Asia

Japan’s economic comeback as labour shortages nudge productivity up


It seems that Japan’s economy — and with it, its workers — are on the move. People are changing jobs and that’s at last produced a boost to productivity.  After a quarter of a century of stagnant prices, GDP and wage growth, pay packets are slowly rising, as are nominal GDP, tax revenues and productivity. 

What’s driving the change is that Japan is running out of its biggest asset — its people and talent. 

Japan’s population peaked in 2010 at 128.1 million and is now an estimated 121.2 million. This population decline is accelerating, with a fall in population of 837,000 in 2023. Those numbers are eye watering on their own, but more important than the total population drop is the decline in the working age population, which is projected to fall by nearly 15 per cent in the next 15 years. 

There’s some good news on the migration front, with 242,000 more people entering than leaving Japan in the last year. But much larger numbers will be needed to arrest the population decline and bigger societal changes will be needed to attract and retain skilled foreign workers to boost the workforce.  

In the first of our three lead articles this week, Yuri Okina explains that currently the ‘ratio of effective job openings to jobseekers for all occupations [is] 1.26, but in industries like construction, it exceeds five’. That’s certainly a very tight labour market.

Severe labour shortages are changing labour market practices and social norms, with the number of people changing jobs increasing. 

It’s been very difficult to change Japan’s rigid labour market practices. The labour market institutions of lifetime employment and seniority-based wages have persisted, reinforcing each other, and held productivity growth back so that efforts to reform the system have only partially succeeded. 

During Japan’s rapid-growth era between the 1950s and 1970s, those institutions helped companies invest heavily in workers and to retain them. Japan was able to catch up to the technological frontier by absorbing and transforming foreign technology and ideas. Once it caught up to the frontier and subsequently growth stagnated after the asset bubble burst in the early 1990s, the labour market practices that were a source of success became one of the biggest barriers to lifting economic potential and performance. 

The ideal worker, as Hiroshi Ono explains in our second feature, ‘was hired straight out of university, worked long hours, socialised extensively after work and committed oneself to a lifetime with the same employer’. The ideal worker — most commonly a man — had almost no responsibilities at home. This salaryman ideal worker model has gradually died out. 

And the era of the Japanese housewife is over as well, according to Mary Brinton in our third feature.

Female labour force participation in Japan has steadily grown to the point that it is now higher than in the United States. As Brinton explains, ‘i​n 2006, just over 60 per cent of Japanese women aged 30–34 were in the paid labour force. By 2023, this had increased to 80 per cent’. 

It turns out Japanese women did want to work. The choice to be a housewife was largely enforced by social norms and incentives to stay out of the workforce. Many women probably want to work more. 

Brinton names two reasons for the increase in female labour force participation. ‘More and more Japanese women have remained single and childless’, and most of them are in the labour force. 

The other reason is that it’s ‘highly likely that the expansion of work-life policies at the firm level has helped increase the continuity of married women’s employment throughout the childrearing stage’. About 80 per cent of Japanese working mothers who qualify for childcare leave take it and then return to the company afterwards. 

A study by Kazuo Yamaguchi found that companies with both an equal opportunity and a work-life balance policy had higher productivity, with both policies contributing to that result. 

Yet there persists a high gender wage gap in Japan, — higher than the average in other OECD countries. Much of the increase in labour force participation for women has been in part-time work and precarious work. And the percentage of managers or politicians who are women remains far below government targets. 

Having overcome some big barriers to female labour force participation, Japan’s next major challenge, Brinton argues, ‘is to utilise female labour more productively’.

The shortage of labour and talent is helping to drive change in this area too. As Okina explains, ‘over the past 30 years, most Japanese companies have defended their business by cutting prices, suppressing costs and wages and preserving employment’, helping to sustain mild deflation and economic stagnation. Okina argues that companies now need to shift to a business model that raises wages, attracts talent — including foreign talent — and increases added value and profits. 

Ono argues that ‘when the labour force shrinks, companies must make the shift from selecting people to being selected by them’.   

Companies are having to offer higher wages, invest in human capital, introduce flexible workplaces and support workers having children to attract and retain workers. 

Flexible workplaces and practices that focus on output instead of input — hours in the office, at the desk looking busy — seem to be disappearing post-pandemic. But with increased labour mobility, a more merit-based wage system and more women with children working, companies will have to reintroduce flexibility to compete in Japan’s changing labour market. 

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.



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