Commentary / Japan

End of Heisei Era and lifetime employment

by Yumiko Murakami

The lifetime employment system is no longer sustainable, Hiroaki Nakanishi, chairman of Keidanren (the Japan Business Federation) told a news conference last month when the top business lobby’s new recruiting guidelines for college graduates were announced. Nakanishi’s comment has made waves throughout the Japanese business community, raising anxiety among white-collar workers, otherwise known as salarymen. The truth is the lifetime employment system was not sustainable for much of the just-ended Heisei Era.

A majority of companies and business leaders have been facing the limitations of the traditional employment policies for years. Now that the mighty Keidanren chief has publicly acknowledged this inconvenient truth, can the rest of Japan come out of its state of denial and change gears, accelerate and catch up with the rest of the world? And is the government ready to implement labor polices appropriately modernized to match the new Reiwa Era?

The notion of salaryman with unshakable loyalty to his company that provides lifetime employment security evolved with Japan’s impressive postwar economic growth during the Showa Era. But this narrative started to change during the deflation-plagued Heisei years, when the costs of maintaining loyal salarymen began to outweigh the benefits of owning a stable and predictable labor force.

To cope with a stagnant economy and muted demand, many firms have been making adjustments in their human resource management practices. The latest OECD Economic Survey points out that lifetime employment is indeed fading in the face of slow growth and intensifying competitive pressures. Among workers in their 30s and 40s in large firms, the share who have remained with the same employer since leaving education was 15.0 and 9.4 percentage points, respectively, lower in 2016 than it was in 2006. Meanwhile, approximately 40 percent of today’s labor force consists of part-timers and contract workers. The share of such irregular workers has almost doubled over the course of the 30-year Heisei Era.

Even though companies have been coping with deflation and the advent of the digital economy for some time now, much of the labor market regulations and employment policies have not been adjusted to the new economic reality. The OECD index of employment protection indicates that Japan has stronger protections for permanent workers compared with the OECD average. The World Economic Forum suggests Japan is one of the most restrictive countries in the world for employers to dismiss their permanent workers. Furthermore, regular workers in Japan are largely compensated based on the length of their employment. The link between tenure and wages in Japan is one of the strongest among the OECD countries.

Digital transformation has started to have a tangible impact on jobs in all countries. For Japan, studies show that approximately 15 percent of today’s jobs are likely to be replaced by automation and an additional 39 percent will probably undergo substantial changes driven by technologies. The rapid pace of these changes makes it difficult for companies to foresee what types of skills will be required in the future for their businesses. Constrained by rigid employment policies, Japanese firms have not been able to acquire opportunistically new talent from outside of their companies to meet newly emerging skill demands.

Internally, companies should be providing continuous opportunities to upgrade the skills of their employees. In fact, more than two-thirds of Japanese workers believe that they need further training, double the OECD average. However, the OECD Survey of Adult Skills finds that participation in lifelong learning in Japan is in the bottom quartile of countries in the survey. The reality is that companies have little incentive to train irregular workers who have no long-term employment prospects. For regular workers who typically put in long hours, time constraints become one of the main deterrents for lifelong learning.

Perhaps one of the most stunning findings about lifelong learning in Japan is that the share of workers who find education and training useful for jobs is the lowest among the OECD countries. This finding is extremely telling of the distorted environment surrounding Japanese salarymen. They acknowledge the needs for training to keep abreast with technological changes, but after long hours of work, they barely have any time left for anything else. Even when they manage to receive training, many of them find it irrelevant for their job. Presumably, it is because their compensation and promotion are determined by seniority instead of merit. Seniority-based wages also serve as a natural incentive for employees to avoid risks. When tenure is valued more than merits by companies, a risk-averse mindset can be fostered among employees.

What if Japanese companies do depart from lifetime employment, as Nakanishi hinted? It may mark the dawn of a new salaryman era and the underlying tone should be the one of optimism. Of course, comprehensive structural labor market reforms will be required, including lowering employment protection for regular workers, expanding the social safety net to assist job transitions, enforcing stricter limits on overtime hours and abolishing the mandatory retirement system. These changes will create dynamic job markets and higher worker mobility. Both companies and workers will be motivated to upgrade their skills for better economic opportunities.

The good news is the Japanese possess the highest levels of literacy and math skills in the world. This is a powerful foundation on which the salaryman can build much-needed digital competency. With the prospect of better upward mobility inside and outside of companies, the salaryman will be more willing to take risks.

Last but not least, the salaryman should be renamed “salary-person” in the Reiwa Era. These employment policy changes will, without doubt, bring more women into the mainstream of job markets. An economy that can thrive with workers with diverse backgrounds is exactly what the new era is calling for. After all, Reiwa means beautiful harmony. Harmony can be created only with a variety of voices. Let the era of beautiful harmony begin.

Yumiko Murakami is head of the OECD Tokyo Centre, where she engages in policy discussions between the OECD and governments, businesses and academia in Japan and Asia, covering a wide range of economic policy issues.