on-the-job training must be more continuous over one’s working life in Japan. As a worker continually receives new training, his skills improve, and so does his pay. This explanation is consistent with the fact that workers “retire” relatively early in Japan and that their real wages fall after age 50—older workers are harder to retrain. This explanation is also consistent with Chapter 7 on Japanese business where it was shown that many large Japanese companies have pursued a strategy of rapid product change through rapid technological change. In the 1990s, the technological change was massive. Workers’ skills developed from on-the-job training could not keep up with this extreme technological change. For the first time, Japanese companies underwent significant competition for young workers who could handle the new technologies.

Another explanation is that seniority wages are used in Japan to reduce turnover (by creating a significant pay penalty for those who leave the company) and therefore to keep a work team together. The argument here is that many of the skills that workers develop are specific to that company. If the worker left that company, the skills would not be useful in another job. And if the worker left the company, the company would have to hire and completely train someone new. Company specific skills involve familiarity with co-workers (forming a good team) and with machines or production methods unique to the company. Once a worker has these skills, the company does not want the worker to leave. So, by this explanation, it has seniority wages to create a financial penalty for leaving.

Other economists have interpreted seniority wages as paying workers according to some notion of fairness (older workers “should” receive higher pay) or as increasing the power of employers over workers by creating a serious pay penalty if one quits. There is no consensus on an explanation.
(2) The Dual Labor Market
There are two different versions of the dual labor market theory. In one, there is a “core” of large, capital-intensive, oligopolistic companies and a “periphery” of smaller companies. The core companies provide high and rising wages, good working conditions, regular employment, and so forth. The periphery companies have lower wages, poorer working conditions, and high rates of turnover. For Japan, this version of the dual labor market theory does not apply now, although it did apply until the mid-1950s. Starting wages for young workers are actually higher now in the smaller companies. Wages rise as a worker gains experience in the smaller companies as well as in the larger ones. (This is not true in smaller companies in the United States.) Productivity has also risen as fast in the smaller companies as in the larger ones. Employees who work in the smaller companies do so for a substantial part of their lives, and are no more likely to be laid-off during recessions than workers in large companies. Nearly 70% of all small and medium-sized companies in Japan are run by former blue-collar employees of those small companies. Those workers in small Japanese companies who do not go on to form independent companies are usually promoted to white-collar status. This typically occurs in one’s early 30s, and leads to career earnings similar to a blue-collar worker in a large company. In this regard, it is clear that the role of small companies in Japanese labor markets is very different from that found in the United States.
The second version of the dual labor market theory focuses on skill development. There is a primary sector. Here skills are low when one is employed but develop with experience. For these workers, wages and responsibility increase the longer one is employed. Tenure with the same employer is long. There is a lower-primary sector. Here skills are relatively high when one is employed, but do not develop much over time. These are the craft workers. And finally, there is a secondary sector. Here, skills are low when one is employed and do not improve over time. These workers have low wages, no promotions, no raises, and high rates of job turnover. In Japan, those who might be considered secondary workers are “shigaiko” and temporaries.

Shigaiko are employed for a small company, but work in the plant of a large company under the large company’s supervision. The large company supplies the tools and machinery. Temporaries are employed by a large company for a limited period of time. Neither are classified as “regular workers”—neither has seniority wages or permanent employment. Most do unskilled or semiskilled work. Those who take these jobs are usually older men and women, farm housewives, and seasonal farm workers. In some industries (iron/steel, shipbuilding, and chemicals), these workers cannot become regular workers; in other industries, they are considered probationary and can be promoted to the status of regular worker. Their wages and benefits are low in comparison to regular workers. Japanese companies utilize them because of their desire to keep their work force relatively homogeneous in relation to job organization.

In the recent poor economic times, part-time and temporary employment has risen significantly – becoming ¼ of all workers (up from 18% in 1990). Part-time workers earn only 51% (for men) and 44% (for women) of the wages of full-time workers; this wage differential has been increasing.

