The Economist on Japanese Labour Market Flexibility: Lessons for Korea

As regular readers will know, I’m an avid reader of the Economist, but I like to think that I know one or two things about Korea that its UK-based writers wouldn’t, and sure enough I’ve found its rare articles on Korea to be quite superficial. But I don’t have time to read much more than the Economist these days, so those mistakes in it about a country I know makes me worry about the mistakes it’s passing on to me about countries and/or issues I don’t know, and while it’s not always wrong to do so, having a dogmatic pro-market editorial stance on virtually everything doesn’t help either.

( Source: paranoidroid )

Fortunately though, today’s topic is Japan, which although I haven’t lived in I’d say I know better than…well, the other 99% of people who haven’t (I even know that there was a prime minister with a funny name in the late-1980s), so I feel at least semi-qualified to sift through the Economist’s special report on Business in Japan, discard the odd piece of libertarian rhetoric, and find the nuggets of genuinely interesting and useful information (and it’s got to be said, there are many). As for why I’m writing this post on a blog about Korea…well, I’d be surprised if 99% of the readers of this blog weren’t equally interested in Japan, but as for the other 1% of you, there are more objective reasons to do so: regardless of how much credence commentators give credence to the “developmental state” model of Japanese development and/or its adoption by various other North and Southeast Asian countries (more on that next month), virtually all acknowledge the strong similarities between the economic histories of Japan and Korea, and so developments on the former often have a lot of resonance in the latter.

(Photo by plynoi)

But regardless of what you think of all that, I’m not actually looking at the whole report and am just looking at the section on the Japanese Labour Market (although if you’re interested in the management-style aspect of the convergence vs divergence debate, its overall argument that Japan is moving to a hybird system would be right up your alley), and what’s striking is how I could have just changed the names and the decade and, no offence, most readers would have had no reason not to think it was about Korea (I would have been fooled too). Tempting as it is to cut and paste the whole thing though, instead I’m going to assume that readers are already familiar with this post of mine where I describe how in ten short years Korea has gone from having the highest numbers of lifetime-employment, extensive non-salary side benefits, male-breadwinner “salarymen” in the OECD (and world) before the Asian financial crisis, to having the highest number of irregular, temporary, and part-time workers in the OECD today. In the absence of a welfare state, the scale of the social upheaval of that shift is self-explanatory, which has meant that since I’ve written that post highlighting the shift I’ve yet to go into the details of it on this blog myself, perhaps subconsciously feeling satisfied with merely getting that information out on the blogosphere.

On that basis, it’s high-time to fill in the gaps, which ties in nicely with some plans for the new year for myself and the blog I mentioned in my last post, so let me begin here by drawing your attention to where the Economist report illustrates the extent of Japan’s own shift, and what exactly Japanese companies and the government are doing about it. Once I’m back in Korea I’ll see if their Korean counterparts are following suit, or have any home-grown approaches and policies not mentioned here. But like the Economist’s choice of header illustration (below) shows, the inferior position of women in both countries features prominently, and making it possible for women not to sacrifice careers while having children is arguably their most pressing problem. Not in the sense that raising the fertility rate to 2.1 is a universal panacea, more that improving the postion of women, urgently needed in its own right, will have knock-effects that will help to fix much of both societies’ other flaws too (not to mention those of many Western ones as well).

Much of the article is about the formation of a two-tier, highly unequal labour market. To begin:

[Back in the early 1990s] the traditional Japanese “lifetime employment” model was deeply entrenched. It is often said that this model is now collapsing and that the era of “jobs for life” has come to an end. But the reality is more complicated. For one thing, the traditional lifetime-employment system existed for only a few decades, and only at large Japanese firms; it was never universal.

It’s well overdue, but this admission is well overdue: in the past, the Economist was as culpable as authors of “journalism-lite” pieces in Time magazine in perpetuating the stereotype that Japan was full of salarymen. Having done so, it would be nice for them to dig deeper and find that Korea had far far more as a proportion of all workers, and so the scale of its shift was all the greater and more interesting, but that’s probably asking too much.

