Simple solutions for Japan's languishing labour market

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Australia & Japan in the Region

Volume 5, No 7, July 2017

Historically, Japan’s employment practices produced highly-sophisticated manufacturing products under harmonious labour relations. Those practices now appear out of date. But since those labour practices were so successful in the past, reform is difficult. Three reforms are especially overdue: reducing long work hours, ensuring equal treatment for regular and non-regular employees and setting a rule for monetary settlement in dismissals.

First, persistently long working hours are a consistent feature of the Japanese workplace. An individual’s job description is rarely clear, so higher productivity workers tend to accrue additional hours. Further, many middle-aged employees with a full-time homemaker rely on overtime payments as an important source of household income. In addition, substantial overtime carries the benefit that in recessions, an employer can minimise wage costs by reducing overtime hours rather than laying people off.

… since those labour practices were so successful in the past, reform is difficult.

But such a practice is unfavourable to married couples raising small children while also working full-time, which has resulted in falling fertility rates and a comparatively low proportion of female managers. Recent proposals by the government council in charge of reforming labour markets indicate that the establishment of a clear ceiling on overtime hours worked and a penalty to employers who breach the ceiling could soon be implemented. This would be an important step towards attaining a reasonable work–life balance.

Second, the prevalence of unequal pay for equal work in Japan looks strange to many people outside Japan. But rectifying the situation is not straightforward in Japan’s labour markets, which are characterised by unionisation at the firm level. As a result, both blue and white-collar employees often belong to the same union, and there is a large wage gap between those regular employees granted seniority-based wages in the firm and those non-regular employees with market wages determined outside the firm.

The principle of equal pay for equal work cannot be achieved without changing the current seniority-based wage system

This discrepancy is a significant source of growing income inequality in Japan. Solving the issue looks to be as simple as setting a clear rule that an employer has to pay equal wages for equal work, regardless of the employment contract signed. But this would necessitate a difficult transition away from traditional seniority-based contracts, as a major source of the wage disparity lies within the seniority-based wages of regular employees rather than between non-regular employees (who are mostly already paid equal wages).

One suggested remedy by the council is that an equal wage be guaranteed to non-regular employees who have the same working experience as regular employees, as the quality of the work is considered to be based on one’s work experience. But ubiquitous and rapidly spreading IT technologies may well make the skills formed by on-the-job training obsolete, so this assumption is increasingly dubious.

Further, the average experience in the same firm of non-regular employees with a fixed term contract is much shorter than regular employees, so such a rule would rationalise the current lower wage of most non-regular employees. Hence, the principle of equal pay for equal work cannot be achieved without changing the current seniority-based wage system — but that involves fighting both labour unions and employers’ associations.

Third, a rule for monetary settlement in dismissals is needed. Contrary to the widespread view that Japan’s regulation on dismissals is too strict, the Labour Standard Law only obliges an employer to pay 30 days’ wages on dismissals, unless clearly prohibited by a specific law.

Contrary to the widespread view that Japan’s regulation on dismissals is too strict, the Labour Standard Law only obliges an employer to pay 30 days’ wages on dismissals

But the current Japanese labour regulations are not consistent with the general practice of employment protection in Japanese firms. In an attempt to align the two, the Labour Contract Act was enacted in 2003. Included in this act was a clause that made ‘unjustified dismissal’ invalid. The law notably does not clearly specify the criteria for unjustified dismissals, which is a copy of the case law based on the interpretation of judges. This causes two problems.

In addition to making hiring costs harder to judge — which can discourage investment — this law entrenches inequality between employees who can appeal in court and those who cannot. Once an employee can get a judgement of unjust dismissal, they can get reasonable monetary compensation in the following reconciliation process with the employer. But where an employee cannot afford to appeal, the employee is limited to only the minimal compensation. Hence, it is necessary to establish a clear rule for monetary compensation based on the years of service to a particular firm. In this way, administrative procedures for dismissals would be streamlined and equalise the process between employees who could and could not appeal in court.

These labour market reforms are prospective challenges for policymakers — they are in conflict with the middle-aged employees in large firms who are beneficiaries of the current employment security and seniority-based wages. But to fix systemic issues in the Japanese labour market for the benefits of the less advantaged employees and aid Japan’s ailing economy, the government cannot afford to avoid remedies to labour market woes.

About the author

Naohiro Yashiro is the Dean of the Global Business Department at Showa Women’s University, Tokyo.

Updated:  23 June 2017/Responsible Officer:  Crawford Engagement/Page Contact:  CAP Web Services Team