Promotion of Diversity

Visiting Fellow, RIETI

Japanese employment practices and their dysfunction

I recently wrote a policy discussion paper entitled "Promotion of Women's Economic Activities and the Recovery of Japanese Firms from their Dysfunctions." Thankfully, it seems that many people are interested in the paper, as it was downloaded more than 1,000 times within 10 days of its publication on the RIETI website. Unlike my earlier research papers on the same theme, i.e., diversity and the promotion of women's economic activities, this paper is non-technical in descriptive expression and intended for a broader scope of readers. In addition to the description of knowledge and insights derived from the author's and others' studies, the paper examines Japan's postwar employment institutions and practices in an attempt to clarify reasons why the promotion of women's participation in economic activities does not progress under those institutions and practices, and why they are now dysfunctional for the utilization of human resources.

The Japanese employment system was developed and prevailed in the postwar period of high economic growth under the cultural and economic "initial conditions" of that time, and evolved into its present state by incorporating various complementary institutional systems developed based on the principle of "strategic rationality" (Refer to the paper for the definition of the concept). The paper attempts to explain the development of the employment system unique to Japan by not only focusing on the system actually developed in Japan but also analyzing the reasons why certain systems which were developed in the United States and/or Europe were not adopted in Japan. Although I do not go into details here (for which readers are advised to refer to the paper), my discussion centers on differences in the initial cultural conditions as well as on rational choices based on complementarity to the existing institutions.

An institution rationally adopted based on its complementarity to the existing system may become dysfunctional when external conditions change. However, it is difficult to change a complex institutional system composed of a set of mutually complementary subsystems because of the enormous cost involved. It will generate such an inferior equilibrium where an attempt to solve problems without changing the core system would lead decision makers to conclude that keeping the status quo would be a rational choice. More specifically, the permanent employment system and the internal labor market system--which constitute the core of the Japanese employment system--are in a dysfunctional state, as shown in the table below. The area shaded in blue is the situation that existed during the postwar period of high economic growth and the one in green is the current situation.

Table: Function and dysfunction of Japanese employment practices resulting from changes in the external conditions
There is low uncertainty about what constitutes a successful model in terms of technological innovation, etc. highly valued in the market: Concentration is importantThere is high uncertainty about what constitutes a successful model in terms of technological innovation, etc. highly valued in the market: Adaptability is important
A steady increase in labor demand is expected, and companies do not need flexibility to make employment adjustmentsThe permanent employment system and the internal labor market system are functional.The internal labor market system is dysfunctional while the diversity of human resources is functional.
There is uncertainty about future labor demand, and companies need flexibility to make employment adjustmentsThe permanent employment system is dysfunctional.The permanent employment system and the internal labor market system are both dysfunctional1, while the diversity of human resources is functional.

1 Permanent employment is inflexible and becomes an obstacle to employment adjustments. Internal labor markets, a personnel appointment system centered on internal promotion, create an environment where a group of people with homogeneous information have decision-making authority, and companies with such characteristics tend to adapt poorly to changing environments. While they can save on recruitment and training costs, they are prone to reproducing once-successful company-specific technologies and/or knowledge even after they cease to be viable.

"Diversity" in the title of this column refers to that of human resources discussed here, and its underlying concept is that collaboration among individuals having diverse knowledge, information, and experiences enables companies to achieve excellent innovation and become more adaptable to changing environments. In contrast, typical Japanese companies--in which a large number of employees work for the same company throughout their career, information held by them is substantially homogeneous and overlapping, and top executives are inbred from among internally-promoted permanent employees--are facing significant risks in the current business environment. For instance, only less than 10% of all executive board members of major Japanese companies are outside directors, compared to more than 50% in their counterparts in the United States and Europe. This shows how lightly Japanese companies take the issue of diversity. In order to facilitate the efficient utilization of human resources, it is imperative to reexamine the internal labor market system fundamentally. However, having diverse individuals involved in decision making also creates problems, giving rise to the question of how to make them collaborate proactively and develop a unified decision smoothly. This is the issue of diversity management. Various principles are available, ranging from sharing goals to establishing agreeable principles of equity, and ensuring the transparency of the decision-making procedure. However, we must not resort to a makeshift solution in dealing with this issue for the reasons discussed below.