The system is now slowly crumbling, but only at the edges….Most of the salarymen inside the traditional system will stay there until they retire. But the labour market is becoming more flexible in several ways.

Mid-career job changes, once unheard of, are no longer quite such a rarity. The strict seniority system is giving way to a greater emphasis on performance-based pay and promotion on merit. And the number of “non-regular workers”…is increasing. But much of this reflects efforts by Japanese companies to shore up the lifetime employment system for its “regular workers”, involving necessary concessions to keep the old system going.

That never occurred to me, but in hindsight it’s obvious. But it’s a bit of a sweeping generalization, so one of my next tasks is looking at chaebol/재벌 and/or employment sectors in Korea individually and seeing if there really is a core group of privileged salarymen in each that everyone else is shoring up through lower wages. Even if this deliberate-sounding strategy is true for Japan, I’m not so sure it is for Korea, where salary, benefit and/or job cuts in 1997-98 were much more immediate and devastating than in Japan’s much slower, more drawn-out crisis in the 1990s.

Under the traditional system, companies hired graduates and then invested heavily in their training and development. To keep workers loyal and protect their investment, they offered lifetime employment on steadily increasing pay, with generous fringe benefits and a lump sum on retirement. Employees worked their way up through the ranks, so age and seniority were tightly intertwined. This made it hard for people to switch companies in mid-career. Women who left to have children found they could return only to more junior, part-time positions. People competed fiercely for jobs at the best companies-but once they were in, their performance made no difference to their pay.“At Mitsubishi your salary went up by the same amount, no matter how hard you worked. My friends at foreign firms found this unbelievable,” recalls Mr Mori (my italics).

If you want to find out who Mr. Mori is, read the report for yourself. In the meantime, had he read my blog posts on the Korean Education system (starting with this and especially this), very similar to the Japanese one, then he wouldn’t have been so surprised: it’s just an extension of the fact that in both countries, which university you go to is much much more important than what you actually learn there. The article goes on to mention that Japanese companies have been slowly implementing performance-based pay and meritocratic promotion schemes in response, but they haven’t been very successful, older salarymen hating working under younger employees (ie, in their late-40s) and vice-versa. Old habits die hard I guess. But young people no longer expect to stay in the same company their entire lives, and those in their 20s and 30s are much more likely to countenance doing so. In addition:

More portable pensions have further increased labour mobility. Under the traditional Japanese system, employees qualified for a lump sum at retirement (over and above the state pension scheme) after 30 years at the same firm, which strongly discouraged mid-career moves. But some firms, most famously Matsushita, a big electronics manufacturer, have introduced a new scheme in which employees waive the lump sum at retirement in return for a higher salary. They can then put some of their extra pay into a personal pension plan, akin to an American 401(k), which they can take with them if they switch employers. This is particularly popular with women…

I wonder why? Given the Korean government’s fixation on small, ultimately useless financial fixes for dealing with pressing issues, then I wonder if the same is happening here?

As the labour market has become more dynamic for regular workers…the gulf between regular and non-regular workers has widened. When the recession took hold in the early 1990s, the idea that Japanese firms would make workers redundant was unthinkable. Instead, to maintain lifetime employment, companies held down pay and benefits for existing employees and stopped hiring new graduates. Spurred by changes to employment law, they also began to take on more non-regular workers on lower pay and short-term contracts. Whereas in 1994 non-regular workers accounted for only 19% of the labour force, the figure has since risen to 33%. This created a “lost generation” of graduates who were unable to get full-time jobs during the 1990s, got stuck in low-paid, non-regular positions in which no training was provided and found it difficult to move into regular employment.

It goes on to to talk about all the freeters, “NEETs” and “net-cafe refugees” that comprise much of that lost generation. Yep, I too had only heard of the first.

