Commentary / Japan

A prologue to work-style reforms

by Heizo Takenaka

When Prime Minister Shinzo Abe’s Cabinet was reshuffled last August, “work-style reforms” was put on the forefront of the Abe administration’s key policy agenda — with a Cabinet minister put in place for the first time to be specifically in charge of the matter. Needless to say, working is an extremely important matter for the people.

In a news conference at the outset of this year, Abe said the following as he declared his intention to tackle work-style reforms: “The government will introduce a system in which people would be able to freely choose among diverse styles of work by correcting irrational disparities in such conditions as wage hikes, job training and welfare benefits irrespective of employment statuses — either regular or irregular employment. We will introduce an upper limit on work hours to end the practice of long working hours, and secure a work-life balance to create an environment where everyone would find it easier to work.” The prime minister then proceeded to name the regular 150-day Diet session that opened on Jan. 22 as “work-style reform” session of the Diet.

To be deliberated in the session is an amendment to the Labor Standards Law. It will be the first major overhaul of the law in its 70-year history. The amendment covers various grounds, but the biggest point is a new provision that seeks to evaluate the value of labor — or wages — in terms of performance. Given the growing proportion of knowledge-intensive labor, there are clear limitations to evaluating the outcome of labor merely in terms of the hours spent. A performance-based evaluation of labor will also have the effect of curbing the long working hours. However, opposition parties and some labor unions label the proposed amendment as “zero overtime wage” legislation by claiming that it will only reduce the workers’ pay. As Abe and his ruling coalition enjoy a dominant political foothold, the opposition camp appears to target the proposed legislation as its point of attack in the just-opened Diet session. There are chances that deliberations on the bill get confused as the ruling parties become worried about possible damage to popular support of the Cabinet.

It has long been thought that the prevalent employment system at Japanese companies is based on the two pillars of lifetime (or long-term) employment and seniority-based wages. While this system was born out of a natural process, it is undeniable that the practice has contributed to a stable employment environment, particularly in the manufacturing sectors. But with an end to the economic conditions in which high and stable growth was taken for granted, the decline in working-age population and the increase in knowledge-intensive labor, it is believed that lifetime employment and seniority-based wages are maintained by less than 20 percent of Japanese businesses today. It is against such a background, coupled with several other factors, that the work-style reform is being introduced.

Why is such a reform needed now? First, it is needed for revitalization of the economy. In other words, the labor market reform is necessary as a growth strategy. It is widely known that in Japan, the number of new business launches is small — roughly half the figure in the United States. At the same time, the ratio of companies that exit from the market — or close their businesses — is low (again, about half the level in the U.S.) This shows that the metabolism of industrial sectors is insufficient. For the economy to grow, it is necessary for capital and labor to move from companies with low productivity to those with higher productivity. That is the very process that revitalizes the economy — and push up people’s wages. Revitalization of the economy would be stalled when poorly performing companies remain in business — and keep employing their workers on long-term contracts. A greater liquidity of employment is what is exactly needed for the economy.

Second, the current system carries major inequalities from the workers’ standpoint. Regrettably, large disparities exist between regular full-time company employees and workers on irregular job statuses — and between male and female workers — in terms of wages and other working conditions. The group of “regular” workers is made up of the ones whose employment is solidly protected under the lifetime employment and seniority-based wage systems. Putting an end to such a dual structure should be important from the viewpoint of social fairness. Abe took up the issue in his policy address to the Diet in January last year by advocating the same work, same pay principle. Realizing equal pay for equal work is also important as an economic stimulus in that it raises the purchasing power of low-income earners.

Third, there is a social necessity to correct the long working hours and improve workers’ lives. This problem is summed up in the grave term “karoshi.” Only when a healthy family life is secured will it become possible to raise the nation’s fertility rate. Expanding employment opportunities for women by helping them have both their jobs and families will also expand economic activities. Recent studies show that increased diversity through greater labor participation of women will also boost the companies’ productivity.

In view of such a background, work-style reforms need to entail quite an extensive reform of the labor market. In that sense, the proposed amendment to the Labor Standards Law, in particular the introduction of performance-based wages, represents only the first step of such reforms. Still, the importance of a fundamental overhaul of the labor market is not yet fully recognized by people at large.

Between today and 2050, the working-age population in Japan is forecast to decline by about 20 million — a number equivalent to roughly 30 percent of the nation’s current workforce. Labor-market reform must be accelerated in order to make the most efficient use of precious manpower.

Heizo Takenaka, a professor emeritus of Keio University, served as economic and fiscal policy minister in the Cabinet of Prime Minister Junichiro Koizumi from 2001 to 2005. He is a member of the government’s Industrial Competitiveness Council.