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(2) 2. and surveys of several large Japanese factories in the mid 1950's carried out by an American labour scholar James Abegglen (Abegglen1958). His basic motivation was to discover how Western industrial technology fitted into a non-Western context with a different social heritage. In his conclusions,. Abegglen noted that employment practices in Japan were such that the employers did not discharge. workers even temporarily and, in return, the workers committed themselves to the company for the remainder of their occupational life. In other words, the employment relationship was static and enduring. Wages were seen to be determined primarily by age, length of service and education, rather. than productivity and occupational positions. In other words, while commitment and loyalty were rewarded, mobility was penalised and discouraged. He felt that these practices were the outgrowth of social relations which existed in pre-industrial Japan. The main ingredients of such a cultural system. was the peculiar behavioural pattern ofJapanese society which valued the attributes of' harmony and consensus and a strong tendency to prefer to operate within groups rather than as individuals.. This culturalist approach was given strong credence up to the 1970s. For example, the Japanese anthropologist Chie (Nakane1970) stressed the group orientation ofJapanese society together with the tendency for the internal arrangement of such groups to be hierarchical in nature - features derived. from both Buddhist and Confucian ideologies. Later, in the 1970s, came the influential OECD report. (OECD1977) on theJapanese industrial relations system which emphasised long-term employment, wage systems based on age, and the presence of enterprise-based unions. ']he report speculated that. there were some unique elements in the employment system which assured the smooth and effective functioning of the Japanese labour market -in essence, the unique culture of the Japanese people.. The report believed that this immobile and economically irrational system was compatible with the rigorous logic of Wl)stern technology because of the unique nature of Japanese society This image was. reinforced by the rapid growth ofJapan after Wbrld War WII when the remarkable performance of her industries began to be explained in terms of its peculiar employment system which seemed to stimulate productivity growth.. Such stereo-typing, which emphasised Japanese cultural uniqueness, paternalism, loyalty, commitment, harmony, consensus and suchlike, tended to prevent a more in-depth understanding of the subtle or explicit elements of competition, mobility, conflict, confrontation, struggle and adaptation. which were also part of the Japanese employment scene. For instance, how could large Japanese firms who were supposed to follow the lifetime-employment `rule' cope with recession and structural reform. when companies needed to change? Gradually, these kinds of questions became easier to answer as the. research on theJapanese employment system widened. the insntutiona/ approach This approach involved various contributions on what might be called the `problem centred' approach to the Japanese employment system. Wbrk by Levine (1958), Sumyia (1963), Shirai(1965),. Cook (1966), Evans (1971), and Shimada (1980) led the vanguard of this movement. These writers provided the wealth of information on the actual operation of management systems, the structure and functioning of collective bargaining, labour disputes, and government regulation of employment. They also clarified various aspects of the structure and operation of the labour market. The work of these scholars provided the basic foundations for a clearer understanding of the Japanese employment.
(3) 3. system and the wotkings of its industrial relations system. Unfortunately, the level of critical interaction. between these descriptive institutionalists was weak so that a more in-depth analysis of the importance issues did not always engage the attention of writers.. 777e i=L/nctiona/ AnaasAs Amoioach In the early 1970's, there emerged a series of writings which were based on a more deductive. approach to Japan's employment system. These writings utilised theoretical concepts based on market competition (economics), conflict resolution (sociology) or power fpolitical science) to study. the Japanese employment system. The functional analysis approach involved model building and hypothesis testing as means of achieving meaningiul conclusions and policy implications. The natural. consequences of such research was to incline the research towards universality of experiences and. convergence. This trend was derived from the tendency of social science methodology to assume a general conceptual world in which a single set of analytical concepts would be capable of explaining. any observed phenomena e.g. the concept of the market in economics, or conflict in sociology The works of Taira (1970), Kuratani (1973) and Hashimoto (1979) used the tools of analytical economics. and human capital theory to demonstrate the economic rationale underpinning Japanese labour market practices such as lifetime employment and length-ofservice reward systems. They stressed. that such developments were the result of optimal choices made by employers and workers alike, rather than being derived en masse from a vague idea of Japanese culture. From the sociology of work organisation, the factory-based research of Marsh and Mannari (1976) provided the essential. groundwork which led to the conclusion that the attitudes of workers in Japan were more closely related to structural and functional variables such as gender, status, and job satisfaction - which. they share with Western workers - rather than such cultural variables as paternalism or lifetime commitment. Reaction against the culturalist interpretation of the employment behaviour ofJapanese. firms also came from other powerfu1 quarters. For example, work undertaken during the 1980s by economists such as Aoki (1988) and Koike (1988) used more generalised propositions from the world of economic theory the Aieo-Ct//tLLralZst SJInthests. The various interpretations of the Japanese employment outlined above began to take another direction in the 1970s with the emergence of in-depth studies ofJapanese companies by foreign writers. who detailed not only the nature of employment practices in Japanese companies but also how the enterprise community functioned in terms of concepts such as the familM politics, or social attitudes. - all of which helped to mould the nature of the Japanese corporate enterprise. For example, the explicit comparative study of English and Japanese factories by Ronald Dore led to the phrase `welfare corporatism' as a description of the nature of the Japanese corporation. (Dore 1973).This was seen as a. situation where employees are provided with welfare benefits by the firm on the understanding that it is tihe firm's responsibility to guarantee the livelihood of the employees in return for their loyalty and work effort. His comparative analysis led him to believe that the role of cultural factors was significant,. but not always crucial, to an understandirig ofJapanese employment behaviour. He brought into sharp focus features common to both Japanese and British factories, although he suggests that one of the.
(4) 4. main differences i.e. worker morale, may have been due to the relatively rapid movement towards an egalitarian revolution in Japan after WWII which did not occur in Britain. This, together with the. benefits derived from being a latecomer in the development process, seems to have strengthened. Japan's industrialisation process. , ･ The work of Dore was complemented by the researches of Cole (1971 and 1979) whose work in Japanese factories began to show Japanese workers as enlightened individuals who expressed their own opinions and put them into practice-a far cry from the group centred harmony postulated by the early culturalists. Rodney Clark in his participatory survey carried out in a medium sized Japanese company. challenged common notions that group consensus and permanent employment were unique to Japan (Clark 1970). In addition, the research of Thomas Rohlen into employee behaviour in a Japanese bank provided essential detail on the life of these workers, covering areas as diverse as ideologies and. employment practices; and from dormitory 1ife to outside recreation-group activities (Rohlen 1974). In essence this provided a picture of broader `enterprise community' without the intention of proving one. particular explanation ofJapanese employment behaviour.. THE NATURE OF THE JAPANESE EMPLOYMENT SYSTEM 777epLzre `sacredtTeasure'mode1 To understand the dynamics ofJapan's employment system and the way in which it has changed over time, it is essential to outline its `three sacred treasures' i.e. paternalistic or lifetime employment;. rewards geared to seniority and length of service; and enterprise unionism. These were seen by many as the keys to Japan's extraordinary worker commitment, peacefu1 labour management relations and, above all, its high productivity;. The first treasure of `lifetime employmenV, at least in its stereotypical form, included three main components. First, the tendency for a high degree of synchronisation in the recruitment of new school/university leavers at the beginning of April of each year. Second, the tendency for workers to. be employed throughout their occupational life by the same company As a result of these features,. the employment of regular workers would be stable, and labour turnover, low since employers were loath to discharge workers except in the most extreme circumstances. Third, workers were rotated regularly among different job assignments over their working lives and promotion was more or less automatic with length of service. Such a fixed and stable employment relations system was believed to be rooted in the paternalistic nature ofJapanese society: In the same way as in a paternalistic society, a. father would recognise his child as a permanent member of his family, so the employer offers work and protection to employees in return for commitment and loyaltyL. The second `sacred treasure' of the Japanese employment system implied that wage rates were determined to a great extent by factors such as age, seniority, length of service and education, and were not directly related to productivity or the nature of a worker's job. A natural extension of this belief. was that this type of wage system was unique to Japan. The stronger relationship in Japan between wages and length of service for both white and blue-collar workers as compared to the UK and France can be seen in the earnings profiles of Figures la and lb... The final `sacred treasure' of the Japanese employment system relates to the nature of Japanese. unionism. Japanese unions are mainly organised on a company basis and only to a small extent are.