The protection of regular workers, in short, has come at the cost of a growing army of non-regular workers. The irony is that companies that claim to be committed to lifetime employment can meet this commitment only by cutting back on hiring regular workers and relying increasingly on non-regular workers. “Toyota and Canon say they are still keeping lifetime employment, but to do so they are introducing a large number of non-regular workers,” says Keio University’s Mr Seike. Canon, for example, now employs 70% of its factory workers on non-regular terms, up from 50% in 2000 and 10% in 1995. Non-regular workers typically earn half as much as regular workers for comparable work. About half of them are not covered by company pension or health-care schemes. But although the use of low-paid, non-regular workers reduces firms’ costs, says Randall Jones of the OECD, it has the broader effect of constraining consumption, “so the expansion is still not firing on all cylinders.”

Now that Japan seems to have largely recovered from its lost decade, unemployment is only at 3.6%, and while I don’t know how accurate that is – I know that since 1997 the Korean government has deliberately used very conservative methods for its own statistics – at least non-regular workers are increasingly free to choose which sucky, non-advancing job they’ll go for. Hence, some companies are”converting” their non-regualar workers into regular workers to retain them, but the danger still remains that:

…Japan will find itself with a generation of middle-aged workers with inadequate levels of training, says Mr Seike. What is needed, he says, is a scheme to encourage companies to invest in training those in their 30s, with some of the training costs provided by the government. But the best way forward would be to close the gap between regular and non-regular workers by reducing the pay and benefits of the first group and creating better conditions for the second.

(Photo by kenchanayo)

And then it discusses the population pressures forcing reforms like this regardless, giving the cool graph below (see here for a dynamic Korean one, no pun intended). I’m sure readers will be familiar with those, as with the fact that Japan finds large-scale immigration unacceptable(despite what this happy clappy article entitled Chinese Immigrants Chase the Japanese Dream in Time magazine says – God knows what possessed me to buy it at HK airport), and so it will have to have encourage more old people and women to work in order to maintain its workforce. And to this end…

…the government has already passed a law requiring companies to raise their mandatory retirement age or provide retraining and re-employment for older workers. Most companies favour the second option: the seniority-based pay system makes the oldest workers the most expensive, so it is cheaper to offer them lower-paid work in semi-retirement than to keep them on as full-time employees.

Japan’s elderly are still willing to work, unlike their counterparts in Europe, notes Mr Seike. In theory, older workers could be put to good use training their younger colleagues. Raising the retirement age to 70 would roughly halve the rate of decline of the workforce. Increasing the participation rate of women from its current level of 61% (versus 69% in America) would help even more. Japan’s working-age population is expected to decline by nearly one-fifth by 2030, and boosting female participation would be the single most effective means of limiting the decline.

Many of the measures needed to do that, such as reducing the inequality between regular and non-regular workers and placing more emphasis on merit-based pay and promotion, would also improve flexibility more generally, notes Kuniko Inoguchi, who was minister for gender equality under the Koizumi government. But other measures that would specifically benefit women, such as better provision of child-care facilities, are also needed. Only 33% of children between the age of three and the mandatory school age (six in Japan) are in formal child care, compared with the OECD average of 73%. New rules for corporate child-care schemes and maternity leave for non-regular workers came into force in April. Big companies tend to offer child-care facilities already, but 90% of women in jobs work at small firms, which need to be persuaded to follow suit, says Ms Inoguchi. (italics added)

The corresponding figure for Korea is 26% (see my post here), but that is from 2001; the Economist’s one on Japan would be much more useful if they told us which year it was from as well. As for corporate child-care schemes, there is a law in Korea that states that large firms with over 300 workers must provide free child-care facilities for workers, but there are no penalties for non-compliance and so most don’t, so I’d be interested to see what the de facto situation is like in Japan too.

Finally, something from the leader article too. The figures for Korea are surely worse, so president-elect 이명박/Lee Myung-bak should take heed – 5 years of little improvement in them under his predecessor would have been the primary cause of his landslide election victory on Wednesday.

Japan prides itself on being an egalitarian society. In a survey carried out in 1987, 75% of the population identified themselves as middle class. By last year the figure had fallen to 54%, and the number of people who identified themselves as below middle-class had risen from 20% to 37% over the same period. Worries over rising inequality were cleverly exploited by the opposition in the upper-house elections this summer, which led to the downfall of the prime minister, Shinzo Abe. His successor, Yasuo Fukuda, has pledged to continue along the path of reform while addressing inequality.

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