Measures to Realize Sustainable Wage Hikes

President and CRO, RIETI

During this year’s springtime labor-management wage negotiations (known as shunto, which literally means “spring offensive”), many companies raised wages. However, in terms of real wages, that is, inflation-adjusted wages, the increase in wages has not led to an increase in workers’ purchasing power. If nominal wages remain unchanged when prices of goods and services are rising, real wages decline. It is natural that price increases should be reflected in wages.

There is a strong correlation between real wages and productivity when examined over time and when compared across companies or countries. It is naturally expected that an increase in the productivity of companies will lead to an increase in their value-added, which in turn will be returned to workers in the form of wage hikes.

On the other hand, there is also a causal mechanism in the opposite direction: a change in wages affects the level of productivity. To be more specific, wage hikes raise worker motivation, put pressure on companies to improve management efficiency, and expel companies with low wages and productivity from the market. Although there are two-way causal mechanisms between wages and productivity, in the medium to long term, the causal effect of a productivity increase on wage hikes is presumed to be stronger.

Therefore, increasing the productivity of the entire Japanese economy should be the basis for realizing sustainable real wage hikes. It is important to take a proactive approach to investment in research and development and in human capital. In addition, it is necessary to remove factors that inhibit new market entry, to scale back protections for inefficient companies, and to promote reallocation of resources in a way that increases the share of employment in companies with high productivity and high wages.

However, there are also factors that may cause productivity to diverge from real wages. Around the world, lively debate is underway about the decline in the labor share (workers’ share of value-added), which has become a hot research topic in the study of economics. Among the things that have been pointed out as the underlying factors of the shrinking labor share are globalization, the spread of automation technology, including computers and robots, the growing market dominance of massive IT companies, and declines in labor unionization rates.

Although corporate profits decline steeply in times of recession, wages remain relatively stable, which means that the labor share has an inverse relationship with the business cycle. Indeed, at the time of the global financial crisis and the COVID-19 pandemic, the labor share rose sharply. However, from a broader perspective, as real wages and productivity have been rising in parallel, the quantitative effects of changes in the labor share have been limited.

Another factor that may cause a divergence between real wages and productivity is changes in the terms of trade (the ratio of export prices to import prices). From the viewpoint of macroeconomics, the portion of inflation that is attributable to deterioration in the terms of trade, including upsurges in prices of imported raw materials, is not reflected in wages, with the result that the people bear the burden in the form of a decline in purchasing power. Conversely, if the relative prices of goods exported from Japan rise, the terms of trade improve, leading to higher real wages.

Although Japan has traditionally exported high-quality industrial goods, the importance of services trade has also been growing in recent years. While a prime example is in-bound tourism, for which demand is gradually recovering due to the waning of the impact of COVID-19, other examples include trade in software products and content. If Japan can export attractive goods and services that foreign users are willing to purchase at high prices, the country’s real wages may increase beyond any increases to productivity.

In the end, to realize sustainable wage hikes, raising productivity and developing high value-added products and services are necessary, which are time-consuming and take continuous, painstaking effort.

>> Original text in Japanese

* Translated by RIETI.

April 6, 2023 - Published in Nihon Keizai Shimbun's "Economist 360° Perspective"

May 29, 2023

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