Accepting Workers from Abroad a Plus for the Macroeconomy

OGURO Kazumasa Consulting Fellow, RIETI

With low fertility, a rapidly aging population and globalization making even greater inroads, Japan's economy is in a state of flux as it continues its steady decline. The country's public debt, at nearly 190% of GDP, the worst among the developed nations, and its social security expenditures, swelling by about 1 trillion yen each year, put Japan at increasing risk of fiscal collapse. While short-term measures are needed, there is very little time left to address these issues, and ad hoc tweaking of the existing system cannot bring Japan out of this crisis. The recent political and economic turmoil and stagnation clearly attest to that fact.

In other words, Japan must give up on stopgap measures and instead undertake as quickly as possible bold reforms to revive its economy. Politicians must act with decisiveness and responsibility on this matter. Broadly speaking, reforms are needed in two areas: the reconstruction of collapsing public finances and social security, and the pursuit of a growth strategy. This article will briefly discuss the benefits of a policy of utilizing foreign workers as a means of contributing to both.

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First, let us imagine the following picture of the Japanese economy in the year 20XX in which a variety of foreign workers actively participate.

Many highly-skilled foreign workers equipped with advanced knowledge and the latest technology, in particular those who have studied for a time at a Japanese university, are playing important roles at companies, universities, research institutions, etc. Around half of the directors at numerous companies are foreigners. Diverse cultures and ideas come into contact with each other, new businesses, services and products are continually developed, and the economy is full of dynamism.

English-language instructors at elementary and junior high schools are foreigners whose mother tongue is English, allowing children of the next generation to cultivate their English ability from a very young age; many of them go on to study abroad when they reach university. The government offers a range of incentives and provides support to Japanese companies and universities hiring first-rate scholars and engineers active on the world stage. A great number of foreigners can also be found working at hospitals, nursing care facilities, factories and supermarkets.

Foreign workers currently make up 5% or more of the total working populations of Germany, France, the UK and the US but a mere 1% or so of Japan's. By 20XX skilled and unskilled foreign workers will become part of Japan's economic engine, accounting for about 5% of Japan's total workforce.

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It is commonly thought that accepting a greater number of foreign workers will have a negative impact economically. This impression stems from the view that, while the acceptance of skilled workers from abroad will produce certain benefits for a country's economy, the admission of unskilled workers will drive down wages for native workers and produce adverse economic consequences. This strongly-rooted "conventional wisdom" ignores the perspective of companies and does not hold at the macro level. An increase in workers, be they skilled or unskilled, will in general lower wages, but this in turn will increase company profits. This increase in company profits will have benefits for the economy as a whole that outweigh the decline in wages.

If the government carries out suitable redistributions at this time, the acceptance of unskilled foreign workers will contribute to the Japanese economy. Problems only arise when workers extend their stays or, for instance, bring over their families, causing controversy over the scope of access to education, social insurance and other public services to be granted to foreign residents and, more broadly, the matter of integrating these foreigners into Japanese society, i.e., social integration.

Social integration actually offers several advantages. The burden on public pensions would be reduced, for example, and tax revenue and consumption would be expanded. As low fertility and an aging population lead to a diminishing number of persons supporting the pension and medical care systems, the acceptance of young foreign workers could be expected to provide a short-term stopgap. This would prove a disadvantage over the long term, however, as these foreign workers become pension recipients upon retiring from the labor market, placing pressure on public finances and social security.

In a joint research effort with Manabu Shimasawa, associate professor at Akita University, we employed model analysis to estimate the utility to each generation of (1) accepting 150,000 foreign workers each year from 2015 and (2) accepting 75,000 foreign workers each year. "Utility" here is a measure of the satisfaction derived by each generation from lifetime consumption, etc., based on lifetime wages (take-home pay after taxes and insurance premiums, plus pensions). The resulting estimates are shown in the diagram below.