(5) 5. Figure 1. International comparisons of age-earning profiles (wage of 2a64 age group = 100). a) White collar workers 140 ×. o. v ,s o. ? g. d20. fi.. . ;.r.;-.. 't"'-. 1OO. 'u' .X"-----"-' '""'. tt.t!.rr:t-ttttrrtrrttttttt tttttttttttt t.ttt. ttrtttmstttt. -;"-g. 80. -'. :t!'"'-"'fi''. Z'<': ''. 60 Jepen- - a- -UK m-- mum France. 40 20-24. 25-29. 30-34. 35-39 40-44 45-49 50-54 55-59 60-64. Age range Source: OECD(1996). b) Blue collar workers 140. × 120. o. v .E ioo. f'. -!･･. ! --. o ? 80. -. )---. .--. -- ny =-- "..r...!... :-e :`- :-:,;.. --;. -.h-" "x"'. --. '. -. ×. ･.- ･. l. ''x'. 60 Japan - ' ' 'UK ---t .m, France. 40. 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64. Age range Source: OECD (1996). they based on skill or industry classifications. Hence, Japanese unions are, in essence, composed of employees of an enterprise regardless of their occupations. As a result Qf this peculiar structure, they. were assumed to be docile, weak, and compliant with company policy because they shared a common interest with management. The･ effect of the combination of the three `treasures' described above was to help create a particularly strong internal labour market in Japan, where the main emphasis was on internal growth and development of the firm.. A 'quaLij7ed t7easuTe'MOde/ In reality, the purely `sacred treasure' approach to the Japanese employment system is partly illusionary There are important qualhications to be made to the simple model of employment behaviour in Japan and in this section this simplistic picture wi11 be modified in order to reflect the reality of the. situation. The permanent or life-long employment hypothesis is incomplete for a number of reasons.. First, the concept of life-long employment is complicated and needs a number of qualifications. The narrow definition of permanent employment refers to male, regular workers in large Japanese companies employing more than 1,OOO workers. This `elite' group probably covers only some 30% of. total Japanese employees. However, even this group of workers have to leave the company at some.
(6) 6. Figure 2. Factors determining basic wages in Japan. Individual-related factors. Age, seniority, education and other individual characteristics. Basic Wage. Job-related factors. Job, performance, efficiency, and. other aspects of assignments or required skills. Combination of individual. Determination on the basis of a. and job-related factors. collective consideration of the above two elements. time between 55 and 60 due to the compulsory retirement system, leaving them with roughly five to ten years left before they finally retire from the labour market. If one measures long-term employment. by the percentage of workers who have more than 20 years service with the same company, the figure forJapan is 19.3%, which is significantly higher than the US (8.8 %) and the UK (9.6 %),but is similar to. Spain (18.4 %) and Germany (16.7 %). Likewise, the average tenure of all workers in Japan is some 10.9 years, being above the UK (6.7 years) but similar to Germany (10.4 years) and France (10.lyears) (OECD. 1996) Second, the idea that the labour turnover is low is also an illusion as shown in labour separation. rates, defined as the number of workers leaving their company as a proportion of the labour force in. certain age categories. For example, over the last thirty years, over 20% of employees aged between. 20 and 29 left their company in an average year-which is hardly an image of a strong permanent employment hypothesis ( Koike 1988, Rodosho1999). Third, it is not accurate to say that regular. employees of Japanese companies do not experience fluctuations in employment with changes in business conditions. Employment fluctuations have always occurred during major recessions years such as those experienced in 1966, 1971, 1975, and 1994.. Finally, the idea that fixed and stable employment system has been fostered by Japanese paternalistic attitudes is also incomplete. For example, intensive studies have made in clear that the. seemingly paternalistic Japanese employment system did not originate from feudal relations in the pre-industrial society, but evolved gradually through the interaction of management, labour, and the. bureaucracy after the end of the Russo-Japanese War of 1904-5. In effect, long-term employment. stemmed from a rational economic reaction of employers when trying to cope with high labour turnover and the shortage of skilled workers after the turn of the century (I;aira 1970, Gordon 1985).. As well as the stereotyping of permanent employment, there has also been an inadequate understanding of the nature of the wage system in Japan. Total wages in Japan are made up of two elements-a basic regular monthly wage, and biannual bonus in July and December. The former is not only determined by age and seniority but also byjob-related factors as shown in Fig 2 above.. Here it can be that there is an individual-related component (honnin-kyu) and a job-related. component (shigoto-kyu) plus various allowances for housing, training, overtime and commuting.
(7) 7. costs. In general, the individual-related factor of age/seniority pay comprises some 35% of the basic. wage, while job related factors such as position (e.g. a Department Head or Section ChieD, ability, performance, efficiency and general ability account for 56% of the basic wage. Therefore it can be seen that merit, as defined by position and ability, is a main determinant of wages. It should be noted. that personnel evaluation by supervisors is important in the determination of the basic wage so that managers have a reasonably wide discretion over the overall wages of employees. All workers receive a basic upgrade in their yearly salary based on seniority and, on top of this, the appraisal system is used. to reward those with greater qualMcations/ski11s/ability i.e. those who are good enough to achieve line positions such as Section Chiefs or Department Heads. The basic conclusion from this brief analysis is that while the age/length of service component does help create a wage profile that rises strongly with. age, this is not an exclusivelyJapanese phenomenon.. 'Ihe second major part of the wage system is the biannual bonus which normally varies between the equivalent of between 4 to 6 months of normal wages per yeai: The bonus is determined by various factors such as company profits and individual ability, thus allowing the company to reward its bright employees who are destined for the `elite' track. As such, it can be seen that it is not true to say that the. wage system has little to do with productivity since the payment system r.ewards worker effort through. the basic and the bonus systems of payments. Finally, in･terms of the stereo-typical view ofJapanese trade unionism, the `pure treasure' model. is that Japanese unions, are weak, management dominated, and not prone to strike (Galenson 1976).. It is argued that union independence from management at the company level is difficult because in Japan, fu11-time union officials retain their employee status and are often elected from employee. ranks. In many cases union officials come from among workers holding lower supervisory positions i.e. Iow management positions. It is argued that this provides general management with a great deal of autonomy in the labour market and results in a subservient work force with little ability to prevent. management from imposing its outright authority However, this is not a true picture of these unions. First, they are `bone fide' unions in that the union constitution limits the authority of its executive officers much more than their American counterparts, and their interim legislative bodies such as delegate meetings, convene every two or three months. Also, within an enterprise union context, the rank and file members of the union are not. as far removed from their representatives as they would be in the US or European countries. Second, they are `authentic' unions in that they have achieved many legitimate union goals. For example, as early as the pre war period, the unions with their strong egalitarian orientation succeeded in abolishing. the differences in status between white and blue-collar worker. In the area of wage negotiation and bargaining, the union movement overcame their fragmented enterprise structure during the 1950's by combining to push for higher wages at the same time of the year under the Shunto or `Spring offensive' system. It is also incorrect to conclude that Japanese unions rarely strike, although it is true to say that. most of the strikes are short-lived while the Shunto movement concentrates such activity in March and April of each year. There is little doubt that enterprise unions do co-operate with management, but. more often than not the reason is that within the Japanese enterprise, managers are often promoted from the rank and file and have often been union representatives in their past. In this way, high ranking. managers tend to regard the rank and file employees not as wage earners with conflicting interests,.
