Development and Utilization of Human Resources in an Era of a Declining Population: Work style reform holds the key to bringing out the skills and talent of people

Faculty Fellow, RIETI

With people getting older and women having fewer children, Japan's working age population is destined to decline in the coming years. In the prospect of such a worrying future, more people have come to embrace the idea that Japan should seek to maintain its level of production by improving individual workers' skills and thereby raising labor productivity.

Today, the working age population—those aged 15 to 64—accounts for about 60% of Japan's total population. However, the proportion will drop to around 50% in 2050, according to the projection by the National Institute of Population and Social Security Research based on the medium-fertility and medium mortality assumptions. Meanwhile, the proportion of those aged 65 and over will increase from slightly below 30% to nearly 40%. Improving the productivity of the working age population is indispensable to sustaining the social security system which includes public pension and healthcare insurance programs. In considering the relationship between skills and labor productivity, we need to be aware that there are two aspects to raising skill levels, i.e., the development of individual skills and the utilization of the skills. In what follows, I would like to examine problems facing Japan by focusing on both aspects.

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On the aspect of skill development, what is important is to raise the level of low-skilled workers. It is particularly important to implement measures designed to ensure that all young people acquire a minimum academic ability equivalent to that of high school graduates.

Analysis using data from the Ministry of Internal Affairs and Communications' Employment Status Survey found that 80% of men aged 25 to 29 with a junior high school educational attainment worked in 2012, falling from slightly more than 90% in 1982. While it is a well-known fact that the labor participation rate for young men has been on a decline despite a decrease in the young population, a more obscure fact is that the tendency is particularly conspicuous among the less educated.

Structural changes over the past quarter century—i.e., the globalization of economic activities and the advancement of information and communications technologies—are the reason behind the downward trend in the labor participation rate observed among young people with low education. As the offshoring of manufacturing processes has continued and computers have replaced humans for simple repetitive tasks, demand for low-skilled workers has decreased over time, and the trend will likely proceed into the future. The level of skills required of workers is on the rise, and it is becoming all the more important to improve skill levels across the board. Special attention needs to be paid to junior high school graduates as they are the hardest hit by a decline in demand for workforce and account for approximately 5% of the Japanese male population aged 25 to 29 according to the latest figures. As three out of every five such young men are high school dropouts, one of the challenges is to reduce the number of high school dropouts.

Students drop out of high school for various reasons. According to a survey conducted by the Ministry of Education, Culture, Sports, Science and Technology, nearly 50,000 students dropped out of high school in FY2015 and only 2.7% cited "financial difficulties" as the reason.

However, recent research and media reports on child poverty have revealed that the lack of an adequate learning environment at home due to financial difficulties is often the root cause for "poor school performance," "maladaptation to school life and study," "changes in future plans," and "family circumstances," which together account for a significant portion of high school dropouts.

Non-profit organizations and local governments are already working to address the problem of child poverty. It is necessary to measure the effects of those efforts and integrate successful grassroots or local initiatives into national policy.

In discussing education in the context of the globalization of economic activities, the focus tends to be on the education of highly skilled professionals, such as the development of human resources with global competencies through university programs taught in English. While such efforts are important, it is equally important to raise the level of those with low skills in view of the fact that globalization tends to reduce demand for low-skilled workers. Failure to regard this may result in social instability, as brought to light through two big events last year, namely, the Brexit decision in the United Kingdom and the outcome of the U.S. presidential election.

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Equally important as the issue of skill development is the perspective of how we should proceed with the work style reform to enable people to give full play to their respective skills. Using data from the Organisation for Economic Co-operation and Development (OECD)'s survey under the Program for International Assessment of Adult Competencies (PIAAC), conducted on those aged 16 to 65 in advanced countries, I performed a comparative analysis of Japan, the United Kingdom, and the United States. My findings were presented at the Spring Meeting of the Japanese Economic Association held in Nagoya University in June 2016.

