Real effect of wage increases

A s signs emerge that major Japanese companies may be ready to accept Prime Minister Shinzo Abe’s call for wage hikes that reflect improved earnings, it is uncertain whether the pay increases will be broad enough to benefit employees at smaller businesses. Nor can the growing ranks of so-called irregular workers, who are employed on a part-time basis or on temporary contracts with low pay and little job security, necessarily expect to gain.

The Abe administration, while pushing for a 2-percent inflation target in two years, has made an unusual plea for companies to increase workers’ wages. While the yen’s fall, brought about by monetary easing, has benefited some export-oriented firms, households have borne the brunt of higher prices caused by the weaker yen, and will even higher prices when the consumption tax rate is raised to 8 percent in April from the current 5 percent. A slump in consumer spending due to the tax hike could derail the prime minister’s bid to get the Japanese economy out of deflation.

Top executives of some firms, including Toyota Motor Corp., have responded by indicating — unusually well before their talks with unions begin — that they are ready to consider pay increases next spring. Hitachi Ltd. Chairman Takashi Kawamura suggested that raising the pay scale will be an option.

Many Japanese firms have in recent years been hesitant to raise pay scales on the grounds that it would result in a long-term increase in labor costs — a disadvantage as they face stiff international competition. They have instead responded to pay demands with higher bonuses when earnings are good.

With the recent upturn in the economy, the summer bonus payment this year at companies with five or more workers inched up 0.3 percent from a year ago — the first rise in three years — but the amount of base pay excluding overtime and other allowances in September was down 0.3 percent for the 16th consecutive monthly decline, according to the labor ministry.

Despite criticism that the government is meddling in matters between labor and management at private-sector companies, the prime minister and other Cabinet members have held a series of meetings with business and union leaders since September to call for wage increases as a key to boost consumer spending and end deflation. The ¥5 trillion stimulus unveiled by the Abe administration in October to offset the negative impact of the planned consumption tax hike included corporate tax cuts. The business leaders are believed to be responding in kind — by showing their readiness to accept Mr. Abe’s request for wage hikes.

The question is how widespread the pay increases can be, given the mixed picture of performances among even the top-tier Japanese firms. Further in doubt will be the pay raises at small- and medium-size companies or even smaller businesses that have yet to reap the benefits of the economic upturn.

As the Japanese economy went through one crisis after another following the collapse of the economic bubble in the early 1990s, the companies have responded by cutting back on investments and manpower expenses. Wages continued to fall after hitting a peak around 1997 — until they sank to the bubble-era levels. Meanwhile, companies have accumulated internal reserves whose total far exceed ¥200 trillion today. Companies with large internal reserves should not hesitate to increase their employees’ wages.

Japan’s top business lobby Keidanren (Japan Business Federation) has long preached restraint in wage hikes. It is a welcome sign that Keidanren itself seems to be changing its position and taking the initiative for wage hikes, as indicated in recent comments by its chairman, Mr. Hiromasa Yonekura, that the federation would urge companies to reflect improved earnings in the pay for their workers.

Labor unions — which have suffered from declining clout in wage negotiations — are seeking across-the-board pay scale raises for the first time in five years. Rengo (Japanese Trade Union Confederation), Japan’s largest labor organization, in late October set a guideline for its member unions to demand at least a 1 percent rise in the pay scale during wage talks next spring. For years, Rengo has refrained from demanding pay-scale increases given the tough economic climate. The last time they did so (in 2009), their demand was widely rebuffed by management amid the global recession following the collapse of Lehman Brothers.

While Rengo leaders do not hide their frustration that the government is setting the pace for the wage talks, labor unions face the challenge of ensuring that pay raises will not be limited to big companies but spread among small- and medium-size firms and to rural parts of Japan.

Also on Rengo’s agenda is narrowing the gap between regular and irregular workers. According to internal affairs ministry data, the number of part-timers and temporary workers in the April-June period rose by 1 million from a year ago to a record 18.8 million, accounting for 36 percent of the nation’s salaried workforce. The number of full-time salaried workers fell by 530,000. But irregular workers now account for only less than 10 percent of the total 6.75 million union members under Rengo’s umbrella.

As prices rise and the consumption tax is set to increase, wage hikes are indeed an essential component of what the Abe administration hopes will be the virtuous cycle of better corporate earnings and increased consumer spending, which trigger more business investments. But it remains to be seen whether pay raises will be widespread enough to cover a significant segment of the workforce. As all workers will equally face the burden of high prices and taxes, it is imperative that union leaders make strenuous efforts to ensure that workers at both large and smaller companies and both regular and irregular workers receive a fair share of wage increases. But unions’ efforts cannot succeed unilaterally. Management must also strive to raise wages across the board.