RIETI Report May 2008

Changing How People Work in Japan

The shifting composition of the Japanese labor market has brought about the need for multidisciplinary approaches to adjusting labor laws and regulations. Such was the goal in the RIETI Policy Symposium, "Labor Market Institutions Reform in Japan: Changing the Way People Work" held in April. The symposium brought together experts in law, economics, and business management and introduced examples from overseas. RIETI Senior Fellow Kotaro Tsuru, a prime organizer of the symposium, documented the proceedings and progress made. This month RIETI Report features his summary.

This month's featured article

Changing How People Work in Japan

TSURU KotaroSenior Fellow, RIETI

Dr. Tsuru joined RIETI in 2001 and has been pursuing his principal research interests of comparative institutional analysis and organizational economics. Since 2005 he has served as a Visiting Professor in the Graduate School of Business and Commerce at Keio University. In addition, he has been a Visiting Professor in the Graduate School of Public Policy at Chuo University for the past year. From January-September 2006, he was a Visiting Fellow at the Economic and Social Research Institute in the Cabinet Office, Government of Japan. Prior to joining RIETI, Dr. Tsuru served as a Research Economist in the Institute of Monetary and Economic Studies at the Bank of Japan from 2000-'01 and from 1995-2000 as a Staff Economist in the Economics Department at the Organisation for Economic Co-operation and Development (OECD). He received his D.Phil. in Economics from the University of Oxford (St. Antony's College) and B.S. in Mathematics from the University of Tokyo. He has authored numerous publications including: "Consolidation of Banks in Japan: Causes and Consequences," NBER Working Paper No. W13399, August 2007 (with K. Hosono and K. Sakai); Nihon no keizai shisutemu kaikaku - ushinawareta jugo-nen wo koete [Japan's economic system reform - beyond the "lost 15 years"], Nikkei Publishing Inc., 2006; Nihon no zaisei kaikaku "kuni no katachi" wo do kaeruka [Fiscal Reforms of Japan: Redesigning the "Frame of the State"], Toyo Keizai, 2004 (with M. Aoki); and "Finance and Growth: Some theoretical considerations and a review of the empirical literature," OECD Economics Department Working Papers No. 228, 2000.

April 4, 2008: RIETI Policy Symposium - Summary

Labor Market Institutions Reform in Japan: Changing the Way People Work

TSURU Kotaro

Early last year RIETI launched a study group on labor market institutional reform. The group has since undertaken theoretical and empirical research on Japan's labor market institutions through a multidisciplinary approach, examining various problems from the viewpoints of law, economics, and business management. It has also drawn on the experiences from other countries, particularly from Europe. The RIETI Policy Symposium "Labor Market Institutions Reform in Japan: Changing the Way People Work" was held in Tokyo on April 4, 2008 to present the study's groups findings for public review. Discussions and proposals came from standpoints that crossed conventional disciplinary boundaries, observing the interrelationships of the myriad factors constituting overall labor market institutions, suggesting perspectives and directions for reforming pertinent laws and regulations.

First, Naohiro Yashiro, professor at International Christian University, began his presentation by offering counterarguments to a series of widespread notions such as the uselessness of economic theory in the labor market, structural reform's being the primary culprit for deterioration of the labor market, and attributing the decline in labor's share of national income to labor-management confrontation. He then pointed out the importance of increasing inter-industry labor mobility as a means of improving productivity. Japanese companies have typically adjusted their workforces by transferring redundant employees to subsidiaries, a perfectly functioning scheme in the era of high economic growth but no longer viable. Professor Yashiro said that it was time for Japan to break away from memories of this past success. He pointed out the need today to create an environment that permits varied working styles and to establish a labor market where workers can quickly find a new job or career, rather than bemoaning their present work situations. Toward that end, he stressed Japan's need to establish a comprehensive labor law system, departing from the segmented approach under the existing law and implementing a set of common rules for protecting non-regular workers.

The next speaker, Yasuo Suwa, professor at Hosei University, acknowledged that labor law did undergo a major shift in its approach vis-à-vis market function in 1999, from a "positive list" system to a "negative list" system. He emphasized, however, that institutional systems and the behavioral patterns of actors would not change overnight as the law of inertia is at work in the labor law system. Under these circumstances, Professor Suwa said, the development of meaningful dialogue between law and economics hinges on whether law scholars can shift from their pursuit of case-by-case justice (solving actual problems) and pursue more general justice (designing and making more reasonable laws and institutional systems) as well as on whether economics scholars can adopt institutional economists' views of the market, departing from the notion of the market held by mainstream economics.

