The Abe administration’s plan to increase the legal minimum hourly wage by 3 percent each year so that the national average — ¥798 this year — will reach ¥1,000 around 2020 is a well-intentioned policy. Along with steadily implementing the plan, the government needs to make sure the move won’t jeopardize employment or hurt the finances of small and medium-size businesses.
Japan’s legal minimum wage remains well below the levels guaranteed in many other advanced economies. The level is determined in each of the 47 prefectures based on a national guideline, and a steep and widening gap exists between the highest — ¥907 in Tokyo — and the lowest, ¥693, in such prefectures as Okinawa and Kochi. Previously, the minimum wage in some prefectures was so low that workers at that pay level earned even less than people on welfare — a situation that was corrected across the nation with a hike last year but not significantly enough to eliminate the still widespread problem of the working poor in this country.
Along with its repeated urging that major companies turn their increased profits into higher wages for their employees, the administration of Prime Minister Shinzo Abe has been pushing to raise the legal minimum wage, the guideline for which is determined each year by a government panel of experts comprising representatives from business circles and labor organizations. While the nation’s major firms offered an average 2.38 percent raise for their workers this year — the sharpest in 17 years — and the average minimum wage was hiked by a record 2.3 percent, it was still short of the 3 percent hike as targeted by Abe.
The plan for the 3 percent annual hike is intended as one of the tools to achieve Abe’s new goal of boosting nominal gross domestic product to ¥600 trillion by around 2020 from ¥490 trillion in 2014 — which would require annual growth of at least 3 percent — by helping expand consumer spending, which accounts for 60 percent of GDP. But aside from the link to such an ambitious target, raising the minimum wage is the right policy and should be pursued over the long term. There won’t be any objection from the opposition camp, since the Democratic Party of Japan was also calling for a minimum hourly wage of ¥1,000 when it was in power.
The legal minimum wage typically affects the income of people in part-time and other irregular forms of employment, many of whom are not unionized and are not represented in annual wage negotiations. Since the 1990s, the ranks of such irregular workers have expanded to account for roughly 40 percent of Japan’s employed workforce as businesses cut back on regular full-time jobs to save manpower expenses. Even as employment figures improve to their best levels in years, much of the increased demand is concentrated in irregular positions. The Cabinet Office estimates that up to 5 million workers are hired on hourly wages at or slightly above the legal minimum wage. It seems to make all the more sense to raise the wage if the government is serious about boosting consumer spending.
The government will need to bear in mind the possible impact of minimum wage hikes on jobs. Under a perfectly competitive labor market, raising the minimum wage in theory will reduce the number of jobs. In reality, the impact will differ according to employment conditions. When conditions are favorable, the negative impact of a minimum wage hike on jobs will be limited and the effects on the overall economy will be positive as it increases consumers’ income. On the other hand, such hikes could severely affect jobs when the employment situation is poor.
Recent employment data gives a fairly positive picture, reflecting the increasingly tight labor demand. The October jobless rate of 3.1 percent was the lowest in more than 20 years, while the ratio of job offers to job seekers was 1.24, the highest in 23 years. The situation seems ripe for raising the minimum wage without hurting employment.
From the employers’ viewpoint, however, a higher minimum wage raises their manpower expenses, and there is concern that the planned hikes will place a heavy burden on small and medium-size firms, especially those hiring workers at or close to the minimum wage. Many of these companies have missed out on the benefits of Abe’s economic policies, such as the weaker yen that boosted the profits of major firms but hurt many others by increasing the cost of imports. Akio Mimura, president of the Japan Chamber of Commerce and Industry, whose members comprise small and medium-size companies, said the plan for the minimum wage hike should be carried out in view of the real situation — an apparent reference to the possible negative impact on smaller businesses.
A package of economic and welfare measures that Abe spelled out last month, including the plan to raise the minimum wage, also calls for support for increasing productivity at small and medium-size companies as well as improving the terms of their business contracts with major companies. The major firms, which stand to gain from many of Abe’s pro-business policies such as corporate tax cuts, should proactively try to share their gains with their smaller subcontractors. At the same time, the government, to set the road map for implementing the promised hikes in minimum wage, should also take effective steps to support smaller companies.