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«14 CSR White Paper Economy ESG Investing as an e Unchanging Face of Japanese Antidote to Myopic Employment Management International A airs Japanese ...»

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Of course, there is more to long-term employment than core employees. Figure 4 tracks the changes in the 10-year retention rate among employees with less than five years’ initial tenure, that is, mid-career hires and younger employees. The 10year job retention rate for mid-career hires has fallen continuously in Japan, whereas the United States has registered little change overall. Likewise, the rate for young workers has fallen steadily Japan. (One should note, however, that the extremely low 10-year retention rate for US workers in their twenties—in the vicinity of 10%—raises questions of statistical reliability.) Figure 5. Predicted Job Loss Rate and Tenure in Japan and United States, 1997 and 2007

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-0.005 -0.005

-0.010 -0.010

-0.015 -0.015

-0.020 -0.020

-0.025 -0.025

-0.030 -0.030

-0.035 -0.035

-0.040 -0.040

-0.045 -0.045

-0.050 -0.050

-0.055 -0.055 1997 (1996) 2007 (2006) 1997 (1996) 2007 (2006) Source: Kambayashi and Kato (2012), Table 7.

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The 10-year retention rate does not distinguish between demand-side and supply-side factors—that is, it lumps those who are dismissed or laid off with those who leave of their own volition. Consequently, it is possible that increases in voluntary attrition in the United States could create the appearance of a decline in long-term employment as a managerial practice. In Kambayashi and Kato (2012), we approached the issue from an alternative angle, tracking and comparing the correlation between years of service and the risk of job loss. Our findings are summed up in Figure 5.

In 1997, the probability of losing one’s job in Japan was 5 percentage points lower among company veterans with 15 years or more of service than among recent hires; in the United States, the difference was 3.5 percentage points. In other words, veterans enjoyed substantially greater job stability in both Japan and the United States. In Japan, the picture remains essentially the same a decade later, while in the United States the risk of losing one’s job has increased across the board, although years of service provided somewhat greater protection.

Taken together with Figure 3, this analysis confirms that it is not Japan but the United States that has experienced a significant decline in long-term employment security.

In short, our comparison revealed that, since the 1980s, job security among core employees has declined in the United States but not in Japan. The only groups that could be experiencing greater job instability in Japan are mid-career hires and younger employees.

4. Understanding the Rise in Nonregular Employment

The assertion that long-term employment has not, in fact, fallen out of favor among Japanese companies may seem to fly in the face of conventional wisdom, given the well-documented rise in “nonstandard” employment (hiseiki koyo). It is perhaps natural to assume that the rise in nonstandard employment signifies a decline in the practice of long-term employment. But if the conclusions presented in the previous section are correct, then that assumption must be wrong.

We took up this issue in another paper, published as a working paper in 2013.

We began by attempting to determine the forms of employment that are recognized as nonstandard employment in the Japanese labor market. Nonstandard employment is defined in a number of ways, but the criterion one encounters most often is whether or not the employee is hired under a fixed-term contract.

Under Japanese labor law, the distinction between fixed-term and indefinite (that is, permanent) employment is all-important. Likewise, the OECD, in calling

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for an end to the disparity in regulations governing the dismissal of regular and nonregular employees, defines nonregular employees as those with fixed-term contracts and regular employees as those with indefinite contracts; in Europe there is really no other definition of nonregular employment. In Japan, however, studies of human resource management and labor relations have traditionally placed more emphasis on workers’ job titles than on the distinction between fixed-term and indefinite contracts.

In our 2013 paper, we conducted a statistical analysis to determine whether the employees’ titles or the term of the labor contract correlated more strongly with such key indicators of the Japanese Employment System as separation risk, wages, and participation in company-sponsored training programs. We found that the designation was the decisive factor. In other words, employees with the same titles were treated virtually the same with respect to the aforementioned indicators, regardless of whether they were working under indefinite or fixed-term contracts.

This finding highlights the limited power of statutory laws and regulations in Japan’s labor market. In Japan, textbook discussions as well as case law concerning abusive dismissals and the legality of employee layoffs all focus first and foremost on whether the labor contract is fixed or indefinite. The employee’s designation within the workplace is never mentioned. From a legal standpoint, therefore, the Figure 6. Composition of Labor Force by Type of Employment

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term of the contract is all-important, and the workplace designation of the employee’s post or job classification is beside the point. Yet that designation—not the term of the contract—is crucial in determining whether an employee is considered part of the company’s core workforce and is therefore subject to the basic benefits and requirements associated with the Japanese Employment System. This suggests that many Japanese employment practices have a life of their own, independent of statutory laws and regulations.

With these findings in mind, our study charted the change in the number of nonstandard employees in Japan since the 1980s, dividing these employees into four groups based on employee designation and whether they were on fixed-term contracts or working under indefinite contracts.

Of particular note here is the steady growth in the segment representing de facto nonstandard employees, even though they are working under indefinite contracts. This group has grown by 10.2 percentage points in the past 25 years, an increase consistent with the widespread perception regarding the increase in nonstandard employment. Yet the share occupied by standard employees (both on indefinite and fixed-term contracts) has declined by a mere 2.5 percentage points during the same time. Most of the increase in de facto nonstandard employment is balanced by a decrease in the share of the self-employed and others, which has declined by 9.7 points.

