This year’s annual labor-management wage negotiations have effectively gotten under way as Keidanren (Japan Business Federation) announced its policy toward the wage talks and organized exchanges between union officials and executives of major companies. As uncertainties deepen over the course of the world economy and large firms expect a steep slowdown in their earnings growth, many companies are reportedly becoming more cautious toward raising the base pay scales of their employees, which would lead to a long-term rise in their manpower expenses. However, the growing economic uncertainties are all the more reason why companies that can afford to offer substantial raises should do so in order to shore up consumer spending and domestic demand.

Concern has indeed intensified in recent months over the prospect of global growth — with the United States and China, the world’s largest and second-largest economies, engaged in a bitter trade war of retaliatory tariffs. China’s economy grew 6.6 percent in real terms in 2018, the slowest growth since 1990, when the nation was hit by international economic sanctions in the wake of the Tiananmen Square incident the previous year, while auto sales fell 2.8 percent for the first year-on-year decline in 28 years. As China’s growth was dragged down by a slowdown in investments due to the effects of increased U.S. tariffs on Chinese exports, Japan’s exports to China in December fell by 7 percent from a year earlier. The International Monetary Fund has cut its 2019 world economic growth estimate by 0.2 percentage point from the previous forecast in October to 3.5 percent, predicting slower growth in the U.S., China and Europe than in 2018.

The slowdown in the world economy has led major Japanese firms — which have earned record profits over the past few years on the strength of the weaker yen and brisk demand in overseas markets — to expect sharply lower growth in profits. According to a tally by Nomura Securities, some 300 listed non-financial firms estimate their consolidated net profit in the business year to March will grow a mere 2.8 percent from the previous year — compared with the 38.5 percent growth in the year to March 2018. The management of these firms may have reasons to be on guard in the wage talks this spring.

At the same time, labor’s declining share of corporate earnings — the ratio of manpower expenses to profits — underlines the fact that firms have not increased their employees’ wages as much as their gains in profits in recent years. Labor’s share, which hit a recent peak of 74.7 percent in 2008, the year the collapse of Lehman Brothers triggered the global recession, has since steadily declined to hit 66.2 percent in fiscal 2017, the lowest level since 1974. While Japanese companies’ operating profits expanded by 2.3 times over the period and their retained earnings combined hit a record ¥446 trillion in 2017, their workers’ wages grew a mere 1.1 times.

Despite the projected slowdown in the profit growth, many firms are still earning record-level profits and should be able to afford higher wage hikes. Keidanren Chairman Hiroaki Nakanishi has urged member companies to consider “diverse ways” of increasing workers’ incomes — indicating that firms should respond to unions’ demands through a mix of wage hikes and increases in bonuses and allowances.

More robust wage hikes would be good for the economy. Even as Japan’s economy continues to enjoy a boom cycle that began in 2012 — which as of this month is deemed to have become the longest boom in postwar history — consumer spending has remained fragile and uneven as net growth in workers’ wages has stagnated. To spur private consumption, the disposable income of households needs to move upward, which will require wage hikes that significantly exceed price increases and rises in people’s tax and social security burdens. Such wage hikes will be all the more important to bolster consumer spending and domestic demand-driven growth as uncertainties intensify over demand in overseas markets.

Businesses should also consider an improvement in wages and other working conditions of employees as a necessary investment to secure the manpower they need as the labor supply tightens against the backdrop of the rapidly aging and declining population. The manpower policy of each company must be based on its individual business strategy. Companies competing in world markets will need to invest in globally competitive manpower. It should be questioned whether the conventional wage negotiations characterized by a herd mentality among firms — in which the outcome of the talks at certain leading companies set the trend for their industrial sectors — are still relevant in light of the increasingly diverse manpower policies and needs of Japanese firms amid the changing business environment.

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