Figure : Acceptance of Immigrants and Utility by Generation Acceptance of Immigrants and Utility by Generation

(Source)Created by the author and fellow researchers.

(Note)The horizontal axis represents year of birth, while the vertical axis indicates each generation's lifetime utility measured against the lifetime utility of the generation born in 1930 taken as 1.

These estimates imply that an increase in the working population through the acceptance of foreign workers will reduce tax and insurance premium burdens and, by boosting gross national income (GNI) and consumption, will improve utility for the generations born in and after 1980. In other words, the advantages accruing from permanently accepting foreign workers outweigh the disadvantages, and these workers have a positive effect on the Japanese economy over the long term.

The previously mentioned issue of redistribution comes down to the question of whether necessary recompense will be provided to disadvantaged native workers. Several steps have already been taken in other countries to address this issue. One is a policy of imposing an additional tax on companies hiring unskilled foreign workers that does not exceed the additional profits gained from such hiring, and redistributing these tax funds to native workers. Singapore, for instance, imposes an employment tax (Foreign Worker Levy) on companies hiring foreigners, with the amount of this tax varying by industry sector and skilled/unskilled classification.

Another such step is a policy of imposing an additional tax on unskilled foreign workers themselves. It is a safe assumption that unskilled foreign workers are motivated to seek out work in other countries by the anticipation of being able to earn higher wages than in their home countries. Therefore, this step would entail imposing an additional tax on unskilled foreign workers that does not exceed the benefits they have gained (the wage differentials between Japan and their home countries), and redistributing these tax funds to native workers.

The above would apply when foreign workers and native workers are deemed fungible and although the acceptance of foreign workers lowers the wages of native workers, a scenario in which the two are complementary should also be considered. In such a case, an increase in the foreign workers accepted would not intrinsically bring down the wages of native workers. Empirical analysis conducted by Professor Jiro Nakamura and his colleagues at Nihon University suggests that contrary to conventional wisdom, and with certain reservations applying, it is indeed possible that an influx of foreign workers would have the benefit of raising the wages of competing lowly educated Japanese workers ("Japan's Foreign Workforce," 2009).

There are many other benefits to expanding the acceptance of foreign workers.

One such benefit would be promoting the "return home" of Japanese companies. The advancing globalization of corporate activities has witnessed an increasing number of instances in which the authorities in a given country penalize foreign companies under that country's law. Japanese companies have, as a result, been subjected to enormous fines and on occasion have even been forced out of business. If companies have been transferring their operations overseas in order to reduce labor costs, then the emergence of areas within Japan in which the proactive acceptance of unskilled foreign workers has made available a pool of relatively cheap labor will likely encourage a "return home" by Japanese companies seeking to reduce their overseas risk. Such a development could also be expected to lead to an expansion in capital investment domestically.

The return home of companies would spark diverse demand. As capital investment expanded, hiring would undoubtedly increase in such fields as the management of foreign workers assigned to production sites. Demand for residential facilities for foreign workers, consumption services for their families, etc., would also be generated, requiring these to be supplied as well.

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In any event, low fertility and an aging population have set the Japanese economy on a steady course toward a balanced contraction. There is no question that the shrinking population will continue and that public finances, social security, the labor market, etc., will place various strains on the Japanese economy, but the government has been slow to respond.

Japan is so busy reacting to current circumstances that it cannot afford to think about its sustainable future growth from a long-term perspective. Should things remain as they are, the Japanese economy would quite possibly stagnate over the medium to long term. It goes without saying that the true road to reform runs through a revitalization of public finances and social security as well as a strategy for growth, and utilizing foreign workers can potentially contribute to both. The times call for urgent discussion regarding approaches to utilizing foreign workers and moving ahead with bold reforms with an eye to the interests of present and future generations.

>> Original text in Japanese

* Translated by RIETI.

September 8, 2010 Nihon Keizai Shimbun

October 25, 2010

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