Changing the Japanese Way of Working through the Introduction of Limited-type Regular Employment Practices

TSURU Kotaro
Faculty Fellow, RIETI

Why employment reform now?

Employment issues tend to aggravate slowly when no one takes note of them. After the bursting of Japan's economic bubble in the early 1990s, the government focused primarily on "visible" issues, such as the financial crisis and bad loans, overlooking a range of issues surrounding the deteriorating employment conditions.

For example, the ratio of non-regular employees has crept up from around 15% in the mid 1980s to almost 40% today. The ratio of fixed-term workers in Japan is at the highest level among the member nations of the Organisation for Economic Co-operation and Development (OECD).

Over the last two decades, the Japanese economic system has lost its luster. So did its employment system, which had previously supported the nation's strong economic growth. There is a growing recognition that we cannot move on to the next stage in the world economy unless the nation transforms its obsolete employment system. At the same time, however, many of us are strongly resisting the concept of "change." A series of makeshift measures have put our employment system in limbo.

Public concern has been spreading in recent years about the decline in the working population and the resulting workforce shortage. It is not easy to predict how the population decline will affect the labor market. What is clear now is that it will accelerate the aging of the Japanese population.

The population aging is suspected to cause two main employment issues. The first issue is the need to increase the employment of the elderly, and the second is how to keep the young motivated to work.

One of the current measures taken to address the former issue is postponing the retirement age. However, this does not mean keeping older workers in their jobs at the same elevated wages. They must accept lower pay and reshuffled work duties.

In an international comparison of wage systems, the Japanese system is characterized by a seniority-based increase in wages paid. While the rate of increase has slowed down over the last 20 years, the Japanese system demonstrates a clear difference from that of Western systems, in which wages typically stop increasing once workers turn 40 years old and thereafter.

In order to establish retirement age postponement as a system, businesses must shift to the Western system of curbing wage growth at an early stage in order to survive. Yet, in reality, people in their 40s and 50s are the generations that are saddled with mortgages and heavy costs of children's education, and cannot maintain their livelihood unless their wages continue to increase.

It is thus evident that Japan can no longer sustain the social model of men being the breadwinner of the family and women staying at home to look after domestic affairs. Both the husband and wife must work to bring in a reasonable combined income. If this is the case, there must be a mechanism to support the change. For working parents to raise their children, it is not possible for both parents to be subject to long working hours. "Work-life balance" must be accepted as a standard concept in business management.

The mechanism that facilitates this change is limited-type regular employment practices. The proliferation of limited-type regular employment practices could be the starting point of a variety of employment system reforms.

Reasons for accelerating the spread of limited-type regular employment practices

What is the definition of regular employment? Regular employment is defined as a form of employment based on (1) permanent employment status, (2) full time work, and (3) direct employment (in which the employer has the direct control of the employee). In Japan, regular employees also have no limit to the scope or location of their work duties ("regular employees with unlimited job duties, etc.). They are obliged to accept future transfers to different workplaces, change of job duties, and overtime. Employers have far-reaching discretionary authority over their human resource arrangement.

The unlimited characteristics of regular workers have created several issues with respect to the way Japanese people work today. These include the following two points:

First, this has led to the expansion of the non-regular workforce, which I mentioned earlier. Why is this? Because those in regular employment are entitled to employment insurance and other forms of benefits, since the 1990s, businesses have become cautious about hiring such employees, resulting in the increase in the number of non-regular employees.

Second, this is inhibiting women's active workforce participation. In society built upon the premise of an unlimited-type regular employment system, wives are often expected to stay at home to look after the family. Even when women seek regular employment, the need to raise children and care for the elderly members of their family has created an obstacle in maintaining their professional careers.

In contrast, people on limited regular employment either have their work locations, job duties, or working hours limited. Since their job duties are clearly defined and specified, this is also known as "job-based regular employment." They typically receive slightly lower wages compared to unlimited-type regular workers while performing the same tasks. There is no legal constraint in employing limited-type regular workers. About half of the major corporations are said to have embraced the system already.

The first advantage of limited-type regular employment system is that it caters to both male and female employees' need for parenting, aged care, and lifestyle-based choice of work. Regular employment with limited working hours is most effective for achieving work-life balance. Job-based regular employment allows workers to clarify their values based on their careers and personal strengths.

Companies also would find it easier to hire limited-type regular workers than unrestricted ones. The limited-type regular employment system is also suitable when placing non-regular workers into regular employment for employment stability. Giving limited-type regular status to non-regular workers clearly would provide job security for them. At least 10% of all workers should be converted from non-regular employment to limited-type regular employment.