(8) 8. but as one-time junior colleagues in the same enterprise with a common interest in the survival of their company The innately fragmented nature of an enterprise-based union movement is, of course, a source of weakness in a Westen sense, but in practice this weakness can be partly mollMed by greater. co-ordination between enterprise unions and the industrial federations of unions (Tansan) to which. many belong.. THE JAPANESE EMPLOYMENT SYSTEMi A REALISTIC APPROACH The effectiveness of the Japanese employment system requires an understanding of two interrelated aspects. First, the nature and effectiveness of the internal labour market approach to. company development, and second, the effect of this type of labour market on company behaviour, and on the Japanese economy as a whole. Therefore, the picture of the Japanese employment system as a unique phenomenon 'is not completely accurate, although the system does have a combination ･of qualities which may make it somewhat different to the labour markets of the US or Europe. The difference, however, may be of degree rather than kind. This section will attempt a more realistic assessment of the Japanese employment system with reference to the `internal market' aspects of the. system. The account also provides a macroeconomic analysis of the employment system within the broader framework of the Japanese economy as a whole.. The rapid investmentled growth of the Japanese economy from the mid 1950's onwards enabled. large firms to grow rapidly, thus assuring employment security for employees even without any written agreements or rules on employment security It was under such circumstances that long-term employment appeared as if it were a `social norm' of the Japanese employment system. This factor was strengthened by the growth of rapid technology which induced employers to look for an increased supply of young, adaptable labour while also increasing the emphasis on internal training. Second, the. fact that workers aged between 15 and 24 years old made up a quarter of the population in the 1960s meant that there was a large stock of such labour available. The repercussions for the labour market. was profound, since industry was supplied with a relatively cheap, and technologically adaptable, labour supply This allowed annual recruitment, internal training, internal promotion and wages by age and seniority to develop in Japan - the internalisation of the labour market had begun in earnest. These. post 1950 forces were also made possible by the fact that Japan was a latecomer in the race towards modern industrialisation. This meant that modern industrial firms emerged in Japan bqfore the stock of industrial labour force, with its craft type unions, had been created. Firms absorbed their workforce. from the rural population who had no industrial experience, so firms had to train them from the very. beginning. Hence the gradual development of a highly structured internal labour market system from. the turn of the ninteenth century onwards (Levine and Kawada 1980). The particular condition of Japan's economy and labour markets after Wbrld War II allowed this system to spread rapidly to both large and medium sized firms.. 777e hexloie system - an insntutional peispective. The benefit of the Japanese employment system has been much debated both at the micro, or corporate level, and also from a wider macroeconomic perspective. At the corporate level, the internal. eiificiency of the Japanese firm is largely determined by the creation of incentives to develop firm-.
(9) 9. specMc human capita1. The firm places great value on the contextual ski11 developed over a relatively. long period of time. In other words, one of the most important aims of a Japanese company is to enhance the information processing skills of its workers. This allows them to understand their role within the company as a whole and thus prepares them for taking up a wider range of activities within. the company ']his means that job demarcation is a much more fiuid and ambiguous concept in Japan. as compared to that experienced in an average Western company Interestingly, this does not mean that the long-term development of contextual skills is necessarily rooted in paternalistic practices in the sense that everyone is rewarded for his or her loyalty to the firm. Ironically, the system can. more meaningfu11y be described as `competitive' because workers are constantly being evaluated by supervisors and rewarded differently over the long term. In other words, the personnel evaluation. systems of the company determines promotion, ranking, transfers and layoffs based on a careful assessment of an individual's potential for developing contextual ski11s within the firm. This makes the. personnel department of the average middle-to-large Japanese company much more important than its equivalent in the West. It also means that fine job specification and well-defined classification ofjobs. which create standard job markets have not always been popular in Japan.. InterestinglM what we have in Japan is a hybrid system where at least two major types of labour. market exist. One consists of the demand and supply of long-term employed workers, and, a second. market, where employment contracts are of shorter duration and where the demand and supply for more specific jobs are transacted. The first market consists of those workers who are increasingly valued according to their longer term contextual ski11, while the second market is more reminiscent. of the more mobile standard job-type market of the West. However, a labour market model based on the long-term employment is incomplete in the sense that the actual duration of employment cannot. be strictly guaranteed even in Japanese companies, since it depends on the performance of the company over the lifetime of the employee. Also, the promotion and wage profiles of employees are often uncertain because they depend on both the quality of the employee and the performance of the company in the marketplace. Finally the screening of high productivity employees and the weeding out of lowLproductivity employees is an important, but also a relatively slow process. How therefore does. the Japanese firm achieve perhaps its most treasured attributes of selecting suitable new employees while also maintaining incentives for existing workers?. The answers to these questions provide the key to the workings of the internal labour market within Japanese firms.. The key to an understanding of the internalised labour market system in Japan's middle to large firms lies in the nature of incentives within companies. In this respect, Japanese companies have an. adverse selection dilemma to overcome. The firm has to select new employees under the conditions of asymmetric infOrmation since it is assumed that new candidates for jobs have more knowledge of their own true attributes than the firm possesses. In other words, how can the firm evaluate which potential employees have the necessary qualities of diligence, productivity and low propensities to quit,. which wi11 allow the `contextual skill' model of the labour market to develop. Second, there is a moral. ha2ant dilemma. How can the Japanese firm provide incentives to discourage workers from shirking. on their work when it is impossible for supervisors to monitor their every move? The problem of adverse selection is minimised through employment screening procedures whereby the graduates of middle school (15yrs), high school (18yrs) and college/university (22yrs) are often recruited on their.
