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ON JAPAN: Two-Tier Economy

Author: Edward J. Lincoln, Director, Center for Japan-U.S. Business and Economic Studies, New York University
April 20, 2005
Newsweek Japan

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Americans have been told for decades that "lifetime" employment in Japan was a great system for workers, companies and the economy. I have heard it claimed countless times that the Japanese system produced loyal, flexible employees who were more productive and more adaptable to technological changes in their jobs than were American workers. Now that system is changing. But the current situation has had some serious negative consequences, and I believe reform needs to move even further.

The downside to hiring permanently employed sei shain ("regular employees") is that it limits a company's ability to adjust labor costs. When the economy was growing fast, this lack of flexibility was not much of a problem. But in the current era of slow growth, the inability to reduce labor costs over the business cycle can be a severe liability. As a result, one of the major shifts in the past 15 years has been the rise in non-regular, especially part-time, employment. Since 1990, non-regular workers have increased from 18 percent of total employment to 28 percent, with most of that increase after 1995. The bulk of these workers are part-timers, who now constitute over 20 percent of total employment-a figure as high as that in the United States. This represents a substantial change in the structure of employment.

After all those years of hearing propaganda about the advantages of lifetime employment, I am amused to see how rapidly corporations have acted to increase non-regular employees. I was always skeptical of the theory that long-term employment led to greater loyalty and productivity and am pleased to see that Japanese companies have responded to the need for flexibility in coping with the ups and downs of the economy.

Nonetheless, the shift has been a painful one. Certain segments of society have been affected by the changes more than others. One such group is young people just entering the labor force. They are discovering that coveted regular employment jobs with large corporations are much harder to get than in the past, and many of them have had no choice but to take part-time jobs. The notion of carefree young people with little job commitment embodied in the term "freeter" hardly reflects the harsh reality of current labor market conditions. Since the market for mid-career workers is poorly developed, a young person initially trapped in non-regular employment will have trouble escaping later to a regular full-time job.

Another disadvantaged group is women. Over 40 percent of women are now working part time, up from 32 percent in 1990 and only 26 percent back in 1980. If increased availability of part-time work were attracting additional women into the work force— women who had previously preferred to stay at home— then the shift would be positive. But the percentage of adult women working has been dropping. Female participation in the labor force had fallen from 50 percent in 1998 to 48 percent by 2004. This indicates that full-time jobs for women are disappearing and are being replaced with less-well-paid part-time positions, which women are being forced into involuntarily.

As indicated in the recently released OECD annual report on the Japanese economy, the unfortunate consequence of these developments is the creation of a two-tier economy. Workers lucky enough to land a traditional job as a "regular" employee are well paid, have good benefits and are unlikely to become unemployed. Their jobs are protected by laws and regulations that make it very difficult for companies to fire them. The rest of the labor force is permanently stuck with much lower pay, no benefits and high job insecurity as part-time or temporary workers. This is not good for the health of the economy or society.

The current situation is thus one of a theoretically useful structural change that has developed in a way that creates serious negative consequences. The solution is to complete the revolution in labor markets. The OECD report calls for ending the excessive legal job protection for regular workers. I agree. Of course, this change would need to be accompanied by a much better labor market for full-time regular employees who want to change jobs at mid-career. But a labor market in which regular workers are somewhat less secure in their jobs, and non-regular workers have a better chance to find full-time regular jobs would be better for Japan both economically and socially.

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