How to Raise Wages in Japan

Japanese Prime Minister Shinzo Abe (Photo Credit: Hudson Institute, Flickr Commons)

Japanese Prime Minister Shinzo Abe (Photo Credit: Hudson Institute, Flickr Commons)

Japan’s economy is still in trouble. The country’s GDP fell in half of the fifteen quarters since 2012. Consumer spending is down almost 5 percent from its peak just before the April 2014 hike in the consumption tax. The drop in spending is, in turn, the result of workers having less money to spend. In the 2014 fiscal year, real wages fell 3 percent, and in just the first five months of the 2015 fiscal year (which began April 1), real wages are down another 0.5 percent.

Prime Minister Shinzo Abe has urged companies to hike wages, but firms don’t do that just because a politician asks them to. And yet, there is a surprisingly simple way for Abe to make a real impact on this front: enforce Japan’s existing labor laws against wage discrimination against non-regular workers and women. Non-regulars (who constitute 37 percent of all employees) include part-time and temporary workers; women constitute 45 percent of the workforce. Abe should also urge the Diet, Japan’s legislative branch, to pass legal fixes when court decisions neuter the law.

The Part-Time Workers Act of Japan requires firms to pay regular and non-regular workers the same wage for the same job. The Labor Standards Act says the same thing for female workers.

Unfortunately, these laws are not enforced. Unlike some other countries, Japan does not mandate any government agency to investigate violations and bring violators to court. Victims have to hire and pay their own lawyers and spend years in litigation. What’s more, class action lawsuits are not available in labor cases, and there are no financial penalties for violators.

Increasing employers’ flexibility to upsize and downsize their payrolls was the official reason for allowing the explosion in non-regular workers (court decisions have made it virtually impossible for firms to engage in mass layoffs of regular workers, even in recessions or when declining industries lose sales). In reality, a 2006 government survey reported that 71 percent of firms hired part-time workers mainly to reduce labor costs. In violation of the Part-Time Workers Act, the average hourly wage for non-regular workers is 40 percent less than those of regular employees.

As for women, full-time female workers are typically paid far less than their male counterparts. One reason is that, in order to evade the 1986 Equal Employment Opportunity Law (EEOL), firms created two tracks: a “general track” meant mostly for women and a “managerial track” dominated by men. By the age of 45, a person on the management track — even one who never actually gets a managerial position — will earn nearly 2.5 times as much as their counterpart on the general track. Despite the fact that revisions of the EEOL outlawed such discrimination in promotion opportunities, the EEOL is not enforced.

Rather than enforce anti-discrimination laws, Abe has taken the opposite tack. He has proposed a law that would enable greater use of temporary workers sent to firms by dispatching agencies. When opposition parties proposed a law that would require equal pay for equal work for dispatched workers, the ruling Liberal Democratic Party (LDP) diluted it to make it meaningless. Given the chance to effectively and meaningfully raise wages for those facing wage discrimination, the Abe team actively defeated the effort – all while Abe falsely boasted of his “success” in getting firms to raise wages.

Abe’s one concrete effort has been a new law urging firms with more than 300 employees to increase the share of women in management slots. Abe declared he wanted women to comprise 30 percent of all managers — up from 11 percent today — in just five years. But, as with almost all of his structural reforms, Abe has once again touted a promising goal without a strategy to achieve it. The law sets no target; it merely requires large firms to set their own targets. It does not impose penalties for firms failing to meet their goals. And, even if the law succeeded, it would help very few women. Only 30 percent of employees work at the large companies impacted by this law. Moreover, only 14 percent of all employees aged 50-64 are managers. 14 percent of 30 percent is 4 percent. What about the other 96 percent of workers?

There is no question that the typical Japanese firm, especially the larger ones, can afford to pay higher wages. The wage share of corporate value-added is at a two-decade low. Companies are raking in record profits, but they are not investing those profits back into the economy in the form of higher wages or increased investment in equipment or technology. Instead, they hoard the cash in financial investments and use record amounts of it to buy up overseas firms.

Abe claims to regard healthy wage hikes as vital to his overall strategy for rejuvenating Japan. Why, then, has he not taken any of these feasible steps?

The sad fact is that Abe’s behavior on this issue is not an exception, but rather the rule. With regard to virtually all of the structural reforms he has labeled the “third arrow” of his rejuvenation program, Abe has announced many worthwhile goals; what he has not done is propose viable strategies to achieve them. Without structural reforms across a host of fronts — wages and labor flexibility, corporate reform, trade and inward foreign direct investment, agriculture, and energy, among others — Japan cannot achieve the productivity revolution indispensable to healthy growth rates.

Unfortunately, Abe is unwilling to spend the political capital on difficult economic reforms, for he would rather devote it toward implementing security policies, such as the very unpopular Collective Self-Defense (CSD) bills. It remains difficult to identify cases in which Abe has challenged a powerful domestic constituency for the sake of solid economic reform. The steps he has taken are more symbolic than substantive. Abepolitics is trumping Abenomics.


Richard Katz is the editor of the Oriental Economist Report, as well as a Special Correspondent for Weekly Toyo Keizai, a leading Japanese business weekly. He received an M.A. in Economics from New York University in 1996 and has testified several times before Congress on Japan-related issues.


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