(10) IO. respective campuses and on the recommendations of their schools or universities (Inohara 1990). Candidates' educational records are checked, and a series of interviews organised by companies. The criteria for screening are strongly linked to the candidates' potential for contributing to human relations and technical learning-which are the main criteria thought important for the development of contextual skills.. At the same time, it should also be noted that the Japanese labour market resembles the `self revealing' system analysed by Joanne and Steven Salop (Salop and Salop1976).As explained previously,. the Japanese labour market is composed of many sub-markets, some of which resemble western markets where higher wages are paid according to job content. In this case, higher rewards are given. for particular ski11s, although the degree of employment security may be low. On the other hand, in the Japanese internal market model, wages are low at the outset but workers who are willing to endure. training in order to develop contextual skills will be rewarded with increased incomes over time together with long-term employment security In the selfselection model, the fact that new Japanese. employees choose to apply for the Japanese internal market model with its slower promotion/wage profile, is seen as a clear indicator that these employees have made their own choices. In other words, this selfrevealing system functions as a selfselection medium to cope with adverse selection. It should. not be forgotten however, that the longer the worker stays with the company, the higher will be the lump-sum retirement payments -varying from the equivalent of 14 months pay for 20-24 year olds to 40. months pay for those with more than 35 years service. This mechanism also helps convince the self selectors that they have done the right thing.. The moral hazard of trying to discourage workers from shirking can be overcome in many ways. For example, the efficiency-wage hypothesis would suggest that the close tie between tenure and wages in Japanese firms helps workers refrain from quitting or, alternatively, that workers are unlikely. to shirk because they have to pay a high price in the form of dismissal. The moral hazard problem is also partly remedied in the Japanese firm by the fact that an employee will have been assessed. by maay supervisors by the time they come to mid-career and if the performance is poor then the employee can be made redundant. This is a serious problem because it will be seen in Japan as a slur on the employee's reputation and any other job they may get elsewhere will be at a lower rank. These mechanisms tend to prevent shirking and function particularly strongly in the Japanese societa1 context, thus acting as a relatively powerfu1 device for enforcing discipline on the employee after entry. Another way of solving the moral hazard problem is taken by other writers (Prendergast (1992) and Takeuchi (1995)) who, on the basis of case studies, assume that Japanese organisations tend to have a relatively late selection of `stars'. This means that workers in large Japanese firms are not. normally differentiated in terms of promotions and wages from their contemporaries during'the first. decade or so of employment as compared to their US or European counterparts. These researchers attempt to analyse the problem of how the system of relatively late selection providesJapanese workers. with the incentives to work hard and develop firm-specific human capita1. The main point here is that late･selection can make most workers feel that a higher position in the company is possible for them in the future, and that this avoids the `discouraged worker' effect. Howeveg the problem still remains. that a wait of 10 to 12 years seems too long a period to maintain worker enthusiasm without giving them some idea of their potential. An interesting study by Isao Ohashi and Hiroshi Teruyama attempt.
(11) ll. to resolve this `time dilemma' by studying the personal profiles of 673 managerial staff in two large. companies ( Ohashi and Teruyama 1996). They conclude that wage differentials between different workers could not be fully explained by tenure or position/grade, which meant that there must be. some other elements determining wages. They found that the most important factor was the degree of internal mobility within the company This relates closely to the Japanese system ofjob flexibility. whereby workers are rotated between different jobs either within company departments (intradepartmental) or between departments (inter-departmenta1).. The findings showed that those employees who were engaged in inter-departmental transfers during their 20's, were likely to have higher wages during later, stages in their career. Such inter-. departmental transfers are a reflection of a worker's usefulness to a company, and are a way in which the company signals quite early on, the differential promotion prospects of staff. It is through. such transfers that worker motivation could be kept relatively high. Since the decisive selection of employees for top jobs are signalled later on in their careeg i.e. in their 40's and 50's, this method is. also ingenuous in that it also motivates those workers who are not initially picked forjob rotation. In. other words, it also makes this group work harder in order to `proye` themselves and thus jump on the promotion bandwagon in later 1ife. This is another way in which the internal labour market model. helps motivate workers to overcome the moral hazard dilemma. This research also complements other work which has shown that despite a tendency in recent years towards earlier selection of candidates. for promotion, there has been no wholesale move in Japanese companies towards making the decisive selection for promotion at an earlier stage than previously (Sato 1997). The final aspect of the formation of incentives within Japanese 1arge and middle-sized enterprises involves the question of how Japanese workers are motivated to act co-operatively rather than in a more individual manner as often seen in many Western firms? The key to this behaviour is to be found partly. in the nature of the ranking system within Japanese firms. In Western-type firms, the hierarchical. arrangement is often strictly vertical, with subordinates communicating with others only through higher ranked supervisors, the latter tending to cascade orders downwards to their subordinates. Also, the job definitions in such systems tend to be finely graded and a clear advantage given to job or task-. related occupation over another. Japanese firms also have a clear ranking system, but the difference is. that the reward is based on achieving a degree of seniority and standard of performance which is not always task-related. The effect of these two systems is that the Western- type corporate format is more. likely to value a corporate culture where the power necessary to achieve the higher task-orientated. rank will prevent employees from co-operating to share their knowledge. Conversely, the standard. rank system within Japanese companies is coupled with the philosophy that there is always `room at the top' even if it is not defined in terms ofjob specification - because status can also be defined. in terms of seniority rank. In effect, the Japanese hierarchical ranking system has both ajob and a. seniority component so that, for example, two employees who have worked together in the company for thirty years, may have roughly equal seniority although only one will have the functional job title,. of, say Department Head. In this context, there is not as much pressure in the Japanese system to. keep one's knowledge `hidden' (not co-ordinating and sharing knowledge) in order to get to the top. Also, the relatively greater weight given in the Japanese firm to multi-skilling and the rotation. of workers across a number of differentjob specifications, creates a greater understanding of the.
(12) ra. enterprise as a whole and hence the importance of co-ordinating and sharing. This helps promote the release of `tacit' knowledge whereby effective working within company-based groups helps release an employee's `hidden' and highly personalised knowledge such as deep subjective insights and hunches. etc ( Nonaka and Takeuchi 1995). One should remember that there is still a significant amount of competition for functional job positions in Japanese companies so that the internal labour market is still relatively competitive. However, the point to make here is that in the final resort, the `losers' in the. promotions race still retain seniority status and wages which are not too dissimilar to their promoted. colleagues. In short, the particular type of hierarchical structures in Japanese enterprises, and the weight given to contextual skill creation, provide an important clue to the co-ordination and sharing qualities of these organisations.. 777e dombie system-a stattsdea/perspective Nations wishing to experience long-term growth and increased competitiveness have always needed to look to improving the efficiency of their labour market. Labour flexibility can be seen as. the degree to which the labour market responds to shocks from both demand and supply sides-with particular attention to the distribution of the adjustment burden between wage changes on the one hand, and employment changes on the other. In this context, it is worth remembering at this stage that the whole concept of labour flexibility should not be regarded as a one-way phenomenon whereby increased flexibility is believed to be, a priori, a good thing. Rapid labour turnover, increased mobility). weak unions, and poorly developed social policies may improve labour flexibility but only at the cost of weakening job security; This, in turn, may actually lower labour efficiency since an insecure labour. environment is not conducive to increased efficiency and drive. From the Japanese perspective, the issues surrounding the flexibility of its labour market has been approached from at least three main. directions. First, the sensitivity of wages and employment to aggregate demand conditions. Second,. the numerical adjustment which companies make to demand conditions through adjustments in hours of work or the use of part time/temporary workers. Third, the functional adjustments made by companies through reorganising methods of production, labour content of work, multi-ski11ing, and job demarcation. As aspects of the third point have been covered previously, this section will concentrate on the first two elements.. As noted previouslM the Japanese wage system is based on two main elements; the basic monthly wage, and a biannual bonus. In terms of total remuneration, the research of Masanori Hashimoto and John Raisian have revealed that the relative flexibility of total remuneration over the business cycle between 1950-1983 was greater in Japan than in the US, and that the cyclical variability of employment was lower. (Hashimoto and Raisian 1992). Similarly, Asao Mizuno, in an investigation into the roles of. both tota1 wages and its components foasic and bonus) in six major economies over the period 1960-83, found that the flexibility of total wages (and in particular basic wages), were greater in Japan than in. the US, France, Germany, the UK and Canada. (Mizuno 1992). Important research undertaken by Kazutoshi Koshiro on the relationship between the Japanese bonus system and company performance over the period 1973 and 1984, showed that both the level of bonus and its rate of increase, was sensitive to changes in profits per employee. The work also noted a tendency for downward rigidity in. the movement of bonus (Koshiro 1992). Even when remuneration was defined in terms of hourly wage.