The situation for Japanese women is quite different from that of Japanese men. The wage gap between men and women is much greater than in the United States or Europe, and has been increasing. As of 2003, Japanese full time female workers earned 66% of the amount the full time Japanese male workers earned, compared to over 80% in the United States and a higher percent in Europe (90% in France). Like men, Japanese women are usually employed directly from school. But they work until marriage or shortly thereafter. Their wages rise very little as they gain job experience. They are likely to drop out of the labor force between their mid-20s and mid-30s, and then re-enter later as basically unskilled workers. They then become a major part of the temporary work force. For Japanese women over 40, 46% worked in part-time jobs in 2001, up from 26% in 1980. The labor force participation rate for Japanese women was only 49% in 2001. Given the limited opportunities in paid employment, it is not surprising that many women workers are either self-employed or work in family businesses. In 1995, 22% of women were either self-employed or worked in family enterprises in Japan, compared to 15% of men. Outside of self-employment, there are fewer opportunities for women in Japan than in the United States.
In summary, the dual labor market, to the extent that it exists at all, is quite different in Japan than in America. In its first description, it no longer exists in any significant way in Japan. In its second description, it appears that women are the main group in the secondary work force, although men over 60 who have “retired” from a large company must also be included. By American standards, this secondary work force seems rather small. This may be true because there is no large immigrant group in Japan, because there is no large “underclass” in Japan, because government subsidies have allowed people to remain in agriculture rather than be forced into the cities, and because government support to small businesses have given options to women and young people other than to work in the secondary sector.

(3) Permanent Employment
About 1/3 of Japanese men work in a system of permanent employment. In this system, they are hired directly from school. They expect to maintain their employment with the same company until the mandatory retirement age of 60. The company is expected to do everything possible to avoid layoffs.
For young people age 16 to 24, the labor market in Japan is quite different from that in the United States. Young Japanese people have only half the number of jobs and stay on each job twice as long as young Americans. This suggests that, unlike the United States, there is no separate labor market for young people in Japan. Japanese young people are not likely to work while in school. Upon leaving school, they begin their work careers. They may experience a relatively short period of “job shopping”. Then they accept a job in which they become permanently employed. Partly, this difference results from the different role played by formal education in the two countries. In Japan, formal education is less important in skill development; most skill development occurs on the job. However, Japanese formal education plays a major “screening” role; getting the “right job” depends more on educational performance than it does in the United States. In recent years, the employment problems of young workers have increased. For example, the unemployment rate for people age 20 to 24 was 3.8% in 1990. By 2002, it had risen to 9.3%. (For those age 15 to 19 and not in school, the unemployment rate rose from 6.6% in 1990 to 12.8% in 2002.)
For males age 25 to 49, turnover rates in large companies are very low. Studies find that separation rates in manufacturing in Japan are only about 25% of those in America (for workers with similar characteristics). Japanese workers in this situation expect to be employed by the same company for a long time. This phenomenon is true in both the large and the small companies. They do not leave the company and the company will do everything in its power to avoid layoffs.
Permanent employment for men seems to end around age 60. Most large companies have a mandatory “retirement” age at 60. Those forced to retire get a lump-sum payment that usually averages about three years’ income. As noted earlier, most then take jobs in small companies with pay similar to men in their twenties. The proportion of men age 60 to 74 still in the labor force is much higher in Japan than in the United States. For men over 55, the job market is very poor. They average about a 25% reduction in pay when they move to a new job and represent about 20% of all of the unemployed people in Japan.
Many have wondered whether the permanent employment system would hold-up during a recession. One recessionary period to be studied was 1975 to 1978. In that period, employers did indeed try to maintain their commitment to permanent employment. Those companies in financial trouble would first try to reduce work hours, especially overtime. If this was not sufficient, the next step was to try to effect “temporary” transfers of workers to other companies in the keiretsu. (Fewer than half of those transferred ever returned to their original employer.) If these steps were not sufficient, redundancies were initiated. (Redundancies mean that the job is permanently eliminated, but that no fault is assigned to the worker. This is called “downsizing” in the United States.) Unlike American companies, Japanese companies have no strict seniority system to determine who is made redundant; employers have considerable choice. As an illustration, in 1978, one company asked for 1500 workers to volunteer for redundancy; otherwise there would be “designated dismissals”. Those “volunteering” would receive a separation payment, while those dismissed would not. Those encouraged to “volunteer” were (1) those whose work performance was not good, (2) those who had not shown a very high degree of cooperation with measures taken by the company, (3) those who would have a hard time conforming to the tough measures the company may have to take, and so forth. This example illustrates not only the role of “merit” but also the subjectivity of merit. Point (3) also illustrates that older workers are more vulnerable to redundancies. The Japanese system places the burden of unemployment on those for whom the cost would be most severe; this is why workers are most militant in dealing with dismissals and why companies strive to maintain permanent employment as long as they can. The most recent recessionary period began in 1990 and is effectively still going as of this writing. The Japanese economy has not yet fully recovered. But again, companies have tried to maintain permanent employment. Companies decreased their employment primarily through natural attrition (not replacing people who left or retired). The current period seems to be repeating the period of the late 1970s.
In summary, the evidence seems to show that the permanent employment system has certain key characteristics. There is no separate job market for young people. Formal education is less important in the development of job skills than it is in the United States. While many men do begin employment directly from school, there is often some “job shopping” in one’s late teens or early twenties. For Japanese workers up to age 50, there is much more job commitment than there is in the United States. After age 60, men leave the large company and work in a smaller company at lower pay. The permanent employment system survived has basically survived the test of recession; companies have maintained their commitment to use redundancies only as a last resort. The way redundancies are determined illustrates the weak position of workers.
Why the system of permanent employment exists is the subject of some disagreement. Some see it as resulting from company-specific skills: workers who learn these skills need to stay with the jobs on which these skills are useful. Company-specific skills were discussed in the last section. Still others see it as a trade-off between stockholders and workers: workers gain employment security in exchange for lower wage increases. Finally, others describe this system as “paternalism”: workers gain employment security in exchange for loyalty. A worker cannot quit because to do so would show disloyalty—a trait that would be condemned by other potential employers. There has been no precise study to determine the reasons for the differences in the permanent employment systems of Japan and the United States.
(4) Enterprise Unionism
Unions in Japan organized about 25% of the wage and salary earners in 1990, compared to about 16% in the United States. This percent in Japan has been falling since the 1960s, as has been occurring in the United States. Unions in Japan are a weak force in representing the separate interests of workers. Management definitely dominates.
(a) Structure of Unions in Japan
Several features of Japanese unions are unique. First, the unions are organized on an enterprise basis, with an average of fewer than 400 members per union. Collective bargaining over wages and job conditions is done basically at the enterprise level. Many enterprise unions have affiliated into one of the large federations of unions. In the late 1980s, these federations of unions merged to form one large industrial federation, similar to the AFL-CIO in the United States. But like the American AFL-CIO and unlike the European federations, this federation limits itself mainly to political activities and does not engage in collective bargaining. In Japan, the dominant level is the enterprise union.

