Unresolved Challenges Facing Working Style Reform: Per-hour productivity should be improved

Faculty Fellow, RIETI

The regulation of working styles, if too tight, could lower companies' competitiveness, while if too lax, could lead to deterioration in the health and welfare of workers. The important thing is to strike the right balance. As the current working style reform is aimed at a rebalancing suited to changes in the situation of the Japanese economy, it is leaning toward tighter regulation on the whole.

In order to adapt to changes such as a labor shortage due to the aging of society, globalization, widening inequality, and technological innovations, the reform aims to realize working styles that will enable diverse personnel to work with a high level of productivity and to be evaluated and treated appropriately while maintaining good health. Generally, this reform deserves high regard. The reform presents a vision of a future labor market in which the economic base of Japan as a whole will be strengthened by using a broad range of potential human resources, rather than relying on a limited group of workers or companies.

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The centerpiece of the reform is correcting the practice of long working hours. Until now, it has been a pervasive practice in Japan to have employees work for such long hours as to undermine their health or force them to work for long hours against their will because the upper limit regulation of working hours is loose. Sometimes, this situation has brought to the surface social problems such as death from overwork, the practice of nominally appointing employees for management positions in order to make them ineligible for overtime pay, and the presence of so-called "black companies," which force employees to work under particularly poor working conditions.

In a labor market where workers move between companies smoothly, these social problems are unlikely to arise because workers shun companies with poor working conditions. However, as labor mobility is low in Japan, market forces do not serve as a strong check on such companies. Therefore, the government needs to intervene in the market, e.g., by setting an upper limit on working hours or making it mandatory for companies to implement measures to keep workers in good health. In this respect, the current reform represents significant progress as it has been made clear that the upper limit regulation of working hours will be tightened, with violation of the regulation subject to a penalty.

Under the proposed reform, the upper limit on overtime working hours would be 100 hours per month during the busiest season. On a weekly basis, working overtime up to the upper limit means a total of around 63 working hours. According to the Employment Status Survey (2012), prepared by the Ministry of Internal Affairs and Communications, 7.3% of regular employees working for more than 200 days per year logged between 60 to 64 working hours, while 6.7% logged 65 working hours or more. Although these figures include employees in supervisory positions who are not subject to the working hours regulation, this means that around 10% of all regular employees would exceed the upper limit on weekly working hours. Therefore, the reform is expected to encourage efforts to correct the practice of long working hours.

On the other hand, the proposed reform would leave some challenges unresolved. First, under the reform, the upper limit may be waived as an exceptional case during the busy season or under extraordinary circumstances. The rules on setting an upper limit in such a case are complicated. For example, hours worked on holidays may be counted toward working hours subject to the regulation in some cases but may be excluded in other cases. This makes it difficult for workers themselves and third-party persons as well to keep track of working hours so as to observe the limit, which means that the regulation is hard to enforce. Moreover, measures to keep workers in good health should be implemented not only on an annual or monthly basis but also in a shorter cycle, such as on a daily or weekly basis. It is also desirable that bold reform measures be taken in order to disseminate a program to require certain amount of rest between working days.

Furthermore, it is left to the discretion of companies and workers about how working style should be improved in order to raise productivity. This is the greatest unresolved challenge.

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According to statistics prepared by the Organisation for Economic Co-operation and Development, Japan ranks lowest among the G7 major countries in terms of per-hour gross domestic product (GDP), or GDP divided by total working hours. Studies that we have conducted have revealed that in a certain aspect, the practice of long working hours in Japan is inefficient in creating value added. In order to enable workers to feel wellness while companies maintain competitiveness, it is essential to raise productivity within the constraints of the upper limit on working hours by correcting the inefficient practice of long working hours.

However, specifically how the practice of long working hours is causing inefficiency differs between workplaces and companies, so it is difficult for the government to provide a solution by imposing a universal regulation. Therefore, it is important for companies and workers to make patient efforts to reform working styles. It is necessary to use the tightening of the upper limit regulation as an opportunity to carefully review and revise the workload, the way of performing jobs, the discretion granted in working, the scope of work, personnel management, and the institutional culture.

The primary objective of the working style reform is raising productivity through efforts made at the company level and the workplace level. The correction of the practice of long working hours should be regarded as a result to be attained through improved productivity.

Requiring reduction of working hours without changing the working style could concentrate the workload on workers in supervisory positions to whom the working hour regulation is not applied, increase work done at home or unpaid overtime work, or shift more of the work burden to subcontractors and affiliated companies. As a result, there is the risk that both the working style and the practice of long working hours will remain unchanged on the whole.

In order to encourage continuous efforts at the company and workplace levels to reform working styles and improve productivity, the government needs to set medium- to long-term targets for improvement in per-hour productivity or require companies to disclose information concerning working hours and the status of their working style reform.

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One way of raising per-hour productivity would be increasing mobility in the labor market to an appropriate level. Mobility in the Japanese labor market is presumed to be excessively low.

The traditional Japanese employment practice that devotes much time to internally training employees has a certain degree of economic rationality, so it would not necessarily be a problem if the mobility is low. However, amid the ongoing drastic changes in the surrounding environment, such as the aging of society coupled with a low birthrate and globalization, it is possible that the low mobility that has been the standard in Japan is not necessarily an optimal state of affairs for companies.

According to an empirical analysis I conducted with Waseda University Professor Sachiko Kuroda in a project at the Research Institute of Economy, Trade and Industry based on data concerning around 2,000 companies, the level of labor mobility is too low at many Japanese companies. If the estimated relationship between indicators of labor mobility at companies (the labor turnover rate and the excess rate of mid-career employment) and corporate performance (profitability) based on the condition that other factors remain statistically constant is shown as an image, it is represented by an inverted U shape (see the graph). Corporate performance improves in tandem with an increase in labor mobility up to a certain point. However, if the mobility surpasses its optimum level, the performance deteriorates.

Our analysis suggests that since many companies are located on the left of the peak of the inverted U, their performance will improve if the mobility is increased. When companies are classified by their characteristics, it is found that while the mobility is lower than the optimal level at companies where the traditional Japanese employment practice is strong, it is higher than that level at the so-called "black companies."

Efforts to increase labor mobility should be made carefully because rapid mobility increase could lead to massive job losses. However, it is possible that as a result of the changes in the surrounding environment, the optimal labor mobility has risen to a higher level than that presumed by companies and workers. If labor mobility is raised to an appropriate degree, progress is expected to be made in the kind of worker-job matching that shifts competent personnel to companies with high productivity or high growth potential, resulting in an improvement in per-hour productivity at the company level and also at the industry and macro level.

In particular, promoting such matching while labor mobility remains constant could be an effective means to utilize a diversity of personnel, including women and elderly people, in the labor market amid the labor shortage. Furthermore, if labor mobility is increased, market forces serving as a check on inefficiency will be strengthened, causing workers to stay away from companies where the working style is inefficient. As a result, in the labor market as a whole, the working style reform will make progress, leading to an improvement in per-hour productivity.

While the current working style reform includes governmental initiatives such as promoting job switching and reemployment, it is also important for companies to review the use of workers hired in mid-career. Workers should also have a career vision that includes the possibility of moving to a company where they can fully exercise their productivity or where the working conditions are favorable for maintaining good health.

Figure: Relationship between Labor Mobility and Corporate Performance
Figure: Relationship between Labor Mobility and Corporate Performance
Note: An image based on the results of the estimation of the relationship between labor mobility and profitability

>> Original text in Japanese

* Translated by RIETI.

May 2, 2017 Nihon Keizai Shimbun

June 23, 2017