In the level of literacy skills, Japanese adults excel over their UK and U.S. counterparts, with minimal difference between men and women. However, when it comes to the use of literacy skills at work, there is a significant gender gap in Japan, unlike in the other two countries (Figure).

Figure: Comparison of Men and Women in the Use of Literacy Skills at Work
Figure: Comparison of Men and Women in the Use of Literacy Skills at Work
Note: Calculated by the author using data from the OECD's PIAAC survey. Scores are standardized to a mean of zero and a standard deviation of one.

Japanese adults also demonstrate higher proficiency in numeracy compared to their UK and U.S. counterparts. While there is a statistically significant gender gap in the level of numeracy skills, the gap is even greater in the degree of use of such skills at work in Japan. These findings suggest that despite having relatively high skills, Japanese adults—women in particular—are not effectively utilizing them.

Factors impeding Japanese women from utilizing their abilities include the division of the labor market based on differences in status—i.e., those in permanent full-time status (hereinafter "regular workers") and all of the others (hereinafter "non-regular workers")—apart from the deep-rooted stereotypical perceptions about the division of roles between men and women.

In Japan, where labor market mobility is not as high as in the United Kingdom and the United States, companies have sought to develop human resources internally and make staffing decisions based on the premise of long-term employment, thereby establishing a personnel system that compensates employees in a way suitable for their commitment. Those subject to such a personnel system are regular workers, whereas non-regular workers are outside the system. In Japan, where the traditional division of roles between men and women remains a norm for many people, the burden of family responsibilities—such as household chores and child rearing—tends to falls disproportionately on women, making it difficult to continue to work in a permanent full-time position that tends to involve a heavy workload. The result is a disproportionately large number of women working as non-regular workers.

Company programs designed to develop and utilize employee skills typically do not cover non-regular workers, resulting in very limited career development opportunities for them and hence underutilization of female human capital. It would be encouraging if non-regular workers were able to land a better-paying position by improving their skills and changing jobs. In reality, however, a job market that enables such labor mobility is slow to develop in Japan.

The equal pay for equal work principle, which the government seeks to introduce, can be defined as an approach that attempts to converge wage-setting mechanisms for regular and non-regular workers within the same company as much as possible by prohibiting unreasonable differences in their treatment.

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Another approach is to develop a labor market, in which all workers, whether regular or non-regular, will be evaluated by the entire market—not just part of it—for their skills and have opportunities to improve their situation through a job change or by using the possibility thereof as a bargaining position.

In many European countries, where trade unions organized across companies have strong bargaining power, unions play a significant role in developing such a market through their engagement in centralized wage negotiations. Meanwhile, in the United States, where wages are determined in a decentralized manner and labor mobility is very high, the pressure of the labor market plays a big role, making employers feel compelled to raise wages in consideration of higher wages offered by potential new employers as well as the sheer possibility of employees leaving.

In Japan, where wages are determined in a decentralized manner through negotiations between each company and its labor union, a realistic approach is to start with removing distortions in the labor market to improve market quality. First, we need to reform the systems that are putting downward pressure on wages for non-regular workers by artificially increasing the supply of part-time workers, such as the income tax exemptions and privileged No.3 insured person status under the public pension system applicable only to non-working and low-earning spouses of employees.

Second, we should establish a clearer set of rules for dismissal to lower the hurdles for hiring permanent employees. Under the current dismissal rules, it is unclear how much a company will end up paying if the dismissal of an employee is declared invalid. This uncertainty may be serving as an obstacle to hiring permanent employees. It is expected that removing such uncertainty by introducing a severance payment system will facilitate a shift from fixed-term to permanent employment, thereby eliminating the division of labor between regular and non-regular workers.

Both the reform of the tax and social security systems and the introduction of a severance payment system are bound to encounter strong political resistance. However, these are the core elements of the work style reform, which is indispensable if Japan is to utilize the talents of its people to the full by eliminating the gap between regular and non-regular workers.

>> Original text in Japanese

* Translated by RIETI.

January 19, 2017 Nihon Keizai Shimbun

February 17, 2017