Ongoing moves for a greater flexibility in the labor market will increase effective labor supply — a good news as Japan faces a declining population, said James Hosek, professor at Pardee RAND Graduate School.

This flexibility will bring greater value to companies by enabling them to reallocate resources in response to new opportunities, Hosek told the June 3 Keizai Koho Center symposium.

At stake is the “effective” labor supply — not just in terms of usual measures such as hours of work and the number of people in the labor market, but also workers’ “effort” on the job, the professor said.

“The end of lifelong employment with a single company is likely to bring less earnings security, but greater job choice,” he said.

This will serve as a disciplining device in the way firms develop their policies to handle workers, he noted, adding that the companies need to devise labor policies whereby workers will voluntarily choose to work for them.

“This in turn may result in increased satisfaction and commitment to work” on the part of the workers, he said.

As flexibility increases in the labor market, there will be a growing demand for “value added” workers, he said. This will involve not just hiring highly-educated workers or those with expertise in areas such as engineering, but a “capacity to add value by effective resource allocation,” he added.

“The improved allocation of labor to its comparative advantage will be another source of considerable growth in wealth,” Hosek observed.

“This will manifest itself in more variable career length, greater mobility within and between firms, and an end of such things as ‘retirement on the job, ‘ ” he said.

For this to happen, companies need to innovate wage structures for their employees and personnel management policies, such as faster wage growth and less deferred compensation; continued provision of career development and training; as well as use of promotion, job assignments and pay to attract, retain and sort workers “to their highest value within the firm”; and to motivate them to bring forth their needed effort, he said.

Although there is concern that greater worker mobility might lead to loss of intellectual property, Hosek said the damage would be manageable.

“Even though a firm will lose some workers who have some firm-specific capital and knowledge of proprietary processes, the firm may also gain workers with substantial valuable experiences,” he said. “And the firm can limit the transfer of intellectual property through such means as nondisclosure agreements.”

Hosek argued that traditional values in Japanese labor relations will survive these changes, because firms will continue to value workers with loyalty and respect.

While outcomes will be less egalitarian for individual workers, this will not be a problem if opportunities are equal and as long as their promotion is based on a valid system of performance evaluation, he said.

And more flexibility in the labor market may help solve the problem of funding for Japan’s social security system, because an end to mandatory retirement and changes in wage structures would allow longer work at meaningful, well-paid jobs, according to Hosek.

Social security

Theodore Marmor, professor of public policy and management at the Yale School of Management, also touched on Japan’s demographic changes and social security system. He suggested that the country can learn from the experience of other countries to adapt its system — rather than try to radically change it now.

As for the pension system, a combination of three key things — a higher age of retirement, lowering the average expected level of pension benefit, and an increase in the funds going into the pension program — when done over a series of years “turn out to make adjustments possible,” he said.

Marmor noted that there are two views on demography.

“One view is what you might call a demography of destiny,” he said. “If you know who’s alive now, you know who’s going to be retiring in a certain point in the future, and if you extrapolate average pensions by those numbers of people and take into account the declining number of people, any pension system pushed far enough in the future will go bankrupt.”

While there is a limit to this view, it is a very strong push to decision-making in many countries, he pointed out.

An alternative view of demography, he said, is that “you can talk about demographic pressures, but you can’t talk about demographic certainties.” There have been many surprises in the world’s birthrate and longevity patterns, and there is “fundamental uncertainty about the shape of a demographic future,” he noted.

In terms of medical care, Marmor also cited the “fearful future” perspective — that if one is to extrapolate the current rate of growth in medical care expenditures, and if it is assumed that the rate of use of medical care by the older population will remain the same, the problem looks pretty hard to cope with.

Unlike pensions, it is extremely difficult to try to project future health care expenditures, because it is not simply a matter of population numbers, but it’s population numbers times the volume and price of medical care services, he explained.

At the same time, he said, there is substantial policy flexibility over what a nation does about medical care prices, volume and expenditures. The experience of Northern Europe since the 1960s, Marmor said, shows that there are nations that were able to keep their medical care and pension costs under reasonable control even as their populations aged.