Japan’s Productivity Gap – Employment System Re-examined

Japan’s GDP per hours worked only amounts to just above 60 percent of the level in the US. In a rapidly ageing society, such a situation is no longer tenable. When the employment to population ratio declines, productivity needs to increase in order to preserve the level of welfare.

Compared to other nations, Japan’s adult population is highly educated. Investment in research and development is also among the highest and corporations have access to an abundant amount of financial capital. The low level of productivity can therefore not be explained by lack of skills, technology or capital. Rather, the available resources are simply not employed in the best possible way.

The deficiencies are being acknowledged by the Japanese government, which is pushing for a “productivity revolution”. Besides the classic approach of promoting new technologies and the recent support for start-ups also undertaken in other countries, the emphasis is on corporate governance reform, more flexible labour markets and a change in working practices (hataraki-kata kaikaku, 働き方改革).

Despite near full employment, Japan’s employment system is rightly under criticism: working hours stretching the limits of physical capacity, absence of work-life-balance, lack of diversity at higher corporate ranks and top positions being almost exclusively staffed by company grown managers. The causes are structural: The Japanese system still works on the assumption of in-house careers. Employees need to enter at the bottom of the hierarchy to make it to the top. Changing one’s employer continues to be associated with losses in terms of career opportunities and income.

The model functioned extremely well during the period of economic catch-up that lasted until the early 1970s, when a huge growth and learning potential was exploited. Now that Japan has taken the lead in many fields of technology and domestic markets are saturated or even shrinking, the disadvantages are coming to light. The long-term in-house competition for promotion requires employees to constantly prove their commitment to the company, which is detrimental to productivity. The absence of exit options in case of disagreement increases the cost of conflict making homogeneity more desirable than diversity. Not only women but also workers employed abroad are disadvantaged. Japanese companies are loosing the “battle for global talent” by not offering foreign employees adequate international career opportunities. Managers become more risk averse when the future of their career depends on the survival of their company. Moreover, company-based careers preclude that the best managers move to the companies with the highest growth potential.

Regulations and moral suasion will not be able to trigger much change. The development of external markets for managerial labour requires time. The drivers of this process are globalization, adjustment pressures stemming from demographic change and successful new companies trying out new forms of employment.

Dr. Franz Waldenberger (waldenberger@dijtokyo.org). Director of the German Institute for Japanese Studies (DIJ), the Japanese employment system forms part of his research on the Japanese economy.

(Posted on request of the author by BDTI.)

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