While the share of nonstandard employees on fixed-term contracts has also increased slightly (2.3 points), the overwhelming majority of nonstandard employees are now workers on indefinite employment contracts—that is, workers who are not titled as standard by their employers but do not qualify as such under Japanese labor law. Furthermore, the share of permanent nonstandard employees has increased fairly steadily since the early 1980s, suggesting that the overall increase in nonstandard employment in Japan has little connection with the relaxation of labor regulations in the mid- and late 1990s.

In our study, we anticipated the objection that individual industries are unlikely to mirror this neat inverse relationship between permanent nonstandard employees and the self-employed. Figure 7 plots the increase in the share of permanent nonstandard employees against the decrease in the share of the self-employed in each sector. The 45-degree blue line represents a linear correlation between the two variables. Most of the industries fall fairly close to the 45-degree line, indicating that the rise in permanent nonstandard employment has been accompanied by a comparable decline in self-employment.

The industries that diverge significantly from the line—those in which standard employment has declined significantly—are food manufacturing, communication,

–  –  –

Figure 7. Change in Share of Nonstandard Permanent Employees and Self-Employed/Family Business Workers, 1982–2002.

Source: Kambayashi and Kato (2013), Figure 5.

finance, and transportation, all sectors that have been the focus of major deregulation or privatization initiatives since the 1980s. For example, the 1980s saw the privatization of government monopolies in the food industry (Japan Tobacco and Salt), communications (Nippon Telegraph and Telephone), and transportation (Japanese National Railways). While most regular employees were retained, it is not surprising that their numbers should decline somewhat as a result of the privatization process. More noteworthy, perhaps, is the fact that such declines have not occurred in the retail sector and service industries that were subject to cost competition from the outset. This raises the interesting possibility that the basic reason for the glut of regular employees lies not with the labor market per se but with government regulation of the product market.

If, indeed, the decline in the number of workers in the self-employed sector accounts for the increase in nonstandard employees, then that increase may have hitherto unrecognized socioeconomic repercussions, as we point out in our 2013 paper. Labor conditions in the self-employed sector are known to be poor overall, and workers tend to miss out on such benefits as paid vacations and employer-sponsored health insurance. A shift from the self-employed category into the nonstandard employee category could signal an improvement in working conditions and such benefits as health-insurance coverage.

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Figure 8. Change in Seniority Gap by Percentile, 1993–2010 Source: Ministry of Health, Labor, and Welfare, Basic Survey on Wage Structure.

5. Trends in Seniority-Based Pay The findings of our 2012 and 2013 papers suggest that, at least where long-term employment is concerned, the Japanese Employment System is alive and well, contrary to the popular perception. Can the same be said for the practice of linking pay to seniority? I tracked the gap between the average compensation of employees in their twenties and those in their fifties at the same workplaces using statistics published by the Ministry of Health, Labor, and Welfare. The results were surprising.

I began by compiling establishment-by-establishment data regarding wages levels for haenuki employees (those who entered the company upon graduation from a four-year university and continued working up to the time of the survey). For each workplace, I compared the average compensation for those in their twenties with those in their fifties and calculated the disparity, or the “seniority gap.” A larger seniority gap suggests a pay scale linked more tightly to seniority. I found considerable discrepancy in the seniority gap from workplace to workplace, and the distribution changed over time. In Figure 8, I track changes in the seniority gap in the lower, middle, and upper ranges of that distribution.

In 2000, the baseline year, the median seniority gap was 2.44. In the same year, the 75th percentile (midway between the median and the top of the range) was

99 InternatIonal affaIrs

2.78, and the 25th percentile (midway between the median and the bottom) was

2.14. This indicates a considerable spread among companies in terms of the magnitude of their seniority gap. Now, however, let us look at the trend. During the 1990s, the seniority gap declined for all three quantiles, indicating a decline in the average gap for all workplaces. After 2000, the gap continued to shrink among workplaces that began with the smallest gaps. But among those with the largest gaps, the trend of the 1990s reversed itself, and the gap began to grow again, suggesting a return to seniority-based pay. From about 2000 on, between one-fourth and one-half of Japanese companies reinforced the seniority curve in their pay scale.

So despite the perception of a gradual collapse of seniority-linked compensation, the shrinking seniority gap may actually be the result of companies temporarily adjusting their pay scales to compensate for the rise in their mandatory retirement ages since the 1990s—while keeping a lid on total personnel costs. If this is the case, then rumors of the death of a corporate culture that honors long-term employment and seniority-based wages may be premature.

6. The Tradition of Autonomous Labor-Management Relations

The foregoing analysis of key Japanese labor practices suggests that their reputed decline has been greatly exaggerated. Long-term employment, reliance on regular employees, and seniority-based pay—all key features of the Japanese Employment System—appear to be alive and well, at least in some parts of the Japanese labor market.

Why are these practices so persistent? The two papers referred to above do not offer a clear answer to this question, but my own studies and observations have led me to a tentative explanation. The first hint was our discovery that the workplace designation of an employee is a more important determinant of the employee’s treatment than the term of the employment contract. This highlights the importance of the distinction between “living law” and official or statutory law—a key concept in legal sociology—within the labor market.

In the Japanese labor market, living law in the form of customary practices may play a larger role in the formation of norms than statutory law. In fact, Japanese labor law itself provides for numerous exemptions in the name of labor-management autonomy. Moreover, the wave of deregulation that began in the 1980s actually expanded the role of collective agreements at the company level. Regulations governing work hours and overtime pay as well as those concerning employee dismissals all stress the importance of reaching an understanding between manage


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ment and labor through consultation. In fact, one could argue that Japanese society lacks any effective mechanism of external control over management-labor relations at individual companies.

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