Debating the merits of lifetime employment

Some years ago I worked for a language-teaching service that offered in-house classes for companies. One client was a major electronics manufacturer, and many of the students were trained engineers assigned to the sales division.

This human resources tactic always struck me as counter-productive, since those men (always men) possessed practical technical know-how that seemed to be wasted on eigyō (sales), but the longer I worked with them the more I grasped the logic, even if I never bought it. Rotating employees throughout the company by means of regular interdepartmental transfers engendered loyalty because they came to understand the workings of the organization, and not just the part they were ostensibly hired to serve.

Recently, I came across an explication of this practice in an article in the business magazine Diamond about nenkō joretsu, the seniority wage system that is central to Japan’s storied lifetime-employment system. The magazine said that interdepartmental transfers provided employees with “experience,” but only within a single company, because, in accordance with lifetime employment, employees were hired straight from university and expected to remain with the company until they retired. In other economies, “experience” is the measure by which a prospective employee is evaluated, and the wider and more varied that experience, the more money he or she can theoretically demand. In Japan, it’s the opposite. When you leave a company and join another, regardless of your skills, you start back at the bottom of the salary pyramid, because in accordance with the seniority wage system your worth is pegged to how many years you have worked for the same employer.

Japanese companies have been chipping away at lifetime employment for 20 years now, because it doesn’t make sense in an economy that no longer grows as fast as it once did. Diamond says only 8.8 percent of Japanese companies have retained lifetime employment. However, the seniority wage system is still in force because older workers were hired with such expectations, and since salaries under this system are not determined by achievement or even promotion, but rather by how long the individual has been with the organization, there are a lot of hatarakanai ojisan (middle-aged men who don’t work) on payrolls. The Ministry of Internal Affairs estimates that there are presently 25 million company workers in Japan who fall within the late-40s to mid-60s age cohort, and since productivity peaks around 45, these workers represent a drag on profitability, the implication being that the seniority wage system is a negative incentive. Older workers just cruise to the finish line.

Diamond doesn’t offer an opinion on this phenomenon. If anything, the magazine plays it for laughs with a rundown of the “Seven types of hatarakanai ojisan,” including workers who “delegate everything,” who pointlessly criticize subordinates out of habit, who still rely on “skills that are no longer relevant in today’s business environment” and, most significantly, who “sigh a lot” while despairing that things “used to be better.”

TV scriptwriters and manga artists have exploited these cliches for years, but the impact of seniority on the Japanese economy is being taken seriously by the government. Prime Minister Shinzo Abe has asked a study group in the labor ministry to look at the system with an eye toward having it replaced with a merit-pay system. The thinking is that as long as companies are pledged to offer unproductive older workers more money as they age, there is less money to pay younger employees who need it to make homes and raise families.

At least two newspapers have criticized the plan. In an editorial, Tokyo Shimbun blasted the administration for siding with corporate management in its desire to maximize profits by restructuring salaries, and drew a straight line from Abe’s proposal to the recent announcement by the Japan Business Federation (Keidanren) that it would resume contributions to political parties. The newspaper argues that “suddenly” changing the system may mean thousands of middle-aged workers will be cut adrift and left unemployable, since the current system hasn’t prepared them for a merit-based job market. And changing the system will not necessarily help younger workers, to whom salary scales may not apply because increasingly they tend to be nonregular employees. Moreover, the discussion is being led by the government and the business lobby, with no input from the labor side. The government should just let labor and management work it out on a company-by-company basis.

If the editorial has a pandering tone, that could be due to the fact that only older people still read newspapers. A more nuanced criticism was offered by financial editor Yuichi Kojin in the Asahi Shimbun, who acknowledges that the seniority system leads to de facto “psychological retirement” by the time a regular employee reaches their late 40s, because if they haven’t been promoted by then they won’t see any point in applying themselves anymore. However, Kojin’s own research found that the seniority system isn’t as monolithic as people think it is. Many companies find ways of either pushing nonproductive workers out or reducing their pay. Rather than doing away with seniority altogether, he thinks it should be altered so that pay is determined by the position, as is usually the case in other countries, and not by the person. That way, older workers understand their situations better, and younger workers can plan for their futures.

What bothers Kojin isn’t so much doing away with wage seniority, but rather the government’s acceptance of the Keidanren assertion that pay is a zero-sum game: You take away money from one group of workers and pay it to another group of workers based on notions of “potential” benefit to the company. The idea that all the workers might share in the success of that company doesn’t seem to enter into the equation.