A second unique feature of Japanese unionism involves the composition of the union membership. All members of the enterprise—including blue-collar workers, white-collar workers, foremen, and some lower-level managers—belong to the same union. (In the United States, by contrast, foremen and managers are excluded from the union by law.) However, shigaiko and temporaries are employed by other companies, and thus do not belong to the enterprise union. Unlike Europe, unless the union represents 75% of workers in an enterprise, the non-union workers are not covered by any union contract.

A third unique feature of Japanese union is the lack of professional union employees. Union leaders are elected by the membership. They work full-time in the union and are paid by the union. But they serve in the union only temporarily and maintain their employment relationship with the company. Many union leaders are foremen. When they return to the company, they are often promoted—especially into upper management. They will be promoted of course, only if their policies as union officials were in line with company policies. Given these practices, it is doubtful that union leaders are truly independent and act freely on behalf of workers’ interests.

Bargaining is typically done in April during the “Spring Offensive”. At this time, all unions bargain over wage increases and other matters. The wage demands follow a form of “pattern bargaining”, with most unions following the lead of the International Metal Workers’ Federation. Prior to the “Spring Offensive”, there are public exchanges of demands and analyses between the major employer federations and the major union organizations. The state of the overall economy has an effect on the bargaining outcomes; since all unions bargain at the same time, there is less desire for one union to try to “leap frog” another union (as happens commonly in the United States). Thus, the Japanese system leads to lower wage demands than does the system of staggered wage demands in the United States. The “Spring Offensive” has often been accompanied by strikes. These strikes typically lasted less than 1/2 day and were well-announced in advance. In 1992, for example, only 17 of every 10,000 Japanese workers were involved in a strike, costing a loss of only 0.002% of all working time. Thus, strikes appear to be mainly for demonstration purposes. Union-organized strikes become militant only when the issue involves discharges of regular employees. In recent years, the Spring Offensive has seen a shift from demanding wage increases to demanding greater job security.
(b) Joint Labor-Management Consultation and Quality-Control Circles
Another unique Japanese institution is the system of joint labor-management consultation that runs parallel to collective bargaining. Opinions of this system range from total adulation to total rejection. Joint labor-management consultation teams are found in the majority of Japanese companies that are unionized. Generally the workers (or the union) elect worker representatives, although some representatives may be appointed by management. In matters relating to production methods, labor problems, shop floor environment, safety, fringe benefits, and so forth, most companies either require consensus with the workers or, at least, some negotiation. In matters relating to investment decisions, new product development, and the financial situation, the workers may get some information or explanations but do not have a say in the decisions. In matters of business policy, employment, or discharge, managers often make unilateral decisions. The “strategic business decisions” seem to be made without much worker participation. The line between collective bargaining and joint labor-management consultation is not clear.
Quality-control circles are also important institutions. A typical company has dozens of circles; each averages about ten workers and meets every week or two for about one hour. They discuss product quality improvements, cost reductions, worker safety, maintenance, inventory policy, and so forth. Management adopts most of the worker suggestions. The personal financial benefit to the worker making the suggestion is small. Yet, participation in these circles is an important part of supervisor evaluations. This indicates that the quality-control circles are more likely to be desired by management, rather than something imposed by workers.
Grievances in Japan are settled internally, without use of outside arbitrators or courts, as would be found in the United States. While most unionized Japanese companies do have grievance procedures, the joint labor-management consultation procedures are used to resolve the types of matters that typically give rise to grievances.

