PART IV: INDUSTRIAL RELATIONS AND THE JAPANESE LABOR MARKET (Written 1989; Revised 2002)
Introduction
Many people have argued that there is a unique system of industrial relations in Japan and that this system contributed greatly to Japan’s high rates of economic growth. Part IV will consider this argument by examining the various aspects of Japan’s system of industrial relations. The first section will consider “seniority wages”, whereby male workers in large companies receive regular increases in wages as their tenure with the company increases. We will consider whether seniority wages exist in Japan and whether they are unique to Japan. We will evaluate the relative importance of seniority and merit in the determination of a worker’s pay. And we will consider the relation of the seniority wage system to the ways work is organized in Japanese large companies. The second section will analyze arguments concerning the existence of a dual labor market in Japan. The argument is that Japanese “regular” workers obtain “seniority wages” and “permanent employment” at the expense of other workers, particularly those in small companies. We will evaluate this argument. We will also consider the labor market for small companies and the labor market for women. The third section will discuss “permanent employment”, meaning that a worker begins employment with a company directly after completing school and expects to continue employment with that same company until a mandatory retirement age of 60. We will determine whether this actually exists in Japan. We will also evaluate the labor market for older males as well as the responses of Japanese corporations to recessions. The fourth section will discuss enterprise unions, meaning that the unit that collectively bargains with the management is restricted to all workers who work in the enterprise. We will examine the structure of Japanese unions, the way that collective bargaining takes place in Japan, the role of joint labor-management consultation and quality circles, and the effects of Japanese unions on productivity and wages. We will also evaluate the ability of Japanese unions to represent their workers effectively. The fifth section will discuss the argument that the Japanese system of industrial relations enhances flexibility in both wages and hours worked, thus allowing the maintenance of low unemployment rates. The last section will present a summary of the basic points and some conclusions.
(1) Seniority Wages
Studies on wages in Japan, America, and Europe have led to several conclusions. First, for Japanese male blue-collar workers, real wages (adjusted for inflation) rise continuously as the worker ages, until peaking at about age 50. In contrast, for American and European blue-collar workers, real wages peak in one’s twenties or thirties. The way that wages of Japanese blue-collar male workers rise as they age is similar to that found for white-collar workers in the United States or Europe. Increasing real wages as one ages is called “seniority wages”. Second, in Japanese companies, the growth of wages between the beginning of employment and the year of peak earnings is greater than in similar American companies. Most of this growth in wages results only if the worker has been continuously employed with a specific company. Third, for both blue-collar and white-collar Japanese workers, real wages decline after age 50. This is not true in the West. In order to understand the Japanese employment system, we need to explain these conclusions.
(a)The Wage Structure
Unlike American blue-collar workers, Japanese blue-collar workers are paid on a monthly salary basis. Typically, about 3/4 of this salary is a basic wage, which includes starting pay, annual increments usually tied to seniority, and an across-the-board increment negotiated in the “Spring Offensive” by the enterprise union. About 2% involves incentive pay, with group incentives more common than individual incentives. The rest comes from various allowances—for commuting, for supervisor positions, for special skills, etc.
Since the early 1960s, there has been considerable conflict between workers and managers over the criteria to be used in determining the basic wage. The workers desired to keep the system whereby the basic wage was determined exclusively by age, experience, and education. Management desired changing the system so that job-related characteristics (occupation, job skills, and so forth) would be more important. It would appear that employers have at least partially prevailed; today, most employers rely at least partially on job related factors. However, job-related factors are still less important in determining pay in Japan than in the United States.
Studies in Japan show that starting wages are higher the older one is when hired. Thus, Japanese companies do pay for outside experience. But experience with the company is much more important. A man hired at age 17 and staying with the same company would (on average) have his pay triple by age 40. Those with more education start with higher pay and also experience faster increases as they gain experience with the company. Thus, it is true that age, education, and experience with the company are extremely important in determining a worker’s income in Japan.
A worker’s pay can rise over time for three reasons. First, as noted above, there is an across-the-board increase negotiated by the union during the “Spring Offensive” (see the section on unions below). Second, also noted above, there is an annual increment to the basic wage. And third, there is the possibility of promotion. For the second and third of these, merit rating by employers is very important. For the annual increase, at least half depends on merit rating. For promotion, supervisor assessment is also very important; there is no strict seniority system, as there is in the United States. Japanese companies seem to be more concerned with evaluating employees than are American companies. And Japanese evaluations are likely to be very subjective, including items such as “contribution to the enterprise”, ”attitude toward learning after hours”, “relations with others in the workshop”, and so forth. Many Japanese workers do not know on what standard their wages are calculated.
