Japan’s employment situation has steadily improved in recent years — with the jobless rate in August at a fairly low 2.4 percent and the ratio of job openings to seekers at a 44-year high. Despite the tight labor market, however, workers’ wages have not increased as fast as might be expected in the face of the manpower shortage. Meanwhile, labor’s share of corporate earnings is at a 43-year low — which suggests there’s more room for businesses to raise their employees’ pay. Even as the economy continues to motor along in an extended boom cycle, growth in consumer spending remains uneven and fragile. How to translate the robust employment picture into more significant wage hikes that would drive up personal consumption has been and will be the key challenge for our economy going forward.
According to Finance Ministry statistics, the labor share of value added — the ratio of what is spent on employee wages and their welfare expenses out of what companies make — was 66.2 percent in fiscal 2017. After hitting a recent peak of 74.7 percent in fiscal 2008, when the world was hit by the Lehman Brothers shock, the average labor share (excluding financial and insurance sectors) has been on a steady downtrend, and the 2017 figure was the lowest since 65.1 percent in fiscal 1974.
That may not come as a surprise, since the labor share reportedly tends to drop when the economy is growing — and rise when the economy is hurting — because companies try to avert radical changes in their workers’ wages. Still, the downtrend of the labor share seems to illustrate how Japanese firms earning record profits remain hesitant to give their workers hefty raises. Compared with 2008, operating profits of companies have expanded 2.3 times, but the wages of corporate employees are only 1.1. times larger. On the back of their robust profits, retained earnings of the companies combined rose 9.9 percent from the previous year to a record ¥446 trillion.
The slow growth in the average worker’s wage despite the tight labor market is often attributed to the growing ratio of low-paying irregular workers and elderly people in the workforce. People with irregular jobs, such as part-timers, contract workers and temporary dispatch staff, have come to account for roughly 40 percent of the labor force.
It’s also said that after experiencing a prolonged rough patch, many businesses are reluctant to take steps that would increase fixed manpower expenses, which could be a drag on their international competitiveness.
The economy is now deemed to be in its second-longest postwar boom cycle, touched off by Prime Minister Shinzo Abe’s Abenomics policies, including a massive monetary stimulus program by the Bank of Japan, instilled after his return to power in December 2012. The improvement in the job market over the years is clear: The unemployment rate, which averaged 4.3 percent in 2012, fell to a 25-year low of 2.2 percent in May this year, while the ratio of job openings to seekers rose from 0.80 in 2012 to 1.63, the highest level since January 1974.
The job market is tightening just as the nation’s population is rapidly aging and declining. But the demographic changes alone do not explain the improved employment picture, since no clear correlation can be observed between population trends and job statistics. Japan’s total population began falling in 2008, and the so-called productive age population of people between the ages of 15 and 64 — who make up the core of the labor force — has declined after hitting a peak of 87 million in the late-1990s, falling to 75 million today. But the employment situation has seen ups and downs over this period. The job openings-to-seekers ratio hit a bottom of 0.42 in August 2009, while the unemployment rate was as high as 5.5 percent in July the same year. During the period of Japan’s rapid postwar growth, the population was expanding but labor demand was tight and the jobless rate was low.
Businesses are increasing their hires in light of the growing economy. In view of the worsening manpower shortage, they are also raising employment of full-time regular workers and shifting their irregular workforce to full-time status. The number of regular full-time corporate workers on payroll has been rising year on year for 45 months in a row, and there are now more such positions on offer than there are people seeking those jobs.
But wages need to rise more substantially before the improvement in the labor market can lead to a full-scale recovery in consumer spending. In August, workers’ wages declined 0.6 percent from a year ago on an inflation-adjusted net basis, as prices rose faster than pay. Per household spending rose 2.8 percent in August — the sharpest rise in three years and the second monthly rise in a row — but that was preceded by five consecutive months of decline from February to June. The growth in consumer spending, which accounts for 60 percent of the nation’s gross domestic product, remains uneven. Labor’s share of the corporate profits should rise for sustained, domestic demand-driven growth of the economy.