Those who support the institutions of joint labor-management consultation argue that workers’ desire to participate is high. Workers cooperate with management to maintain their employment. Any actions that would hurt the competitive position of the company would also hurt the workers. But any actions that “enlarge the pie” would lead to higher pay and more promotion possibilities for workers. (Japanese workers are much more likely than American workers to see a personal benefit from productivity improvements in the company.) That Japanese workers have the ability to participate is a result of the system of training. Because of their general training and job rotation, Japanese workers gain an understanding of the entire production process. This allows them the knowledge to be able to participate effectively.

Those who oppose the institutions of joint labor-management consultation believe that workers have no real influence—they can give their opinions, but cannot actually influence policy. They argue that these institutions weaken the workers by weakening the unions and by “co-opting” the workers. These people also argue that workers’ commitment to their companies is not particularly high in Japan, contrary to popular belief, and therefore is not enhanced by these institutions.

  1. Effects of Unions on Wages

The few studies that have been done on Japanese wages show that the unions have at most a small effect in increasing the wages of workers beyond the wages they would have otherwise been received. In most years, wages have risen less than productivity has risen; that is, wages have not risen in accordance with the employer’s ability to pay. And, the share of national income paid to workers as wages is considerably lower in Japan than that found in either the United States or Western Europe. Given these facts, plus the fact that wages rose faster in the small companies than in the large ones, the fact that “merit” has increased in importance in determining one’s wages, and the fact that the number of strikes has fallen, it would seem most likely that Japanese unions have not had much effect on workers’ wages.

(d) Evaluation of Japanese Unions
It would appear that Japanese enterprise unions are a weak force in representing the separate interests of workers. In Japan, management dominates industrial relations. This would help explain why Japanese workers work the greatest number of yearly hours of any workers in the industrialized world and why the intensity of work is higher for Japanese workers. What influence unions do have seems to be limited to the area of dismissals. Once companies are able to create institutions to maintain worker security, they do not seem to be constrained by unions.

  1. Wage Flexibility

Research has shown that wages in Japan are more downwardly flexible than in the United States (that is, they can fall more readily). As a result, companies can adjust to a decline in sales by lowering wages rather than by increasing unemployment. Partly, this downward flexibility reflects the payment of a considerable part of total wages (averaging about one fourth) in the form of bonuses that, to some extent, are related to profits. Partly, this downward flexibility may reflect the “Spring Offensive” which eliminates the effect of one union trying consistently to get ahead of the others. And partly, it may reflect the weak bargaining position of workers and their unions.

Secondly, research has shown that hours are also more flexible in Japan than in the United States. Partly, this reflects the large amount of overtime and the long work year in Japan (that is, there are more hours to be cut when demand falls). And partly, it reflects the greater use of part-time workers, temporaries, and outside contractors in Japan (who are not part of the system of permanent employment).

Finally, research has shown that employment is less flexible in Japan than in the United States. During a decline in demand, Japanese companies try to maintain employment by reducing hours and wages. Given the militancy of unions when the issue is dismissals and the weakness of unions when the issue is wages, it seems that both workers and employers in Japan are willing to trade-off wage increases to gain employment security. The fact that unemployment in Japan does not rise greatly during times of recession is partly attributable to this response. It is also attributable to the ability of small companies (especially family-owned companies) to absorb people, to the tendency of many to drop out of the labor force rather than stay unemployed (over 1.2 million people have dropped out of the labor force since 1990), and to the low labor force participation of teenagers.
(6) Conclusions
Summary of Major Points
(1) Seniority wages do exist in Japan for blue-collar workers as well as white-collar workers. Wages rise with internal experience more than is found in other countries.

(2) Job-related factors and “merit rating” are more significant in the determination of pay than they were previously. But age and education are still the most significant factors.

(3) No system of strict seniority exists in Japan for decisions on promotions, transfers, or dismissals.