(13) B rates (in nominal or real terms), Ybshio Higuchi found that over the period 1970-1991, the standard deviation of the wage rate was much higher in Japan than in the US and the UK (Higuchi 1997).. These studies showed that when compared with other countries, Japan's wage system was more sensitive to economic conditions than in other countries, thus helping to prevent major changes in. employment over the economic cycle. In Japan, the effect of economic downswings were therefore felt to a greater extent on wages while other countries showed greater fluctuations in emPlqyment adjustments as economic conditions changed.') To some extent, this research also gives an insight into the theory of firm-specific human capita1 which was discussed previously, in that Japan's internal. labour market model tends to regard labour as a quasi-fixed factor. The type of employment practices. carried out in many large and middle sized Japanese companies tend to lower transactions costs because the nature of the employment relationship is clearly understood at the outset. This factor. reduces the haggling and post-contractual opportunistic behaviour which often raises corporate transaction costs. As a result, it becomes much easier forJapanese managers to `invest' long run in its labour force hence creating a relatively quasi-fixed factor of production. In return, firms obtain a sort. of quid-pro-quo of relative wage flexibility which helps both companies, and the economy as a whole, to combat adverse economic conditions. InterestinglM this relative wage fiexibility is clearly linked to. the mode by which the Japanese cultivate their labour ethic. The Japanese corporate system places the burden of corporate risk on the individual worker in that the system is designed to reward position, seniority, and social status over a long time period as discussed above. This system means that very. little can compensate the workers for a sudden loss of social status if the company went bankruptmaking it in the workers' interest to `agree' to some element ofwage flexibility (Matsumoto 1991).. Such wage flexibility can be seen in the evolution of the wage curve for'Japanese employees as. economic and labour market conditions change. Figure 3 shows how the age-earnings profile has changed by reference to the years 1974, 1984, 1994 and 1998. It can be seen that over the past twenty five years, the earnings of younger workers have declined relative to the average, with the peak earning. period shifting from the 45 to 49 age group in 1984, to the 50 to 54 age group by 1998, reflecting the. higher retirement age. The shape of the wage curves can be altered by changing the wage level that. .workers receive when they join the company; the amount of the yearly wage increment; and also company policy relating to retirement. Changing the profile thus alters the tota1 wage bill. Although not shown here, the wage profiles also differ by size of firm, gender, job category and by sector. It therefore provides a wage system closely related to the experiences of the particular company The second aspect of labour flexibility revolves around the importance of numerical flexibility in. adjusting employment levels to economic conditions. In Japan, the adjustments take place mainly in. 1) Of course, the flexibility of wages can sti11 be limited by the downward rigidity of nominal wages. This, in. turn, varies according to the mpe of nominal wage. For example, hourly wages of female employment appears to be perfectly rigid in a downward direction while regular monthly salaries and annual earnings exhibit only partial downward rigidity ( Kuroda and Yamamoto 2003a).InterestinglM when inflation is below 1% the marginal increase in unemployment attributable to the nominal rigidity is small since it is moderated by the adjustment to. bonuses and wage cuts. These results seems to show that serious increases in the steady state unemployment rate is avoided in Japan through bonus/wage cuts- signifying a certain degree of flexibility in its labour market.. (Kuroda and Yamamoto 2003b).
(14) l4. Figure 3. The evolution of the age earnings profile (wage of20-64 age group =100). l30. -dipt, ;,;" rr?l =uE g"kN,. ..-..e...... i20. "-. y. -. as 110. .k. e ioo. -X'''"''". ''. -. 'r paH '. tw. -k, -. Rfu"er. '#lji'. y'pt. i5. ". ypt"･'". ? 90. ."..,. g ,, 'oft"'""'""""""""" '"""'. 70 60. '3)pa". /. 1974 " " " "1984 '"'"" """" i994 ""m"m" ". m'. 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59. 1998 60-64. Age range Source: OECD (1996), Rodosho (1999). terms of hours worked and the use of part-time and temporary employees. A study of the changes in. output and employment over the three major economic downswings 1973-7, l991-93 and 1997-9 show that of the total labour input adjustment (index of regular employment multiplied by an index of tota1. hours worked) during these downswings, the adjustment in hours worked comprised 70%, 90% and 91% of total adjustment, respectively ( Koshiro 2000, Bank of Japan 2000) This clearly indicates the reluctance to lay-off regular workers in Japan. Also, the fact that employers are strictly regulated by the doctrine of `the abusive use of the right to discharge' as spelt out by many court cases in favour of. employees, means that the speed of employment adjustment is slow in Japan (Rodosho 1994). The other method of adjusting labour input is by utilising more part-time and temporary workers.. These types of workers, (whose scheduled working hours per day) or working days per week, are less than those regular workers), have increased from 5% of the workforce in 1975 to 25% by 1997-a high. percentage of this group being women. Other labour adjustment mechanisms utilised by Japanese companies are closely linked to the nature of the relationship between groups of affiliated companies in Japan. The `family' structure of related companies (Keiretsu) can be of the horizontal kind, being. composed of large companies from different industries e.g. Mitsubishi, Mitsui and. Sumitomo groups.. They can also be of the vertical kind, composed of a parent company with its family of subsidiary companies and subcontractors e.g. TOyota and Matsushita. Because of the relatively close relationships. between firms within these groups, workers can be shifted between them rather than being made redundant. This mechanism can be through a temporary transfer between related companies (shukko) or a permanent transfer of employment from one company to another (tenseki) - the important thing is that in both cases employees do not lose their jobs. Interestingly, this was the second most important. way of adjusting employment next to hours of work in the three recessions shown on Table 1.2) The other methods available to firms as a means of''employment adjustment is to reduce the number of. new recruits in the annual April employment period and also to decrease the number of mid-term employees (i.e. new, but older workers in mid-career), from other firms. The importance of the various forms of adjustments during three recession periods can be seen in Table 1..
