Japan's labor market is getting so tight that companies are starting to convert contract and part-time workers into full-time, regular employees to prevent them from leaving — a move that could lift wages and spending but squeeze profits.

The trend is a reversal from the decades-long practice here of hiring cheaper contract workers who receive few benefits and are easier to hire and fire. They now make up more than a third of the workforce.

Companies are willing to reverse course and take on the extra costs that come with regular employees because of the tightest labor market since the 1970s, as Japan's population ages and declines.