(4) Unlike American companies, Japanese companies devote a considerable part of labor cost to voluntary fringe benefits (housing, recreation, and so forth). These are readily reduced during recessions.

(5) Wage differences within a company, including between managers and workers, are narrower in Japan than in the United States.

(6) For blue-collar workers in Japan, skills are acquired through a process of job rotation. Workers are expected to learn many tasks and to be able to handle unusual situations. Japanese management has more flexibility in worker deployment as a result.

(7) The work year is longer in Japan than in Western countries. This seems to be related to the low level of real wages plus expensive housing and inadequate recreational facilities.

(8) Absentee rates are very low in Japan, with workers not taking all of the vacation time to which they are entitled. This is related to the system of sick pay, the lack of substitutes for workers, and the emphasis on loyalty.

(9) There is no compelling evidence that organizational commitment and job satisfaction are higher for Japanese workers than for similar American workers, contrary to popular opinions.

(10) The description of a “dual labor market” by size of firm is not appropriate. Small firms treat employees similarly to large ones.

(11) The description of a “dual labor market” by type of skill is appropriate for Japan, but is different from the United States. In Japan, the secondary labor force is composed mainly of married women. There is no segregated market for young people and no large group of minorities or immigrants. Temporaries are outside of the regular work group of the company. The situation of Japanese women in the labor force is worse than that of American women.

(12) Permanent employment does exist in many Japanese companies for men up to age 60. Most hiring is done directly from school or shortly thereafter. Between the ages of 25 and 49, job turnover is very low. In times of recession, companies have been able to maintain their commitment to use dismissals as a last resort.

(13) Formal education in Japan is not commonly used to provide vocational skills. Its role is to provide general skills (especially mathematics and science) and to screen potential workers according to abilities and personal characteristics.

(14) The situation for men age 50 and up is different in Japan than in America. The “retirement age” is very early. The worker “retires” from the company but not from the labor force. The older worker moves to a small company and continues working at much lower pay. The labor force participation rate of older workers (age 55 and up) is much higher in Japan than in the United States.

(15) During periods of low demand, the Japanese system places the burden of adjustment on those who are the most vulnerable—the older workers.

(16) Enterprise unions are very weak in representing the independent interests of workers, except when the issue is dismissals. It is doubtful that unions have achieved a large wage premium. Union leaders are too closely intertwined with management to represent an independent interest.

(17) While joint labor-management consultation and quality-control circles may have had some effect in raising productivity, their effects appear to have been overstated.

(18) Relations between companies and workers put a premium on cooperation and loyalty.

(19) Wages and hours appear to be more flexible in Japan than in the United States. For wages, part, but only part, of this greater flexibility is due to the system of bonus payments. Employment is less flexible in Japan; however, it is not reasonable to conclude from the studies that the flexibility of wages is a cause of the inflexibility of employment.

(20) The Japanese system of industrial relations reinforces a system of production that focuses on product differentiation, continual introduction of new technologies into products and manufacturing processes, low inventories, and high quality.
How the Japanese system of industrial relations will change can only be speculated upon. In making this speculation, one can see that the system has several vulnerabilities. First, the system is highly dependent upon low rates of unemployment. In the long period of slow economic growth and recession from 1990 to the present, Japanese companies have had more difficulty in keeping their pledge to avoid dismissals. A few large companies abandoned their commitment to lifetime employment in the 1990s. If workers come to believe that they can no longer count on the permanent employment, much of their cooperation may be removed.

Second, the Japanese system places the greatest strain on the oldest workers. This has not been a large problem yet, as the workforce is still relatively young. However, the population is aging rapidly. Japanese companies will have to make some accommodation to the increased number of older workers.

Third, the system is very dependent on worker “loyalty”. This makes it vulnerable to a new generation, one that does not remember the deprivation of the immediate postwar period. There is some evidence that the younger generation is more individualistic and materialistic; if true, this generation will be harder to fit into the existing system.

Fourth, the system is very dependent on exports. This makes it vulnerable to (1) foreign protectionism, (2) foreign recessions, and (3) the improved competitiveness of foreign companies. With a reduced ability to export, the high degree of competition in Japan could force major changes on the system of industrial relations.

Finally, the system is very dependent on women to take positions in the secondary labor force. This makes it vulnerable to a “feminist movement” similar to the ones that have developed in nearly all other Western countries.
Given these vulnerabilities, it is not at all clear what adaptations will be needed, or whether the Japanese companies will be able to make them. But through the period of economic difficulties that has existed in Japan since 1990, the industrial relations system has remained more or less intact.

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