(15) 5 Table1 Employmentadjustmentsinperiodsofrecession:1975-1999 Wholesaleand. Manufacturing. Services. Retailtrade. 1. 2. 3. 1. 2. 3. 71. 40. 42. 37. 14. 26. Restrictionsonovertime. 54. 26. 27. 16. 8. Increaseinvacationtime. 14. 4. 6. Suspensionofcontractrenewals anddismissalofparttime workers. 16. 6. 5. Reduction/suspensionof recruitmentofmidterm employees. 50. 12. 23. Internalworkerreallocation Transfer. Allfirmstakingmeasures. 2. 3. -. 15. 23. 15. -. 5. 11. 1. 2. -. -. 2. 5. 1. 3. -. 4. 2. 12. 24. 4. 6. -. 5. 5. 20. 25. 6. 6. 10. m. 3. 11. -. 11. 14. -. 4. 6. -. -. 8. -. 9. 11. -. 2. 4. -. -. 3. 20. 3. 6. -. -. .. -. -. 5. 3. 5. 1. -. 3. .. 1. Ofwhich:. Internalworkerreallocationor transfer. Temporarysuspensionof business. Voluntaryretirementsand dismissals. 1. 1. 3. Notes: Recession periods: 1 (1975); 2 (1986/7) ;3 (1999). Source: OECD (1999). What is interesting about the labour adjustment process in Japan is that the process has developed a special variant of the core-periphery model of the labour market often discussed in the West. In effect,. there is a central core of regular employees who represent the commitment made by management to the development of firm-specific, human capital investment and who are less likely to be made redundant during recessions. This is a logical way of maintaining the core of valuable regular workers. relatively intact. Any employment adjustment of these workers are often done through the shukko or tenseki systems of transfer described above. In effect, this is a form of extended internal market with the difference that this time the flexibility is made within a group of related companies rather. then within the individual firm. This internal re-shuffting within the group is accompanied by more. 2) Between 1994 and 2000 there were some signs that `assignment to other companies' may have become less important as an overall employment adjustment mechanism - particularly for large companies employing more the 1,OOO employees. While the use of this type of adjustment does not seem to have decreased in manufacturing as a whole, it does appear to have fa11en in importance in the wholesale/retail trades, finance, and service industries. 'IEhis has been due, in part, to the increased importance placed by companies on voluntary. retirement as a means of employment adjustment. However, more detailed information on the changes in the different types of Shukko and Tenseki would be needed before definitive conclusions can be given on this subject. (Ministry of Health, Labour and Wblfare 2002b).. ..
(16) x6. Figure4 Evolutionofthelong-termpractice (average duration of employment by age group) 25. wh-epme td ptkNta ..X. ypt'"-'- XYz''. 20. !di,s,4. ISt"t"'"`'"''"h,,X,>). ×. o. V.s 15. o? 10. '; F,, rk. g 5. ,Pdil.. y. -. 1974' " in '1984 -' -- 1994 ou 'x "1998 o. 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64. Age range Source: OECD (1996) Rodosho (1999) significant changes in the employment of workers on the periphery, including part-time, temporary. and day workers, who continue to act as an important employment adjustment buffer during the diflicult economic periods. When discussing the role of non-regular workers, it is not necessarily true that they are treated badly since the general mentality of permanent employment is still strong. in Japan across the whole spectrum of companies. For example, the percentage of women part- time workers who continued to work in the same enterprise for more than five years is rising, as smaller firms in particular move to utilise par"timers as part of their `permanent' labour force.(Genda 1999).. The Japanese system of employment `hoards' labour for longer periods during downswings on the assumption that the cost of maintaining their investment in `human capital' relatively intact (by not making people redundant swiftly) is greater than the shortterm cost cutting benefits brought about by. making employees redundant. Figure 4 shows the continued resilience of long-term employment in that the average tenure for male workers was longer in 1998 than in previous years and did not decline sharply after the age of 60.. The above conclusions relating to the flexibility and resilience of the employment system have been derived from the enterprise or `supply side' of the argument, while little consideration has been. given to the `demand side' of the equation as expressed by the motivation of employees themselves. A. major questionnaire survey of 3,126 white collar and management employees in thirty firms based in Osaka in Tokyo during 1996 may help clarify some thought on this side (Morishima 1997). It showed that `internal ski11 developed through experience'- the classical in-house skill development ofJapanese. employment practices - was still the single most important procedure felt to be relevant for reward allocation. However, the increased use of a faster promotion system, one which could reverse the older seniority/hierarchical model, were also felt to be important. The research also found that the majority of employees still prefer to have jobs that provide them with career development and contextual ski11s. developed within their firms. This was the main feeling, despite an increased inclination to move to other firms in order to do the work they like.. e.
(17) ty. the interna/ market and the re-commoo77ficatlon of labouz' a sLvslem in t7ansltion?. This survey has traced the main features of the Japanese employment system since WW2 and has tried to explain the logic behind such system from both economic and social standpoints. The previous section discussed the continued flexibility of the employment system and showed a relatively resilient. system which was adjusting to the needs of a new era. This final part will try tb delve a little more. deeply into the factors which have started to weaken the workings of internal labour market model in Japan which may, in time, lead to the `re-commodification' of labour.This section wi11 also briefly. assess the extent to which the twin pillars of the Japanese system i.e. permanent employment and seniority wage, have been fundamentally modMed. In the post- Fordist era many companies across the globe began to become active in the promotion. of internal labour markets (ILMs). ILMs were based on the development of firm specific human capital by introducing policies which rewarded seniority and lifetime commitment to a company This process lead to what many writers have called the de-commodification' of labour i.e. those institutional processes which prevent labour from being treated as mere commodities. Although this de-commodification was not unique to Japan, we have seen earlier in this survey that it was adopted in. a more fundamental form in that country. Over the last twenty years, the ILM `model', has come under pressures to change not only in Japan but also in other countries such as France and the US (Gautie 2002). Since the 1980s, for. example, the US firms began re-organising their modes of production and adopted wage systems that were less based on work classification and more on competency levels while, at the same time, systematically opening up the labour market to outside infiuences. The process has been progressing at a slower pace in France, while in Japan, where the ILM logic is most developed, the change has been. even slower. Nevertheless the forces which have weakened the ILM model have been similar in most countries. Firstly, the slowing of economic growth in recent decades has `frozen' the ILM structure. because when firms hire less young people, the average age profile increases, making it difficult to sustain a clear seniority payment system This, in turn, weakens the incentive mechanism based largely on the ILM's hierarchical promotions system. Secondly, the conditions for stable, long term planning so important for the development of ILMs, has changed. 'Ihe growth of shorttermism and the increasing importance of shortterm profits coupled with the spread of globalisation (which brought with it competition and uncertainty), have helped to de-stabalise ILMs. FinallM changes in technology. and work practices often require the individualisation of performances based on individual targets,. and hence the individualisation of wages. At the same time, attempts by governments to modernise the school curriculum and to upgrade training levels at school, may have lowered the price of training acquired through the school system vis-a-vis the price of a firm's internal, on the job, training. This, in. turn, could have led to the weakening the ILM system.. The re-commodification of labour, whereby market forces become increasingly dominant in the determination of employment and wages, has lead to the modMcation of institutional processes and has. created problems for some sectors of the labour market. For example, under the seniority type wage. system, companies that are now being forced by competitive forces to bring wage and productivity more into line as competitive firms find that their older workers are becoming expensive. We saw previously that this was because the seniority system tends to `underpay' the young and `over pay' the.
