Labor Market Institutions Reform in Japan: Changing the Ways People Work

TSURU Kotaro
Senior Fellow, RIETI

On April 4, RIETI will hold a policy symposium titled "Labor Market Institutions Reform in Japan: Changing the Ways People Work." I would like to introduce the purpose of this symposium and the underlying concepts.

In this symposium we members of the RIETI study group on the reform of labor market institutions will present analysis results and other accomplishments in order to stimulate public discussions. The study group, launched as a RIETI research project in January 2007, has held 11 meetings, including a workshop in which interim findings were reported.

Purpose of symposium

First, we attempt to define a new framework and design for labor market institutions in Japan, set a direction for future reform initiatives, and present underlying concepts. It should be noted that we are trying to achieve "reform of labor market institutions," not labor market reform in its conventional sense. The term "labor market reform" connotes reform needed to make the labor market more efficient and ensure proper functioning of the market mechanism. Opinion also persists that the labor market should not be treated in the same way as other markets where goods are traded. Our approach is based on the fundamental concept of "comparative institutional analysis," that is, the proper functioning of a market, regardless of its type, hinges on the underlying institutions as a supporting infrastructure, and particularly on interaction and collaboration between the private order voluntarily established by the private sector (soft institutions) and the public order enforced by the public sector via law and regulations (hard institutions).

Second, in order to consider new design and framework for labor market institutions, we have organized theoretical and empirical research from a multidisciplinary standpoint encompassing areas such as law, economics, and business administration. Speaking at the upcoming symposium are 13 scholars and experts, of which five specialize in labor law, seven in economics, and one in business administration. Speakers for each session include at least one each from those specializing in law and either in economics or business administration. Law scholars focus on individual workers' rights and justice, whereas economists emphasize "efficiency" of the market as a whole, or resource allocation. Likewise, in considering reform, law scholars focus on existing institutions as the starting point, whereas economists seek to define optimal institutions as the ultimate goal. Thus law scholars and economists differ in their approaches and viewpoints. Yet, by focusing on institutions, they can find common ground and collaborate. This kind of multifaceted viewpoint is vital to addressing difficult problems arising from factors affecting workers such as their increasingly diverse profile and employment status, and widening income disparities.

Third, while eyeing overall labor market institutions, we will pay close attention to interrelation and complementarity among institutional components. Particularly, we will consider ideal forms of comprehensive labor legislation from a broad perspective that goes beyond sectoral boundaries or barriers. This not only affects the substance of reform, but also leads to changes in the decision-making process that formulates reform measures. For instance, establishment of common rules applicable to all non-regular workers is now emerging as an issue of paramount importance. Currently, such workers may be subject to the Part-time Work Act (Act No. 76 of 1993) or the Worker Dispatching Act (Act No. 88 of 1985) depending on their type of employment. In considering institutional reform, we need to look through a "wide-angle lens" to avoid failing to "see the forest for the trees."

Fourth, it is important to learn from the experience of other countries and related analytical findings. Labor markets of course vary in characteristics as each country has its own institutional and historical backgrounds, but even with these differences taken into account much can still be learned in considering policy and reform. When looking abroad, Japan tends to seek examples from the United States. Yet for labor market and employment systems, Europe's experiences have much to teach. For instance, as early as the 1990s, inequalities between regular and non-regular workers and the bipolarization of the labor market were recognized as serious problems in Spain and France, where restrictions on employment of fixed-contract workers had been substantially eased. There has also been growing perception that European countries compare poorly with the U.S. in entrepreneurship and innovation because labor market problems and stricter restrictions on layoffs in Europe discourage companies from taking risks. These European experiences and their related analytical findings have significant implications for Japan in formulating its policy.

No development without cutting into labor market problems

In the "15 lost years," handling of the financial sector, particularly the problem of nonperforming loans held by banks, was the biggest theme of Japan's economic reform. Now having emerged from the prolonged economic slump, Japan must find new frontiers to ensure steady, further development and, in pursuing this goal, aggressive approaches toward the various problems concerning how people work are clearly needed. Unfortunately, however, discussions over the past two years have been produced no substantial results. Discussions on the "big bang" reform of the labor market and institutions, aimed at introducing white-collar exemptions and comprehensive reform of labor laws and regulations, went nowhere in the face of labor-management confrontation and with increasing political stigma attached to the issue. Due partly to these circumstances, recent discussions on the reform of labor and employment seem to be disproportionately focused on "work-life balance."

However, a range of difficult problems, including unequal treatment of non-regular workers relative to that of regular employees, remain unsolved. We hope the upcoming symposium will serve as a starting point for those with different standpoints - workers and employers, law scholars and economists, etc. - to come together and produce comprehensive discussion on the reform of Japan's labor market institutions.

Policy symposium
"Labor Market Institutions Reform in Japan: Changing the Ways People Work" (in Japanese)

March 25, 2008

>> Original text in Japanese

March 25, 2008