Even after pandemic, Japan's labor market faces shortages and mismatches

Japan has been unable to shift its economy into higher gear as the coronavirus pandemic rages on, a fact that has often overshadowed some of the country’s chronic labor challenges, including worker shortages and job mismatches.

But those issues haven’t gone anywhere, and it appears that the situation could even worsen once society returns to some semblance of normality as vaccinations help ease the pandemic’s fallout.

In the wake of the first coronavirus state of emergency, in April last year, the labor market temporarily saw excess employment as a record 5.97 million workers were furloughed. But the latest government data shows that figure has decreased significantly — to 1.82 million in June.

“That excess employment ceased in a very short period of time, and labor shortages are more or less back now,” Shinichi Nishioka, senior researcher at the Japan Research Institute, said during an online seminar last month.

“If the pandemic calms down after vaccines become more widely available, pent-up demand will emerge, since we’ve been refraining from enjoyable activities for a long time,” Nishioka said. “The economy might recover quite sharply, but labor constraints will be concerning.”

The tourism and restaurant industries, hard-hit by the pandemic, will likely be troubled by shortages of workers as demand recovers.

Due to virus restrictions on businesses, those industries have lost a considerable number of workers.

Businesses relying on face-to-face service, in particular, have been suffering from subdued demand over the past year and half due to measures that have restricted people’s movement.

Restaurants and bars in Tokyo and many other areas have been unable to maintain normal business hours since January, as they have been under either a state of emergency or quasi-emergency declaration in which they are requested to close or shorten their opening hours.

Government data shows the total number of people working in the tourism and restaurant sectors stood at 3.82 million in June, compared with 4.05 million in February last year.

Regaining that workforce won’t be smooth sailing given that wages in the sector are lower than other industries, Nishioka said.

Indeed, the restaurant and tourism sectors have been sustained by lower paid workers: Average monthly wages for men and women in the industry last year were the lowest among other industries such as construction — at ¥278,000 and ¥209,000, respectively — according to government data.

Moreover, the government’s decision to raise average minimum hourly wages by a record ¥28, or 3.1%, from the previous year to ¥930 will heap extra financial burdens on already suffering businesses in the two industries.

“They’ve been losing money for the past year, so raising wages is pretty tough,” Nishioka said. “They won’t be able to take advantage of the upcoming pent-up demand because of the limited labor supply.”

Labor shortages are also expected to have an impact beyond just the hospitality sector. They are also likely to be a headache for tech firms, many of which have even thrived amid the pandemic.

The pandemic has highlighted how Japan, often characterized as tech-savvy, remains a laggard in utilizing digital tools, with many firms and organizations unable to make quick use of them to better cope with the knock-on effects of the virus.

In one example, a number of municipalities nationwide endured a chaotic period last year when local officials were forced to print out and manually check applications for a ¥100,000 cash handout program due to a faulty online application form.

Reflecting these lessons, digitalization efforts are finally gathering steam, and demand for individuals who possess skills in the digital arena is expected to surge.

But even prior to the emergence of COVID-19, Japan had seen shortages of tech workers. The industry ministry estimated in 2019 that the country had a shortfall of about 220,000 information technology workers in the prior year, with the figure predicted to grow to as high as 790,000 by 2030.

While the newfound momentum behind the digital shift could aggravate the labor situation, the tech industry — in contrast to the hospitality sector — can in many cases expand recruitment overseas, especially with additional funds raised through the digitalization drive.

Facing uncertainty last year, many companies refrained from hiring foreign workers, said Katsuhiro Hashimoto, director at Fourth Valley Concierge Corp., a Tokyo-based firm that matches Japanese companies with foreign workers

But “there seems to be a growing trend among Japanese firms toward looking to hire foreign talent again once the pandemic calms down,” said Hashimoto, adding that the number of domestic firms looking to recruit from abroad this fall has recovered to about 70% to 80% of pre-pandemic levels.

Most of those companies are looking for tech workers, Hashimoto added.

Once entry restrictions are eased — currently, new entries to Japan are in principle prohibited — “I’m certain that more companies will make moves,” he said.

As more Japanese companies gear up to hire foreign tech workers, Fourth Valley has reinforced its connections with overseas labor markets.

The firm signed a partnership in May with India’s National Skill Development Corp., a state-backed body that provides training programs to Indian people, to be able to introduce more Indian talent to Japanese companies.

Attracting engineers from India — home to scores of up-and-coming tech workers — has been a hot recruitment trend among Japanese firms.

While the acceleration of Japan’s digital transformation will help lift its low productivity, it could fuel another labor issue, namely deepening job mismatches.

A report by the Mitsubishi Research Institute predicts that the accelerated digital transformation will have a significant impact on administrative positions overseeing routine tasks, saying that the digital transformation will likely undermine their jobs more quickly than it had expected before the health crisis.

“The world where remote work and education and videoconferences has become the norm was not something that we were familiar with (prior to the pandemic). We were somehow thinking that something like that would happen in the distant future,” the report said.

The pandemic, however, changed this and “consumers have become more flexible in accepting new technologies, while companies that provide such technologies have hastened the speed of development,” the report added.

As part of the digitalization drive, such a trend will likely spur the excess supply of administrative workers while simultaneously creating posts requiring special skills that cannot be immediately filled, resulting in a widening job mismatch.

To overcome the mismatch, workers will need to learn new skills and shift to jobs that require more expertise, said Masashi Santo, research director of the Center for Policy and Economy at the Mitsubishi Research Institute.

“We call it socialization of recurrent education. Identifying what skills workers need and sharing that information across industries … and then offering public funds to support people to acquire new skills,” said Santo.

“If you leave it to individuals to take the initiative, you won’t be able to stop the widening job mismatch.”