(18) I8. older workers in relation to their productivity- a form of `implicit subsidy'. The result is that firms will. try to control wage bills and adjust or dismantle the implicit subsidy system by excluding young people. and firing old workers. This happened in France during the 1980s (Gautie 2002) and has been a major concern in Japan since the 1990s in particular. Even in the US, where the ILM model is less prevalent,. the `downsizing' of companies following mergers an acquisitions have led to a weakening of trusVtype relations between management and labour. This has resulted in a fall in the employment rate of older workers and a degree of fiattening of the seniority wage curve. (Gokhale, Groshen and Neumark 1995). The point to note at this stage is that Japan is not necessarily unique in experiencing the de-. stabalisation of the ILM model nor in its public employment subsidies policy For example, France. has implemented youth employment subsidies and early retirement schemes since the 1980s, which in effect `substituted' public subsidies for the implicit subsidies inherent in the ILM system. The. interesting point about Japan is the depth to which the ILM model became rooted in the Japanese labour market after the Second Wbrld War. Although this is an interesting area of study, it is outside the brief of this survey, and so the final aspect of this general survey will investigate the degree to. which changes are occurring in the main aspects of the ILM model as it pertains to Japan. The `recommodification' of labour should not be seen as a replacement of ILM type structures by the `spot'. type relations so reminiscent of the pure market mechanism, but as a more complex interaction of processes that depend on the specifications of the actual society concerned. Some general work on the. average tenure (Neumark 2000, Auer and Cazes 2000) and employers affect on wages ( Groshen and Levine 1998) seem to show that the ILM model has not been radically destabalised. In the Japanese context, research on the nature of the ILM model has found that the slowdown in Japanese productivity} if it continues as it has since the 1990s, wi11 reduce the importance of the ILM in Japan. In addition, it will also lessen the steepness of the earnings profile, since the slope of wage profiles are closely correlated with measures of ILM (Ariga et al 2000) .In this context, the real dilemma is to try to assess the rate of change of the main constituents of the ILM in Japan .. L/tetime empieyment First, if we take the lifetime employment aspect of Japan's employment situation it seems that there is no rapid or clear diminution of this phenomenon in Japan. There was a rise in average tenure across the spectrum of firm size between 1976 and 1996 (Ariga et al 2000). This information is confirmed by the fact that the average years of service of core male workers increased from 12.5 years to 13.6 years between 1990 and 2001 with the greatest increase being for the over 50 age group.. (Ministry of Health Labour and Welfare 2002a) However, there has been a tendency for the average tenure of the younger university graduates and high school graduates to fa11 slightly in the 1980s and. 1990s illustrating that some small change has occurred for the youriger age brackets. (Hattori and. Maeda 2000). An important study of 1ifetime employment by Hiroyuki Chuma (Chuma 1998) studied middle aged male employees in the private sector who had an indefinite contract of more than a year.. He found that the ratio of `employees of lifetime employmenV to the total numbers of employees calculated for categories relating to age, education and firm size, has remained stable over time. This was especially true for university graduates working in large firms i.e. the core workers lifetime working group. In fact, the practice of 1ifetime employment seemed also to be spreading throughout all.
(19) rp. industries and firm sizes with the exception of the 55-59 cohort of employees.. Another method of assessing the resilience of the lifetime employment concept has been completed in a a more recent study by Takao Kato who.compared the pre and post bubble periods (1977-87 and 1987-97) by using job retention rates as a measure of long-term employment. (Kato 2001).. His conclusions were the following. First, that among core workers aged 30 to 44, with five or more years of tenure, the ten year retention rates for both 1997-87 and 1987-97 periods was around 80%. In other words, four in five employees with five or more years of tenure at the beginning of each period,. were in the same job ten years later. Secondly, retention rates were considerably lower for female employees than for males for all age-tenure categories, and in both periods. Third, the job retention. rates among younger employees (20-29yrs) and middle age employees (30 -44yrs) with short tenure up to 4years fe11 noticeably between the pre and post bubble periods. The job retention rates for women fell much more than for men.. The overall evidence from job retention rates shows the continued presence of lifetime employment for male, core workers. As a result, the burden of the labour market adjustments have hit. young and middle aged workers with short tenure- especially women. This study merely substantiates the fact that labour adjustments in Japan continues to be most acutely felt, as in the past, by young workers and those with relatively short initial tenure. Finally the study updated the work of Hashimoto. and Raisian (1985) by finding that long-term employment was continued to be more prevalent in Japan than in the US. For exqmple, in Japan, of the male employees aged 24-34 with five or more years of experience in the early 1960s, 73 per cent were in the same job fifteen years later as compared to 47% in. the US. By the 1980s the figures were 72% and 48% respectively The resilience of lifetime employment as shown in these statistics will slowly change as the labour. market adjusts to the new economic environment. For example, the ratio of non-regular to regular employees rose from 21.5% in 1996 to 28.7% in 2002 with the growth of non- regular workers growing especially fast in the service industries. (Osawa et al 2002). What we will see over time is a situation. whereby there will be a continued slow decrease in the number of regular workers, while a smaller inner core of workers will continue to follow the lifetime model. Meanwhile, an increasing group of younger male and females will comprise a larger external labour market than in previous years i.e. there will be a re-balancing of the `core-periphery' aspects of the labour market. However, we need. to understand that the existing Japanese labour market has a more sophisticated system of labour flexibility than is obvious from first appearance. For example, in Japan's important retail trade, which. is a significant employer of people, there is a finely segmented labour market with an `inner core' of. long-term workers, mainly men with stable employment and career opportunities (seishain), and an. `outer core' of permanent part-timers (patol), mainly experienced women employees with limited career opportunities. Then follows an `inner periphery' category (pato 2), mainly women with less experience and no career opportunity Finally, the `outer periphery' is made up largely made up of arubaito workers such as students, trainees or others who do not want to commit themselves to a full time permanent career (freeters) on shortterm contracts. This relatively fine segmentation of labour divided according to gender, age, experience, and wage levels is very largely `socially constructed' and so fits into the needs of different sections of the labour force e.g. parttime women workers. The forces which will change such a structure e.g. the greater demands for equality of opportunity and the.
(20) 20. `westernisation' of family life, are not likely to change the employment system in this sector as rapidly as one would think ( Gadrey et al 2001).. There appear to be indicators that attitudes towards switching jobs began to change in the 1990s. when employees across the age spectrum reported that changing jobs was acceptable if it allowed one to make better use of one's abilities ( Small and Medium Sized Enterprise l999). However, one has to. be carefu1 with the changing meaning of lifetime employment in a dynamic environment. For example,. Japanese firms have been downsizing since the recession by transferring a significant number of their senior employees to subsidiaries and related firms through the process of Shukko and Tenseki as we discussed previously In this context, we could.argue that 1ifetime employment with one firm is increasingly becoming lifetime employment with that firm and its subsidiares and related firms. A final. point to make is that in an environment where companies need workers with standardised values to activate efl]cient mass production techniques, the model of lifetime employment is still ideal. However,. in a fast changing business environment, the demand for non-standard workers with different types of skills will inevitably increase. 'This could mean that the importance of the firm specific skills (which. are integral to the ILM model), may not be so attractive in some sectors of the Japanese economy in the future. It is also true in the last resort that the persistence of lifetime employment across all sizes of. companies is intimately related to the long-term economic performance of the Japanese economy as a whole (Whittaker 1997).. Sen1on' 41 wErges strucane What has happened to wage trends and wage systems in recent times and what can be predicted for the future? Two aspects of the pay system wi11 be analyzed here. First, a brief investigation will be. made to determine the extent to which merit or performance based criteria are becoming important in determining wages in Japan. The growth of the merit criteria has, of course, implications for the shape of the wage profile. Second, trends in the shape of the wage profile over time will be briefly investigated to see whether such wage profiles are `flattening' as they adjust to pressures on the labour. market and the implications for the ILM model discussed above. In addition, this section will assess, of such changes given present trends, how long it would take basic wage profiles in manufacturing in Japan to resemble other countries such as the US or the UK.. The first thing to understand is that the Japanese wage system has always been governed by a mixture of seniority and merit (Dore 1996). The modification of the seniority system (whereby the basic wage is fixed mainly on the basis of personal factors such as age, education and length of service),. began in the 1950's when `job based wages', or shokumu-kyu, (basic wages fixed on the basis of work content and capabilities) was introduced as an additional element determining basic pay However this aspect was not widely'incorporated until after the oil shock when more specific skills needed to. be rewarded. In other words, the Japanese wage system responded to changing circumstances while continuing to incorporate the seniority system into wage determination.. An insight into how the basic wage fixing pattern has changes can be seen in the research of. Susumu Watanabe (VVatanabe 2000). He uses statistics from the General Survey of Wages and Wbrking Hours Systems ( Chingin RodoJikan Seido-to Sogo Chosa) to show that the most significant change has been the increasing number of firms using job or work-based systems as their sole criterion.
