Seniority pay on its way out?

Prime Minister Shinzo Abe has proposed a review of the seniority-based wage system prevalent among Japanese companies, calling for higher pay to younger generations and a shift to paying wages according to labor productivity. A growing number of large companies are in fact altering their systems to cope with changing business and labor market conditions.

Still, a review of the seniority-based pay system needs to be done in the overall context of employment practices by Japanese firms. The review should not be used as an excuse for simply trimming pay for senior employees.

Abe made the proposal in recent meetings with representatives from the business and labor communities — the same venue where he urged companies a year ago to translate their profits into greater wage hikes for employees. This year, he is urging that pay raises be coupled with reform of the wage system that traditionally has raised the pay according to workers’ ages and the length of their employment with the firm.

Seniority-based pay is one of the major features of labor practices prevalent in Japan, along with the lifetime employment system in which workers typically serve the same company until they reach mandatory retirement age. Many Japanese firms hire graduates fresh out of school and give them in-house job training. The wages are kept low for young employees and are increased as their job skills improve with age and experience.

In many Western economies, companies generally define specifics of the workers’ tasks in employment contracts. Labor mobility is high, and people rarely work for the same company throughout their career. They often move to other firms if they offer better conditions. Many businesses put priority on hiring of skilled workers over inexperienced young people.

Lifetime employment and seniority-based wages are credited with having increased workers’ loyalty to their companies as Japan went through its rapid economic growth during the postwar years. Productivity rose as the employees built up their skills through on-the-job training and experience.

As the economy entered a period of slow growth in recent decades, this system began to clash with the changing business environment. Amid the persistent economic doldrums that began in the 1990s, middle-aged and elderly workers earning higher wages became a target of job cuts by many firms through such means as voluntary retirement.

On the other hand, companies unable to shed full-time workers shielded by lifetime employment cut back on the hiring of younger workers or sought to trim their manpower expenses by hiring cheaper irregular workers.

Some aspects of these systems are believed to impede labor mobility in Japan. Seniority-based pay scales can be a hurdle for hiring workers in mid-career, including women who may have temporarily left the career path to raise children and talented workers from abroad.

Hitachi Ltd. announced in September that it is terminating seniority-based pay for about 11,000 employees above middle-management ranks so that their wages will more directly reflect their job responsibility and performance. The company says it is vital for the firm to be able to secure talented workers from overseas as it expands its operations globally, and that the pay system needs to be adjusted so that workers are compensated on the basis of their job duties — not the duration of their employment with the firm.

Panasonic Corp. says it is in talks with its labor union to change the seniority-based pay for its rank-and-file employees. Sony Corp. is also reported to be reviewing its system.

Labor union officials are on guard against Abe’s proposal, saying that changing the system of seniority-based wages to one of merit-based pay will result in pay cuts for senior workers and an overall deterioration of conditions for corporate employees. Still others are critical of the government’s effort to influence labor practices — which they believe should be determined by individual companies based on their conditions and needs as perceived by the management and workers. They have a valid point.

Regardless of the Abe administration’s prompting, it is expected that companies will increasingly shift away from seniority-based wages. The government should limit its role to ensuring that this trend does not result in unfair treatment of certain groups in the labor force.

  • kernals

    If Japan wants to end its stagnation, it needs to break up the old boys clubs that run many of its most important institutions.

  • phu

    Note, right off the bat: “a shift to paying wages according to labor productivity.” Japan’s historic measure of productivity is time spent at the desk; this is not an encouraging metric.

    “Seniority-based pay is one of the major features of labor practices prevalent in Japan, along with the lifetime employment system in which workers typically serve the same company until they reach mandatory retirement age.”

    Where is the past tense in this statement? It hasn’t been reliably true for new graduates for quite a while, which is part of the reason for the younger working generations’ malaise.

    Seniority is appropriate as a minor factor in compensation; you can’t expect a person who’s worked for you for 10 years to keep working for you without at least inflation-adjustment raises. But the Japanese tradition of seniority-only compensation consideration is so obviously outdated that it hardly deserves detailed consideration. The labor unions still pushing it are doing so only for very selfish reasons that do not mesh with the needs of the nation or its people.

    Unfortunately, this is not a legal issue, it’s a cultural phenomenon; despite lifetime employment having effectively already disappeared, seniority-based compensation and promotion are still a problem, and good luck changing that before the last two generations of management have retired. Particularly when they can continue to fill their ranks with part-timers.