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Solving Japan’s Wage Stagnation – Analysis

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By Richard Katz*

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The issue of wages has been on Japan’s political agenda since former prime minister Shinzo Abe urged companies to raise wages to fight inflation. Prime Minister Fumio Kishida included wage hikes in his slogan of ‘new capitalism’. But the government has only applied toothless measures, such as requests by the prime minister for companies to alter their behaviour, applying temporary tax cuts for permanent wage hikes and enacting a series of weak ‘equal pay for equal work’ laws.

Japan is hardly the only rich country where price-adjusted wages have been suppressed in the last few decades, but it’s second only to crisis-wracked Greece in showing virtually no growth in labour pay over the past quarter century. For most of the past two centuries, wages in industrial countries grew over the long term at around the same rate as GDP. Then, beginning in the late 1970s, things changed.

The wage share of national income has now fallen to its lowest level in a half-century. Between 1996–2019, productivity grew at around an average of 30 per cent in 16 rich countries, including Japan, while real hourly compensation grew only 19 per cent in the typical country. In Japan, it was a negligible 3 per cent. Until recently, Japan’s workers ironically got a higher share of national income than workers elsewhere.

While economists disagree on whether policymakers can remedy the situation, the brunt of the evidence suggests that they can.

Some economists contend that the primary factor is the rise of Information and Communications Technology (ICT). To a greater degree than in past technological waves, ICT has decreased demand for low- and medium-skilled labour, and this has not been sufficiently offset by increased demand for high-skilled labour, so, more of the fruits of growth have gone to owners of capital via profits. The OECD estimates that new technology and related trends caused about 80 per cent of the decline in the wage share of income. If technology is destiny, then policy solutions are limited.

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But technology cannot be the whole story. After all, wage suppression began two decades before the marriage of the personal computer and the internet sparked the ICT revolution. In Japan, it goes back to at least 1980 (the earliest comparable data available). Besides, rich nations have access to the same technology, so why do outcomes differ so much from country to country?

For these reasons, some experts correctly stress the declining political and bargaining power of labour. As early as 2001, Olivier Blanchard, later the IMF’s chief economist, argued that wage suppression resulted from diminishing union membership, neoliberal deregulation measures and the weakening of past alliances between labour and political parties. The decline in the labour share of national income has been most severe in countries like Japan, the United States and South Korea, where union contracts cover the smallest share of the labour force.

There is a marked difference in wage outcomes depending on the extent to which countries apply ‘active labour measures’ — some of which can raise the labour share of income by several per cent of GDPThese measures help unemployed workers find new jobs via retraining or matchmaking between employers and employees, enhancing their ability to resist demands for wage restraint. Japan and the United States unsurprisingly come near the bottom in spending on such measures as a share of GDP.

The diminished enforcement of antitrust measures in many countries has also enabled ‘superstar’ companies to gain an inordinate market share, increasing their bargaining power in a growing number of industries. In those industries, the labour share of income declined even more severely.

Japan’s situation is even worse than these global trends. The biggest reason for this is the sharp upsurge of poorly paid non-regular workers who rose from 15 per cent of the labour force in the 1980s to nearly 40 per cent in 2021. While regular workers on average earn 2500 yen (US$21.50) per hour, temporaries make just 1660 yen (US$14.30) and part-timers a meagre 1050 yen (US$9.05).

France, too, has a third of its labour force as non-regular workers, yet it suffers only a small wage–GDP gap. In both countries, the law requires equal pay for equal work. While France enforces its law, Japan has not mandated any Ministry to investigate companies and prosecute violators. Virtually all French workers are covered by union contracts, whether or not they belong to a union. In Japan, only union members are covered by contracts, and temporary workers are legally banned from joining. The result is that in France, unlike Japan, regular and non-regular workers labouring side by side in the same job get the same compensation per hour.

If Kishida wants results, enforcing ‘equal pay for equal work’ laws and instituting active labour measures would be good places to start, along with enabling temporary workers to join unions. But that would step on the toes of the powerful employers lobby, while the penny wise and pound foolish Ministry of Finance would likely object to spending money on active labour measures. Kishida’s actions on this issue are a key test of whether his ‘new capitalism’ is anything more than a catchphrase.

*About the author: Richard Katz is a Senior Fellow at the Carnegie Council for Ethics In International Affairs. This is an excerpt from Toyo Keizai.

Source: This article was published by East Asia Forum

East Asia Forum

East Asia Forum is a platform for analysis and research on politics, economics, business, law, security, international relations and society relevant to public policy, centred on the Asia Pacific region. It consists of an online publication and a quarterly magazine, East Asia Forum Quarterly, which aim to provide clear and original analysis from the leading minds in the region and beyond.

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