(21) 2I. during the 1990s (from 14.4% in 1989, to around 23.5% by 1999) and a decline in the percentage using combined work and personal factors from 64.6% to 42.7%. Meanwhile the percentage of firms using personal factors only as their only means of deciding remuneration stayed relatively steady at around 7% over the period. In addition, the research also indicated that individual firms seem to. be moving towards multiple wage systems. i.e. where firms use different types of wage systems for different categories of workers within the same company( as distinct from the statistics quoted above. which relate to different wage system applied to all of a company's workers ). These percentage of companies who used these multiple systems rose from l5% in 1989 to 26.6% by 1999. What this shows is the ability within the pay structure to adjust to changing circumstances by varying both the weighting of various factors determining wages and also the types of people covered by the such systems.. It is a well known fact that since the early 1990s there has been an increased focus on annual salary systems then posei) which are designed to concentrate on individual worker performance over a year compared to goals set at the beginning of the year i.e. closer to true incentive/performance-. based pay systems. By the middle of the 1990s, various surveys had shown that an average of around. 10% of companies had introduced some kind of annual salary system (Ornatowski 1998).A more recent survey by the Japanese Productivity Centre in 2001 showed that by that date 34.8% of the surveyed companies has some kind of annual salary system. Uapan Institute of Labour 2002) However, it should be noted that the system is mainly orientated towards managerial staff, while their introduction at the. ordinary employee level had increased from 1.8% of firms in 1997 to 7.6% in 2001. Nevertheless, the. speed at which such wage systems will become signticant determinants of wages across Japanese industry and services in general, may be somewhat slower than first thought. Using incentives such as those embedded in the annual wage system may not be easy to introduce at the shop floor level for. many reasons. First, the spread of performance-related pay could make workers more uncertain of their status and income from year- to-year which would not be conducive to improved productivity performance. Second, it is not always easy to measure workers efforts accurately In that case, employees may feel that supervisors continue to use subjective criteria to assess their wage. Third, when work organisation is team based, it is difficult to measure the input of the individual. It should be noted that modifying the. wage structure to refiect performance has begun in earnest, but its overall adoption will take longer than first thought. A long line of research has already shown that performance appraisal is one of the most problematic aspect of human resource development for firms. It is often the one most difficult to. improve (Kleuger and DeNisi 1996) and may not always result in higher individual efforts and better. company profits. (Mitani 1998) The tensions between the benefits from performance-related pay on the one hand, and potential uncertainties in the minds of workers about how pay determined on the other, may slow down the rate of diffusion of new pay systems in the core areas of the Japanese labour. market. In the meantime, what has happened to Japanese wage profiles over the last twenty years, and are there signs that they are flattening out as age and seniority become less important in the determination. of basic wages? The traditional way in which Japanese companies used to adjust their labour costs when their output/productivity fell was to adjust the bonus component as indicated in an earlier section of. this paper. However, since the mid 1990s, there has been a stronger correlation between nominal GDP.
(22) 22. per head and regular wages, fuelling the debate as to whether this is due to the growth of a higher proportion of non-regular workers, or due to greater flexibility in the earnings of regular workers. (Osawa et al 2002).. Statistical analysis has shown that the rising rate of wages per person during the 1990s was mainly. due to the ageing and increased education levels of employees (Hattori and Maeda 2000). In response to these factors, firms have attempted to flatten the slope of the age-wage profile by reducing the wages. of the mid to senior age groups (which contain an increasing number of degree-holding executives), thus decreasing the importance of the age and seniority factors in the determination of wages. This tendency for a flattening of the wage curve has been strongest in sectors which are ageing most rapidly. e.g. in industries such as finance and insurance; in large firms; and in occupational categories such. as management and clerical workers. (Ministry of Labour 2000a). In this way, companies have been adjusting their total wage bill in what could be considered a `rational' way. At this stage it might be usefu1 to complete this survey by reviewing trends in Japanese wage profiles between 1985 and 2000. The aim is to investigate if there is a discernible flattening of such. profiles, and also to determine whether aggregate data given in the profiles provide any evidence of. the increased importance of the merit payments system. As there are many types of calculations that can be made on wage statistics, this brief analysis will discuss the basic wages of core white-collar male. university graduates in manufacturing, the sector most open to competition. An additional presentation. will also be made for male university graduates working in large companies employing over 1000 employees and covering all industries, including services. The calculations are adapted from recent work done in this area or research. (Koshiro 2002). Fig 5a shows basic money wage curves (excluding overtime, but including allowances) for white collar graduate workers in manufacturing, using the wages of the 20-24 years as a base of 100. It shows. a progressive flattening of the wage curve over the 1980-2000 period. To provide a simple idea of the rate of change in the wage profiles, the rate of fall in the basic wages of those employees on the highest part of the wage profile i.e. those aged 50-54 has been chosen. Using simple regression analysis, we see that the rate of decline of basic wages for this group of workers has progressed at a relatively constant. rate between 1985 and 2000. To gain some insight into the relative movements of wages in relation to other countries, the trend Iine has been projected to 2025 and then compared with similar wage ratios. in the US and UK in the late 1990s (Thornton et al 1997; ONS 1998). Here we see that the Japan's wage ratio based on the trend line would be 210.36 in 2025 as compare to the US ratio of 168 and the. UK's 181 in the late 1990's. If we assume a linear trend (and noting the problems of extrapolation based on a small number of data points), we can tentatively say that it wi11 still take some time for the. Japanese basic wage profile to mirror those of the US and UK. However, it must be noted that Japanese wage profiles have already been changing in a relatively constant fashion over the last twenty years, partly reflecting the gradual weakening of the seniority-based wage structure.. Fig 6a shows the total annual earnings profiles (including bonuses) for male university graduates. working for large companies employing more than 1000 employees in both industry and services. Here again we see a relatively constant rate of fall in the total earnings profile of those in the 50-54. age group with the simple prediction that the earnings ratio would fa11 to around 257.4 by 2025 if the. trend continues. These basic calculations show that changes have already been occurring in the wage.
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