Japan's Manufacturing Employment Falling below 10 Million: Productivity growth should be maintained

Faculty Fellow, RIETI

According to the national census conducted by the Ministry of Internal Affairs and Communications, the number of employees in Japan's manufacturing industry was approximately 14.6 million in 1990, and it declined to less than 10 million, approximately 9.6 million, by 2010. Its fraction among total employment decreased from approximately 24% in 1990 to approximately 16% in 2010. While the fluctuation of foreign exchange rates affects the number of employees in the manufacturing industry in the short run, its long-term decline reflects the improvement of labor productivity within and outside Japan as a result of technological advancement.

♦  ♦  ♦

Along with the income growth, the demand for both manufactured products such as digital cameras and non-manufacturing services such as tourism has increased. However, the demand for manufacturing goods does not grow as fast as that for income. Furthermore, given the labor productivity of the East and Southeast Asian countries improving due to their technological catch-up, inexpensive high-quality industrial products have entered the Japanese market. With the influx of foreign industrial products and the productivity improvement of domestic companies, the number of employees in the manufacturing industry is inevitably decreasing.

Moreover, in order to compete with industrial products from overseas, domestically manufactured industrial products are limited to those that require advanced technology, which is not prevalent in emerging countries. As a result, labor productivity in the domestic manufacturing industry is further enhanced, leading to an improvement in labor productivity in the manufacturing industry and a concurrent decrease in employment.

Such changes are similar to the historical transition seen in the industrial structure in which productivity improvement in the agricultural industry enabled a smaller number of workers to produce a sufficient amount of food to support the entire population and shifted workers toward the manufacturing and service industries, resulting in a higher standard of living. Hence, we should not be pessimistic about such transition.

The manufacturing industry's low capacity to absorb employment does not mean that productivity improvement in the manufacturing industry is unimportant. If high-quality products are produced at low cost based on research and development for high value-added products and further technological progress, sales of such products will not be restricted by the size of the domestic market.

The consequential improvement of productivity per employee will not only increase the income of direct stakeholders including the managers, shareholders, and employees of the manufacturing companies but also enhance the welfare of the Japanese people by providing high-quality industrial products at reasonable prices.

In addition, the income generated around the world increases the income of those working in the manufacturing industries as well as the demand for local non-tradable goods. For example, the local income increases the demand for homemaking and care services and expands the local employment opportunities. The importance of the knowledge-intensive manufacturing industry generating high added value, which secures reliable earners, will remain unchanged in the future.

Strategies to attract foreign manufacturing companies and transfer production back to Japan are important for encouraging high value-added divisions to be located in the country. However, the location of the companies will not be significant contributors to employment creation. The objective should be the location of high value-added industries. To increase employment, it is more realistic to expect indirect effects such as stimulating demand for local services.

♦  ♦  ♦

Despite the decrease in employment in the manufacturing industry, research and development bases and head office functions often remain in Japan. Overseas transfers start with the transfer of production lines. Blue-collar workers—predominantly male, high-school graduates—are the ones who are directly affected by the overseas transfer of production lines and labor-saving investment. Moreover, as many factories that were located in the Tohoku area were in pursuit of relatively low-cost workers, male, high-school graduate workers living there are considered to be the most affected.

Along with the reduction of public investment in the 2000s, employment opportunities for high-school graduate workers residing in rural areas have decreased. Attention has been paid to the issue of youth employment over the past two decades, including the issues of those who are not in education, employment, or training (NEET) and part-time job holders. Such issues need to be interpreted in the grand context of the transformation of industrial structures.

The figure compares the change in the ratio of employees in the manufacturing industry to all employees and the rise of the unemployment rate of male workers between the ages of 20 and 24 from 1990 to 2010. Their overall trends do not indicate that the decrease in the ratio of employees in the manufacturing industry simply leads to the rise in the unemployment rate.

Figure: The change in the ratio of employees in the manufacturing industry and the rise in the unemployment rate of male workers between the ages of 20 and 24Figure: The change of the ratio of employees in the manufacturing industry and the rise in the unemployment rate of male workers between the ages of 20 and 24
(Source) Prepared by the author based on the national census by the Ministry of Internal Affairs and Communications

The relations of these two trends in the urban areas and those in the rural areas differ, however. In prefectures such as the Tokyo metropolitan area, Kyoto, and Aichi, although the ratios of employees in the manufacturing industry are decreasing, there is no indication of a clear relation with the rise in the unemployment rate. On the other hand, in suburban prefectures such as Yamanashi, Nara, and Gunma as well as those in the Tohoku region such as Yamagata, Fukushima, and Miyagi, the decrease in the ratio of employees in the manufacturing industry correlates with the rise in the unemployment rate of male workers between the ages of 20 and 24. This difference indicates that while the decrease in employment in the manufacturing industry was matched by the increase in employment in other industries in the urban areas, employment did not grow in the rural areas, where the number of unemployed rose.

As the manufacturing industry's employment level is expected to continue to decline, what response measures are required? As mentioned above, the importance of the added value created by the manufacturing industry remains unchanged even with the fall in the employment level of the manufacturing industry. The endeavors to keep high value-added sectors in Japan, such as technological development and corporate planning for the global market, continue to be important. With the advancement of information and communication technologies and globalization, ever-higher levels of technological development and corporate planning skills will be required.

Improving graduate school and university education to foster individuals with such skills is necessary. At the top universities, improving students' English proficiency is indispensable. At the same time, increasing the opportunities for many capable young people to receive university education continues to be important. There is an argument that there are too many university students. However, although the number of university graduates has increased significantly over the past two decades, their wages relative to high-school graduates have not decreased. The demand for university graduate has grown enough to absorb their increased number. This trend is expected to remain unchanged.

♦  ♦  ♦

There are two perspectives for considering employment in the rural areas. If there is any barrier against labor mobility from areas with no jobs to those with jobs, it should be eliminated. For example, financial support should be provided for young people who cannot attend universities in the urban areas despite their high academic achievement because of financial constraint.

Although the mentality to lament the youths for leaving their rural hometowns is understandable, it is inevitable that the population, especially nimble young people, will relocate along with the transformation of industrial structures. Facing many issues including the aging population, Japan, unless it realizes economic growth for the entire country as a whole, could fall.

On the other hand, a perspective to create employment in rural areas to address the falling employment level in the manufacturing industry is also needed. Policymakers are paying attention to tourism and other areas. However, the sources of employment creation for new businesses are the business leaders who can implement new ideas. A planned economic approach cannot be expected to create new employment.

While business leaders are found among entrepreneurs as well as among small- and medium-sized enterprises, large corporations, and the public sector, starting up new businesses and creating employment cannot be realized with ordinary capability and efforts. Extraordinary capabilities of such business leaders should not be wasted on unproductive activities merely to overcome regulations and receive public support. Policymakers must maintain a perspective of preparing an environment for business leaders to concentrate on the development of new enterprises.

>> Original text in Japanese

* Translated by RIETI.

March 22, 2013 Nihon Keizai Shimbun

May 31, 2013