Two other features of a Japanese worker’s wages are worthy of notice. First, as noted in the part on savings, a considerable portion of a worker’s pay comes as a semiannual bonus. The bonus depends on the performance of the company, but usually equals about two months’ salary. Up to 1973, bonuses were rising as a percent of total earnings; since then, they have been falling. Second, fringe benefits in Japan typically include company housing, insurance policies, recreational facilities, and so forth. During the period of slow growth after 1973, these fringe benefits were reduced. The bonus payments and these types of fringe benefits are rarely significant in American companies. In Japan, they can be seen as a form of “profit-sharing”—they can be reduced quickly when sales fall and thus can be used to pass some of the risk of falling sales on to workers.
(b) Wage Differentials
One result of the Japanese method of determining wages is that wage differentials within a company are narrower in Japan than in the United States, at least for men below age 50. This is true because pay for blue-collar workers in Japan resembles the way white-collar workers are paid in the United States. One group of white-collar workers of special interest is managers. Whether one is a manager is of much more importance to one’s pay in the United States than in Japan—i.e., the pay gap between managers and other workers is smaller in Japan. Japanese hierarchies seem to have more ranks than do American ones. But changes in rank in Japan appear to involve little change in either authority or in responsibility. In addition, the symbols of management status are less noticeable in Japan. There are no separate management parking lots, dining rooms, bathrooms, and so forth. All workers are paid a monthly salary. All dress similarly and use informal patterns of speech when communicating. Thus, it would appear that ranks in Japan are used to reward “good performance”; higher ranks carry increased social status but have little material value. One can conclude that there is greater equality within the Japanese company than within the American company. Japanese management has deliberately sought this as a goal in that it fosters company loyalty. As we shall see later, it is a goal that has been realized in part by excluding the lowest paid and least educated workers from the company.
(c)Job Organization and Skill Acquisition
Several aspects of job organization in Japan are different from the United States. First, in most large Japanese companies, there is a widespread practice of job rotation. Workers commonly perform several technologically-related jobs. The training of young workers is done by older workers who work next to them. Use of vocational schools is very limited. As a result, Japanese workers are more generally trained than American workers. Because they are so generally trained, they are better able to adapt to the introduction of new products or new technologies. They are also able to do “unusual operations”—such as repairing broken machinery, eliminating defective products, and so forth — operations that are normally done by specialists in the United States. This allows Japanese companies to get-by with fewer workers. (Also, because workers are generally trained, companies do not have to hire substitutes for those who are absent.)
Second, average working hours per week are substantially higher in Japan. This difference has existed only since the middle 1970s. About 25% of Japanese workers work six days a week. In all, 75% average more than 5 days. This is NOT the result of the dedication-of Japanese workers; they report themselves are working more hours than they desire. It would appear that the long workweek results from the low growth in real wages combined with very expensive housing (one must work more to make the payments), the inadequacy of recreational facilities (thus, there is less desire for leisure), and the weakness of Japanese labor unions.
Third, absentee rates in Japan are very low. Also, workers take only 50% to 60% of the paid holidays due them. These facts have been used to argue that Japanese workers must be extremely dedicated. But the explanation would seem to be different. In most companies, sick pay is only 60% of regular pay; this provides a major penalty for workers who are ill. To compensate for this, workers accumulate their vacation days to use when they are ill. Also, Japanese companies have few workers to serve as substitutes. The workgroup leader must take over the tasks of an ill or vacationing employee, in addition to doing his own tasks. This generates considerable workgroup pressure to minimize absences. Finally, as noted above, merit evaluations are very important in Japanese companies; “excessive absence” is an important criterion on which merit is determined. Although a contrary impression is gained from American newspapers and magazines, surveys report lower commitment to the company and lower job satisfaction among Japanese workers than among American workers.
