Commentary / Japan

Questions over raising minimum wages

by Heizo Takenaka

Interesting discussions have lately developed in Japan over whether to raise legal minimum wages. In a May session of the government’s Council on Economic and Fiscal Policy, a member from the private sector proposed that the minimum wage that an employer is legally required to pay workers be quickly raised to ¥1,000 per hour. The minister of economy, trade and industry, whose jurisdiction covers the nation’s small and medium-size companies, expressed his reluctance toward the idea, saying that small businesses are already finding it hard to keep up with the current pace of minimum wage hikes.

Following such discussions, the Central Minimum Wages Council, an advisory panel to the health, labor and welfare minister, decided in late July to raise the guideline for the minimum hourly wage by ¥27 to ¥901 on a national average basis. That was the sharpest hike on record for the minimum wage, which is set in each prefecture, and the level will now top ¥1,000 for the first time in Tokyo and Kanagawa Prefecture.

The idea of the minimum wage is said to have originated in New Zealand. After a large-scale labor dispute involving dockworkers shook the country in 1890, a law on mandatory arbitration was enacted four years later. At the beginning of the 20th century, an Australian court spelled out the concept of the minimum wage, which was later called the basic wage.

However, similar ideas existed much earlier than that. In “The Wealth of Nations,” Adam Smith refers to the concept of wages that are enough to bring up a family.

Today, the minimum wage is generally considered as an aggregate wage that gives workers sufficient time to rest so they can maintain their labor efficiency in optimum conditions and can fulfill their duties under their civic rights. In Japan, the 1947 Labor Standards Law stipulated that minimum wages are set by administrative organs, and the law on minimum wages was enacted in 1959.

What, then, is the logic behind the arguments made recently over minimum wages? The grounds given at the Council on Economic and Fiscal Policy for raising them can be summarized in the following two points:

First, minimum wages in Japan are at fairly low levels when compared with those in other countries, and raising them will help boost consumer spending and galvanize economic activities. In fact, roughly 30 percent of the nation’s personal consumption takes place in the greater Tokyo area. Therefore, growth in workers’ income, including in the regions outside of the Tokyo metropolitan area, would have a significant effect in stimulating the economy.

Second, a certain group of economists argue that raising minimum wages will promote the metabolism of businesses and industries. It’s true that Japan has a large number of small and medium-size companies with poor productivity. If minimum wages go up, these companies will likely be forced out of the market and be consolidated into firms with higher productivity. Such arguments gain traction because raising productivity is extremely important for Japan with its declining population.

Naturally, politicians and bureaucrats who are in a position to protect small and medium-size businesses strongly object to the idea. Akio Mimura, chairman of the Japan Chamber of Commerce and Industry, which represents smaller enterprises, expressed concern over the impact minimum wage hikes would have on the management of those businesses and regional economies.

Meanwhile, the government in 2016 set a target of raising the minimum wages by about 3 percent annually, and its guideline on economic and fiscal policy measures compiled in June this year prodded businesses to raise employee wages by more than 3 percent. The latest hikes in minimum wages come to an average 3.1 percent increase — in line with the government expectations on private sector wages.

Given these developments over the issue, it is likely that pressure for raising minimum wages will intensify. In my opinion, however, it is worrying that such pressure continues to build up because in the argument for minimum wage hikes, basic viewpoints concerning how wages should be determined and what roles minimum wages should play are lacking.

First, wage levels are determined by labor productivity, as basic economics tell us. Wages will go up if labor productivity increases, while poor labor productivity will keep them low. Workers will benefit from higher wages and consumer spending will increase as a result. But the basic approach to making that happen is to raise productivity. There will be limits to merely pushing up wages without structural reforms such as deregulation to boost productivity.

Then comes the question of minimum wages. Minimum wages are determined — on a dimension apart from economic principles — by calculating what pay is needed for workers to earn the minimum essential income to cover expenses. In short, this belongs in the realm of social security policy. However, some people are calling for minimum wage hikes to facilitate industrial and business metabolism through greater competition. But one should beef up the competition policy to expedite the industrial metabolism instead of resorting to minimum wage hikes.

Confusing competition/industrial policy with social security policy will make it more difficult for people to understand the essence of policy measures. It is a contradiction to take policy steps such as subsidies to protect small and medium-size companies while at the same seeking to raise minimum wages to promote industrial metabolism.

Minimum wages necessary from the viewpoint of social security must be secured. But policy systems should be as simple as possible. The adoption of a social security policy for the purpose of a competition policy must be avoided.

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.

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