Cheer Up, Labor Unions!

Ronald DORE
Visiting Fellow, RIETI

"Japanese trade unions are just too sweetly reasonable." It was not some activist burning with the spirit of class conflict who said this to me two or three years ago, nor some "left-leaning" academic. It was a middle manager of the Bank of Japan, a man generally spoken of as one of the Bank's highfliers. He spoke with the half-joking tone of somebody defying common sense, but he was also making a serious point.

It was a time when Japan's deflation had already lasted for five or six years. The assumption underlying his remark was that the deflation was responsible in many ways for the stagnation of the Japanese economy, and that no amount of "quantitative easing" by the Bank of Japan was going to cure it. A few militant trade union leaders, forcing wage rises in the "spring offensive" might raise wage costs across the economy which would then feed into prices. And two to three percent inflation might put a bit of vigor into economic activity overall.

That is still today an aspect of economic policy that needs emphasizing. Thanks to growth in China and the U.S., Japan's export industries are doing extremely well. Optimists who believe that this represents a real recovery grow daily in number. That change of mood is in itself a powerful plus factor, but prices are still falling and no one can forecast when the deflation will end. The slow rate of increase in household consumption still gives many economic experts grounds for doubting the sustainability of the recovery.

And one reason for that is the fact that wages and bonuses have not risen. The general pattern of past cycles was that as conditions improved and company revenues increased, not all of those revenues went to boosting profits but also wages as well, thus raising personal consumption and thereby giving a further stimulus to the recovery.

But what has happened this time, now that unions that have become more compliant? The Ministry of Finance's "Company Statistics" is instructive. One analysis it gives is of the distribution of value added, which shows what happens to the surplus after raw materials and bought-in parts and services have been paid for - how much goes in personnel costs, i.e., wages and salaries, how much in taxes to local and central government, how much to banks and landlords in the form of interest and rent, and how much in profits that can be used at the discretion of shareholders. In 2001, the share which went in profits was 7.0 percent, which last year rose to 10.3 percent. Personnel costs fell over the same two years from 75.1 percent to 71.6 percent.

Here, surely, is one reason for the sluggishness of the recovery. Managers are saying to their unions, "Conditions are still pretty tough out there. We've got to ask you to be patient." And unions, even if their willingness to go along and accept what managers say is not a sign of weakness but of a rational understanding of what is best for the firm, the rationality of individual firms does not add up to macroeconomic rationality. It is from the aggregation of innumerable "rational" decisions that the deplorable phenomenon of inadequate aggregate demand arises.

However, it is not only on the balance between profits and personnel costs that the weakening of trade unions has an impact. There is also the question of the relative shares of managers and other employees. There is an interesting journal called Wage Conditions, which for many years has conducted surveys of the pay of CEOs and company chairmen. According to that journal, in the golden age of the "Japanese management system," from 1984 to 1990, the pay of CEOs rose by an average of 3.44% per annum, and that of other employees by 3.21% . In recent years, however, with the penetration of the "performance, performance, performance" ideology, there are a lot of companies where, when profits increase, it is only the salaries of top managers which go up.

You can't expect to get a good economic recovery in an economy where the only union that remembers it has a right to strike is that of the baseball players.

>> Original text in Japanese

* Translated by RIETI.

September 19, 2004 Tokyo Shimbun

October 1, 2004

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