Although we can't emphasize enough the importance of the service sector, there is still quite a lot of misunderstanding about it, fed by some off-base reporting. Let's look at some of the facts.

Social vision to promote diversity

When the concept of diversity management, which began to appear in business administration journals in the United States in the 1990s, was imported to Japan as if it were the idea representing the concept of diversity itself, it reminded me of Masao Maruyama, the late philosopher and political scientist who described the Japanese academic community as a stack of "octopus pots." He was referring to the segregated nature of academic disciplines in Japan. Various academic disciplines seen today in the fields of humanity, social science, and natural science originated from the ancient Greek and Roman civilizations and developed through the Renaissance. Thus, in Western countries, they are like branches and leaves growing from the same trunk, having common grounds of philosophy and thoughts. This, according to Maruyama, is not the case in Japan where academic disciplines are linked to the tips of the leaves or branches of their respective counterparts in Western countries but have no common trunk that links them together over disciplinary boundaries. The term "diversity" is not business administration terminology but represents an idea of humanism that seeks to create a society where diverse individuals are given equal opportunities, and the potential capability of every person is highly valued and fostered.

Finding it necessary to develop a fundamental understanding of the concept of diversity in Japan, I wrote and published Diversity: Tales for Life Empowerment (in Japanese) as fantasy fables targeted at young readers, an unusual form of publication coming from an academic. The book is composed of two tales, respectively designed to explain what diversity means to individuals and what it means to society. One of the readers wrote in her blog as follows: "Creating a society that fosters creativity by accepting individual differences and cooperating with one another is, in fact, closely linked to each of us living our lives with self-esteem, although they seem to be completely different themes. That is what I took as the message of the entire book." That is exactly what I try to convey in my book. Diversity is not simply about making use of information and knowledge held by diverse individuals but making society enable full human developments for diverse people. Its bottom line principle is the full realization of equal opportunities for diverse people.

Utilization of female human resources at companies

In December 2012, I was invited to lecture at a workshop organized by the National Women's Education Center of Japan (NWEC) to help middle managers understand the philosophy of diversity. In the course of the seminar, I learned that NWEC President Fusako Utsumi established the so-called "3K" principles for managers for the utilization of female human resources while she was an executive board member of NEC Soft Co., Ltd. The 3K principles are: kimetsukenai [do not presume] based on the gender of employees, kitaisuru [expect] just as much from female employees as from male employees, and kitaeru [train] women for work in the same way as would be the case for men. They are concise and concrete statements to call for equal opportunities to women and men. Also, at the same seminar, Kazuko Takamatsu, former vice president in charge of the environment at Sony Corporation, pointed out that many Japanese male managers are mixing up "being kind to women" with "assigning simple and easy tasks involving little responsibility to women." Given the reality that many female workers have work-family role conflicts, it is important to pay high respect for employees' work-life balance. More specifically, companies should introduce flexibility in work hours and work locations so as to create an environment where employees can achieve a work-life balance more easily. Meanwhile, typical Japanese male managers' "kindness" pointed out by Takamatsu goes against the principles prescribed by Utsumi because it deprives women of opportunities to develop their career and enhance their competency for performing tasks. Although giving considerations to individual and family circumstances is the key element of the philosophy of diversity, it must be done in order to provide equal opportunities, while taking away opportunities from female employees as many Japanese male managers do is out of the question. If "simple and easy tasks involving little responsibility" are typical tasks assigned to the so-called "general staff" (as differentiated from "professional staff") of Japanese companies, the presence of a large number of such staff may be one of the reasons for the low productivity of white-collar workers in Japan. In the United States, the number of white-collar support staff, i.e., routine clerical workers, has decreased significantly due partly to the information technology revolution. Staff carrying out simple and easy tasks with little responsibility may become unnecessary in the near future. On the other hand, another aspect of diversity promotion is to utilize and cultivate the specialties and expertise of individuals.

February 19, 2013

February 19, 2013