(d)Explanations
There have been many attempts to explain the existence of seniority wages and the Japanese system of skill acquisition. Two economists have linked these to a production strategy that requires the progressive introduction of technological innovations. Because new technologies are continually introduced, on-the-job training must be more continuous over one’s working life in Japan. As a worker continually receives new training, his skills improve, and so does his pay. This explanation is consistent with the fact that workers “retire” relatively early in Japan and that their real wages fall after age 50—older workers are harder to retrain. This explanation is also consistent with the part on Japanese business (Part II), where it was shown that many large Japanese companies have pursued a strategy of rapid product change through rapid technological change. A second explanation is that seniority wages are used toreduce turnover (by creating a significant pay penalty for those who leave the company) and therefore to keep a work team together. The argument here is that many of the skills that workers develop are specific to that company. If the worker left that company, the skills would not be useful in another job. And if the worker left the company, the company would have to hire and completely train someone new. Company specific skills involve familiarity with co-workers (forming a good team) and with machines or production methods unique to the company. Once a worker has these skills, the company does not want the worker to leave. So, in this explanation, it has seniority wages to create a financial penalty for leaving. Other economists have interpreted seniority wages as paying workers according to some notion of fairness (older workers “should” receive higher pay) or as increasing the power of employers over workers by creating a serious pay penalty if one quits. There is no consensus on an explanation.
(2) The Dual Labor Market
There are two different versions of the dual labor market theory. In one, there is a “core” of large, capital-intensive, oligopolistic companies and a “periphery” of smaller companies. The core companies provide high and rising wages, good working conditions, regular employment, and so forth. The periphery companies have lower wages, poorer working conditions, higher rates of turnover, etc. For Japan, this version of the dual labor market theory does not apply now, although it did apply until the mid-1950s. Starting wages for young workers are actually higher now in the smaller companies. Wages rise as a worker gains experience in the smaller companies as well as in the larger ones. (This is not true in smaller firms in the United States.) Productivity has also risen as fast in the smaller companies as in the larger ones. Employees who work in the smaller companies do so for a substantial part of their lives, and are no more likely to be laid-off during recessions than workers in large companies. Nearly 70% of all small and medium-sized companies in Japan are run by former blue-collar employees of small companies. Those workers in small Japanese companies who do not go on to form independent companies are usually promoted to white-collar status. This typically occurs in one’s early 30s, and leads to career earnings similar to a blue-collar worker in a large company. In this regard, it is clear that the role of small companies in Japanese labor markets is very different from that found in the United States. (See the discussion in Part II)
The second version of the dual labor market theory focuses on skill development. There is a primary sector. Here skills are low when one is employed but develop with experience. For these workers, wages and responsibility increase the longer one is employed. Tenure with the same employer is long. There is a lower-primary sector. Here skills are relatively high when one is employed, but do not develop much over time. These are the craft workers. And finally, there is a secondary sector. Here, skills are low when one is employed and do not improve over time. These workers have low wages, no promotions, no raises, and high rates of job turnover. In Japan, those who might be considered secondary workers are “shigaiko” and temporaries.
Shigaiko are employed for a small company, but work in the plant of a large company under the large company’s supervision. The large company supplies the tools and machinery. Temporaries are employed by a large company for a limited period of time. Neither are classified as “regular workers”—neither has seniority wages or permanent employment. Most do unskilled or semiskilled work. Those who take these jobs are usually older men and women, farm housewives, and seasonal farm workers. In some industries (iron/steel, shipbuilding, and chemicals), these workers cannot become regular workers; in other industries, they are considered probationary and can be promoted to the status of regular worker. Their wages and benefits are low in comparison to regular workers. Japanese companies utilize them because of their desire to keep their work force relatively homogeneous in relation to job organization. (The use of shigaiko has been declining while the use of temporaries has been unchanged over time.)
The situation for Japanese women is quite different from that of Japanese men. The wage gap between men and women is much greater than in the United States or Western Europe, and has been increasing. Like men, Japanese women are usually employed directly from school. But they work until marriage, or shortly thereafter. Their wages rise very little as they gain job experience. They are likely to drop out of the labor force between their mid-20s and mid-30s, and then re-enter later as basically unskilled workers. They are the major part of the secondary work force of Japan. Given the limited opportunities in paid employment, it is not surprising that many women workers are either self-employed or work in family businesses. In 1995, 22% of women were either self-employed or worked in family enterprises in Japan, compared to 15% of men. Outside of self-employment, opportunities for women are less in Japan than in the United States.