Is the dual employment system an asset for Japan?

The Economist has its latest update on the economic situation in Japan. After outlining the dire situation of plunging exports and domestic consumer sentiment, the writer drops this bombshell:

There is cause to temper the pessimism. Households still have their savings. And bank lending to companies is on the rise, though a good chunk of this is taking over from credit once supplied by capital markets, which have dried up.

Crucially, adjustments are happening swiftly in areas that beleaguered companies tackled only slowly during the last slump, such as bloated workforces and excessive capacity. Bankruptcies of “zombie” companies long kept alive on cheap credit and an undervalued currency have soared now that credit is harder to get and the yen has risen to a fairer valuation on a trade-weighted basis. And at the end of a decade in which much more use was made of contract and temporary workers, companies are now laying these off fast. In order to reduce inventories, production is also being slashed. This marks a new flexibility in Japan’s economy.

Unemployment, now 3.9%, may head back towards the post-bubble high of 5.5%. At the same time, the structure of the labour force may lessen the pain. As the economy recovered, many companies asked workers from Japan’s huge generation of baby-boomers to stay on past retirement age. Plenty of these will now simply retire with their pensions. Swift adjustments to workforces and inventories mean that Japan may recover sooner than other rich economies.

Really? Is keeping a third of the population in employment limbo really that much of a boost? Surely, I don’t deny that unpleasant realities can prove positive for economic growth and stability, but I just have never senn anyone actually defend the dual employment system.

Among many including myself, it is almost taken for granted that Japan’s dual employment system is unfair and exploitative. And even among those who disagree, I have seen near universal dissatisfaction with the status quo.

In the postwar era, one of the defining aspects of Japan’s economy was lifetime employment, in which most employees at the core companies were given job security in exchange for loyalty and limited input into their career destinies. This system was instrumental in Japan’s development as it provided a highly motivated, highly skilled workforce and contributed to developing Japan’s broad middle class. While never the sole driver of Japanese development, it did form a core component of the “full mobilization” of Japanese society to achieve growth and development.

But the devastation of Japan’s “lost decade” in the 1990s meant that companies could no longer afford to fund generous seniority-based pay scales. In response, the Japanese government began instituting a series of reforms that expanded employers’ options to employ workers under different schemes, including fixed-term contracts (keiyaku shain) and temporary employment (haken shain).  Today, today non-regular employees make up around a third of Japan’s workforce.

With 2/3 of workers given vastly better treatment for often the same work and experience, many have long called for reforms that would equalize the situation. The dual system persists, however, due to resistance from the big labor unions who instead claim that the temp and contract workers should be brought into the regular employee system.

As I mentioned, many such as the OECD and writer Masafumi Tsujihiro see this system as highly problematic in terms of basic fairness. But unlike the labor unions, they call for the elimination of the excessive protection of regular employees, which is backed up by court decisions that make the hurdles for firing employees quite high. 

Just off the top of my head, I would think that the US, with its reputation for having an enormous capacity to make “swift adjustments to workforces and inventories,” would beat Japan out of recession, all things equal.  So readers, help me out here — are haken really a blessing in disguise?

9 thoughts on “Is the dual employment system an asset for Japan?”

  1. First, I think that it is necessary to hit on the fact that this is a myth dominated discussion. I don’t mean your post – I mean whenever this subject is raised in Japan or elsewhere, there are a few incorrect assumptions that are floated.

    First, is this a Japanese thing?

    The only good studies that I have seen that can be used to compare are from the EU. In Spain, the percentage of contract workers has ranged between 25-35% since 1980.

    In some areas of North American employment, there is a huge reliance on temp labor. 60% of university employees, for example, are on contracts of one year or less according to some estimates. I’ve seen some business papers that talk about a “contingent workforce” and say that around 25% is the “sweet spot”. So Japan is neither unique, nor particularly egregious in this area.

    So before we talk about “Japan’s dual employment system” we should be asking why this issue is so bitterly contested in Japan and more or less taken for granted elsewhere?

    That comes down to another myth….

    “In the postwar era, one of the defining aspects of Japan’s economy was lifetime employment”

    I’ve seen stats that indicate that the percentage of short term hires in Japan was about 20% in 1985 and is now up to 27-33% depending on how things are measured and who is doing the measuring. A shift, yes. But then, as now, most of these short term contracts are being given to older women returning to the workforce after childbirth – a cheap labor pool throughout the postwar period and an engine of growth in some industries that nobody wanted to talk about. The only difference now is that more men (of a better social strata as all sorts of crap short-term jobs including day labor were common during the boom years) are finding themselves in dead end haken jobs. This idea that lifetime employment was hollowed out during the Koizumi years is bunk – some never had it and the shift, while notable, is pretty small.

  2. Never have understood how keeping a third of the workforce worried about the future and not giving a toss about the crappy job they’re in was good for the economy, in any country.

  3. I think that one of the reasons that Americans are entering late into this debate (as a major thing, it certainly existed earlier) is because easy availability of credit between 1995 or so and last year allowed people to continue spending like they had secure jobs, even if they didn’t. Japanese consumer spending flatlined earlier because they didn’t go through the same CC orgy. Now it seems as though the US and Japan are staring at the same problem – the domestic market will be the engine of growth for both of these economies in the near future, but how to get the engine started if many, many workers are in job situations that are so tenuous that it kills the motive to spend? As long as employees are being nickel and dimed on the edge of an unemployment razor blade, employers are going to be hurting as there will be few people who can spend enough to fill their coffers. We also are looking at a nasty (from the POV of Japan/US) potential development – wages in China have to rise at some point. This will cause a rise in the price of all of that wonderful consumer junk in Japan/US. Not going to help consumer spending any.

  4. I read in The Guardian some years ago, that Japan saves too much and should be spending more, to get out of flat growth, but that the employment insecurity and lack of social welfare made employees reluctant to dip into their savings.

  5. I’m pretty sure they mean that having 1/3 haken gives more flexibility that having 0% haken. It would be even better if 100% of the workforce was “haken”, i.e. pretty much the situation in market liberal western countries. Then the stigma of being a “temporary” (i.e. fireable) worker would disappear, and society could be reorganised to help fired workers retrain and find new jobs rather than trying to save their old ones. In a word, “flexicurity”.

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