Will the seniority rule wreck Abe’s wage rise?

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Australia & Japan in the Region

Volume 6, No 2, February 2018

‘Shunto’ is a nation-wide wage negotiation called every spring between companies and enterprise-based labour unions in Japan. Shunto attracted special attention this year after Japanese Prime Minister Shinzo Abe urged the top leader of the Keidanren (the association of Japan’s CEOs) to target a 3 per cent wage increase. Companies that successfully achieve this target are granted a corporate tax reduction of 5 per cent.

Abe’s latest move is the opposite of a traditional incomes policy, where the government tries to incentivise wage restraint in order to avoid inflation.

Prime Minister Abe has been criticised domestically because average workers have not benefited from ‘Abenomics’. This disappointing result for the average worker comes despite the fact that share prices have increased to highs not seen since the bursting of the bubble in the early 1990s (mainly due to a significant monetary easing policy). The Prime Minister is therefore forcing large firms to use their accumulated corporate savings to stimulate consumption by raising the wages of their employees.

Prime Minister Abe has been criticised domestically because average workers have not benefited from ‘Abenomics’

The increase in the wage costs of large firms can be partly offset by a reduction in corporate tax. But this tax incentive would likely only be applied to large firms: 70 per cent of Japanese firms, most of which are small- and medium-sized, run at a loss and do not pay any corporate tax.

The Japanese public welcomes wage increases, since they have suffered from long-run deflation. But one should ask: given tightening labour market conditions, why have Japanese wages not risen automatically? The Japanese unemployment rate declined to 2.8 per cent in 2017, but the average nominal wage (including bonus payments) increased by just 0.4 per cent and negative 0.2 per cent in real term.

A simple explanation for this is that both employers and labour unions prefer long-run stability of employment to short-run wage increases. The same groups are also uncertain about whether or not the Japanese economy will continue to grow through monetary and fiscal stimulus alone.

The Prime Minister’s target of a 3 per cent wage increase may seem too ambitious under such conditions, but the market wage need not carry all the weight of Abe’s urgings. The Shunto wage increase includes not only the average market wage increase but also the average seniority wage increase, which is based on a worker’s length of service to their firm. Even if the average wage level is held constant, the seniority wage can still increase as workers move ‘up in seniority’ in the firm.

Abe’s intervention goes deeply against the principle of ‘equal pay for equal work’

This happens to a greater extent in large firms. Labour unions deem the seniority component of the Shunto wage to be top priority even in recessions, which reflects their particular interest in the full-time, permanent workers of large firms.

Shunto wage increases increased by 2.1 per cent in 2017, and while average market wages also increased (which reflects tightening labour market conditions), they were a small component of the overall Shunto wage rise. Instead, an increase in average seniority wages accounted for over 70 per cent of the wage increase.

Seniority wages are becoming less important over time: their share of the Shunto wage has decreased by 10 per cent over the last five years, which has been partly offset in terms of overall wages by the increase in the average market wage component. The decline in the seniority wage component is clearer when comparing the seniority wage paid to male employees in large firms over the last decade. The average wage of such workers actually declined between 2006 and 2016, which reflects the increased percentage that middle-aged workers constitute of all workers in the firm. Under the seniority-based labour market in Japan, the jobs of middle-aged workers are different from younger workers, which becomes poor business practice when there are many more middle-aged than younger workers in spite of the economic circumstances that firms are not growing as fast as they were during the high economic growth phases of the past.

There will consequently be a flattening of the seniority wage that is paid to middle-aged workers in particular. This long-run trend is the major force that is lowering the seniority component of the Shunto wage, and it is one of the forces behind the downward pressure on average wage increases.

The public may welcome Prime Minister Abe’s intervention in Shunto wage determination, but this intervention may soon have a negative impact on the labour market’s adjustment and on decreases in the seniority-based wage’s contribution to Shunto wage rises.

Abe’s intervention goes deeply against the principle of ‘equal pay for equal work’ — a key basis for labour market reform to reduce the current large wage difference between permanent and temporary workers as well as to enhance labour mobility under ‘Abenomics’. Hence, barring the minimum wage, the Japanese government’s intervention in the setting of wages should be avoided even though it appeases the Japanese public.

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