Until now, women needed to behave just like men in order to perform well in a traditional work environment. The introduction of the equal employment opportunity law consequently forced women to work on par with men. Some women even did more overtime than men to survive in the male-dominant work society.

Suppose that the husband of such a woman said, "If you are putting so many hours into work, let me do more housework," the way that present day Japanese people work would not accommodate it if the husband was also an unlimited-type regular employee. That is because he would have to accept any order to work overtime or be transferred to another workplace. A male regular worker does not have the option of reducing his workload to accommodate his wife's desire to advance her career.

Renumerations for overall balance

The most delicate issue in spreading the limited-type regular employment system is the transition from an unlimited-type regular workforce to a limited-type regular workforce within the same company. The management must not be allowed to make this shift deceptively without ensuring that the employees fully understand the implications.

Such a transfer must be initiated always upon each employee's request, and there must be a mechanism in place to return former limited-type regular workers back to unlimited-type regular employment. This is a matter of crucial importance.

Labor unions have opposed the introduction of this system, saying that the switch to limited-type regular employment would make workers subject to easy layoffs. Television news reported a scenario in which a limited-type regular worker had his employment terminated when his local office closed down. Their argument included some misunderstanding, but it played a significant role in that it sparked caution in the minds of many workers.

However, it is important to understand the circumstances and living environments of people who choose limited-type regular employment. In the case of those with a fixed work location, they opted to accept minor disadvantages to deal with their circumstances, including raising children and looking after aged parents. Those who are happy about working in limited way do not always see the benefit in having to transfer to another workplace just because their current workplace is facing closure.

Cutting jobs is a topic that is often avoided like the plague. Yet, when this type of mechanism is to be introduced, it is important to explain the situation carefully, and for both parties to acknowledge and understand the possibility of dismissal in certain circumstances and the differences from ordinary regular employment.

The important point is that remunerations are determined based on the overall balance of each person's preferences. There must be a substantial number of people who would accept lower wages in exchange for not having to do overtime, accept workplace transfers, or change job duties. In this sense, it almost seems like it is corporate management that is reluctant to embrace this change.

Companies will continue to require a certain proportion of unlimited-type regular workers in their workforce. Their unrestricted nature, however, should not be applied to all regular workers as how it is currently. In fact, it should be limited to a handful of candidates for executive positions.

Transforming our sense of values

The change of regular employment is not the only factor that must embrace a fresh mechanism. Another factor is the Japanese people's perception of working hours, although I do not have enough space to discuss this in detail.

Despite the statutory working hours at eight per day, Japan has a so-called Article 36 Agreement (an agreement under Article 36 of the Labor Standards Act) on overtime, effectively allowing open-ended working hours including unpaid overtime.

Long working hours that Japan is famous for are nothing short of abnormal on the international scale. People in other countries can hardly believe there is such a thing as karoshi (death from overwork).

As a means of curbing excessive working hours, Japan has a penalty-rate wage system in the form of overtime rate, but its effectiveness is questionable. It would be much better to explore a system such as working-time accounts in Germany, in which overtime work hours are saved in employees' accounts instead of being paid as extra wages.

In Japan, debates on working hours mean debates on wages. I feel very uncomfortable with this. Working hours should be discussed separately from wages. In the case of white-collar work, in particular, the increase in the number of working hours does not produce a proportionately greater outcome.

There are two systems in Japan whereby overtime is not reflected in wages. One is the exemption system for people in supervisory or managerial positions, in which those serving as sections heads or above do not earn any overtime pay. The other is the discretionary work system, which is rarely seen in other countries. As the system for those in supervisory or managerial positions are left to the judgment of the employer, it adds to the problem of so-called managers in name only. The percentage of workers to whom the discretionary work system is applied, on the other hand, accounts for less than 1% of those working in companies as its requirements are complicated. The former system is totally unrestrained, and the latter is too rigidly regulated.

We must adopt a system that is easier to apply. To this end, national debate that goes beyond the labor-management tug of war is necessary.

Human society is never free from the law of inertia. There is a strong tendency toward maintaining the status quo and avoiding change. The same applies to employment. Initiating a change to the current mechanism represents a challenge on our sense of values.

For example, whenever I cite the scenario of a husband switching to limited-type regular employment to support his career-minded wife on unlimited-type regular employment in order to explain what limited-type regular employment is all about, both men and women would express their disappointment over the man's decision, questioning why the husband wouldn't strive for his own career advancement. At the end of the day, we are still trapped in the mindset that men should be the ones who are career-minded.

It is not easy to walk away from something with which we are familiar. In order to change the current mechanism, we must transform our own mentality. This might be the biggest challenge of the employment reforms.

>> Original text in Japanese

* Translated by RIETI.

December 11, 2014 Chuo Koron Shinsha

December 19, 2014