Why Japan’s Economy Is Labouring

As Abenomics stalls, Prime Minister Abe is turning his focus to a major economic drag: Japan’s labour market

The struggles of temporary workers have gotten the attention of Prime Minister Shinzo Abe, who says reforming the way Japan works will be his government's biggest challenge in the next three years.

After three years, the prime minister’s Abenomics revival plan is stalling, with growth and inflation both around zero. The nation’s labour market is a big reason why. It feeds a range of the country’s core problems: weak wage growth, low productivity and investment  even low rates of marriage and births.

“I believe reforming our way of working will be the biggest challenge of the next three years,” Mr. Abe told The Wall Street Journal in an interview this week. “It will be the key to enabling the Japanese economy to grow in a sustainable manner.”

He said he wants to ensure equal pay for equal work, lifting wages for workers without permanent jobs. He is pushing to get help for workers, mostly women, who have to balance their jobs with caring for children and elderly relatives. Those initiatives include more child- and elder-care facilities and broadening eligibility for child-care leave.

After Japan’s asset bubble burst in the early 1990s, companies sought more flexibility in hiring and firing, increasingly turning to nonregular workers. Japan Inc., saddled with overcapacity and debt, faced a choice: cut jobs or cut pay. It chose the latter, reflecting the view in Japan that big companies are public institutions with a responsibility to provide employment.

But protecting permanent employees led to the expansion of a second tier of nonregular workers as companies, through years of economic stagnation and falling prices, hired more workers they could more easily dismiss in bad times.

Workers in the first tier are still essentially guaranteed lifetime employment. Workers in the other, now accounting for 38% of nonexecutive employees, earn far less, even for doing the same job as permanent workers. They receive little formal training, aren’t represented by unions and flit from posting to posting, blocked from advancement by permanent workers.

“If you’ve had only irregular jobs, by the time you are in your 30s, you aren't an attractive employee,” said Richard Katz, editor of the Oriental Economist Report.

Nonregular workers’ precarious status and low pay also make them unattractive as potential spouses, a problem in a nation with a shrinking population. Only 27% of men in their 30s with nonregular jobs were married last year, compared with 66% of men the same age with permanent jobs, according to government statistics.

Reforming the dual labour market is one of the most important issues Japan faces, said Randall S. Jones, chief economist for Japan and South Korea at the Organization for Economic Cooperation and Development. It is a big drag on labour productivity, in which Japan ranks in the bottom half among OECD nations  a primary reason the nation’s potential growth rate is now so low, he said.

The high level of protection for permanent employees limits the flow of talent and money into more-promising companies, and innovative startups struggle to attract venture capital because they can’t hire the employees they need, Mr. Jones said.

Mr. Abe has long stressed the importance of higher wages, but he initially paid little heed to the labour divide, putting priority on policies such as monetary easing as a way to drive corporate profits and pay higher. This year, as the economy continues to struggle despite the Bank of Japan’s introduction of negative interest rates, he has changed course.

A panel of experts convened by the prime minister began meeting in late March to study the labour market’s effects on wages and to recommend any necessary changes to labour laws. Mr. Abe said a change in terminology was needed too: “I want to eliminate the word ‘nonregular’ from the lexicon,” he said in the interview.

Many are skeptical significant overhauls will be passed. Business leaders have long pushed for more flexibility in firing permanent workers, but they express wariness about Mr. Abe’s focus on equal pay, which is already required under existing law but rarely enforced. They say efforts to enforce it would be burdensome.

Sakie T. Fukushima, head of the employment and labour-market committee at the Japan Association of Corporate Executives, an influential lobbying group, said Japan needs to change its beliefs about work and the employee-company relationship, including the ideas that a permanent job is best and companies should never fire anyone. Workers should be paid according to productivity and achievements, she said, meaning some nonregular workers should earn more than their permanent counterparts.

On Mr. Abe’s push for equal pay, she said: “It is wonderful that he has put his mind to it and is making efforts to correct it. But if you handle it wrongly, you could create a situation where companies lower wages of regular workers to pay the others more.”

Mr. Abe has stressed the need to get everyone working, and the labour participation rate has risen during his three years in office, pushing the unemployment rate to a two-decade low. But the headline figures mask underlying weakness. During Mr. Abe’s tenure, the number of regular workers has fallen, while the percentage of nonregular workers has hit a record.

The jump in labour participation has been fueled mostly by an increase in the number of married women and people aged over 60 taking part-time jobs as incomes of heads of households fall and the pension age rises, Goldman Sachs said in a January report.

The Wall Street Journal, April 8^th, 2016