Following the presentations by the two invited speakers, Kotaro Tsuru, senior fellow at RIETI, took a bird's eye view of the symposium and proposed five perspectives on reforming Japan's labor market institutions. Specifically, from the standpoint of comparative institutional analysis, focusing on the role of institutions as the underlying foundation for market functions, he stressed the need to reform labor market institutions in five directions: 1) from insider-oriented to macro-oriented, 2) from heteronomous homogeneity to autonomous diversity, 3) from uniform regulations to decentralized orders, 4) from the weak and disadvantaged to empowered individuals, 5) from a segmented approach to a cross-cutting approach.

Part I of the symposium focused on the problematic issue of inequality and discrimination among workers that has arisen from the increasing diversity in employment. First, Daiji Kawaguchi, faculty fellow at RIETI and associate professor at Hitotsubashi University, presented on the wage differential between men and women. Using panel data from the Ministry of Economy, Trade and Industry (METI) "Basic Survey of Japanese Business Structure and Activities," he estimated that the relative wage of women to men is about 30% whereas the relative marginal productivity of women to men is about 45%. He emphasized that these estimates indicate that the current male-female wage differential cannot be fully explained by productivity differential.

Next, Noriaki Kojima, professor at Osaka University, reviewed labor-related regulatory reforms over the past 10 years and their impact on companies' day-to-day operations. He expressed concern that some companies might have been subjected to requirements that exceeded their capacity. As an example, Professor Kojima cited the categorical distinction between "contract workers" and "dispatched workers." Workers are regarded as the latter if they receive order or direction from the ordering company (client). He also cited a requirement for companies to make efforts to give regular employee status to workers on fixed-term contracts. Applying rules in a one-size-fits-all manner is impractical and unreasonable, he said, stressing the need to provide for certain exceptions that act as a shock absorber or lubricant in implementing the new rules.

Hideyuki Morito, professor at Sophia University, focused on age discrimination in employment, highlighting problems with existing Japanese law and policy that aim at enabling people to work regardless of their age. Japan, as compared to the United States and Europe, lacks a perspective of human rights protection in seeking age-free employment policies, he said, noting that no sufficient discussion has taken place on this. He also said that companies should be required to account for and clarify why they impose age limits in recruitment.

In Part II of the symposium, presenters discussed from an economics viewpoint issues regarding regular employees, such as problems posed by regulatory restrictions on dismissing employees and on long working hours.

Fumio Otake, professor at Osaka University, began his presentation by drawing attention to the workaholic nature of employees as a contributing factor of long working hours. He then reported findings from an empirical analysis of work behavior based on a survey of behavioral patterns. Specifically about men, he showed that those who have worked long hours have a tendency to continue to do so and that those inclined to procrastination are more likely to work long hours (slacking off during regular work hours causes the need for overtime). Based on these findings, he pointed to the need to introduce a system for forcing employees to properly complete tasks during regular work hours.

Next, Hiroko Okudaira of Osaka University, also a research fellow at the Japan Society, presented on how Japanese companies' productivity is affected by regulatory restrictions on dismissing employees, based on an analysis of panel data from the "Basic Survey of Japanese Business Structure and Activities." She demonstrated that total factor productivity (TFP) growth and labor productivity growth are significantly lower for companies primarily operating in prefectures with a relatively high cumulative number of court rulings voiding an employee dismissal. She emphasized that the impact of labor protection goes beyond the labor market, affecting the whole economy through the channel of corporate productivity.

Aiming for facilitation of labor-management communication

Part III focused on the reform of labor market institutions, aimed at facilitating labor-management communication. First, Yuichiro Mizumachi, associate professor at the University of Tokyo, introduced newly emerging labor law theories; procedural regulations in Europe and the structural approach in the U.S., and stressed that Japan needs to adopt new labor law as well. Due to growing complexity and increasing manualization Japanese labor law has become detached from reality and no longer functions properly, he explained. Based on the common viewpoint of the two new theories in the U.S. and Europe, he noted, it is important that Japan adopt an ex-post regulatory system focusing on collective communication, building a foundation for decentralized communication where diverse employees can have their opinions properly represented.

Ryo Kambayashi, associate professor at Hitotsubashi University, showed the changing trend in labor disputes, from collective to individual action, seen in Japan from the 1990s onward. While an increasing number of companies moved to release employees as part of their reorganization efforts, the number of collective labor actions decreased and the number of labor lawsuits filed by individuals increased. This tendency has recently been strengthened by new labor consultation service centers opening across the country and the introduction of a labor tribunal system, he said, pointing to the possibility that the nature of labor-management communication, which has been serving as a complaint-handling mechanism, may have changed.

Part IV examined the elements of desirable institutional design for personnel management, shifting the focus of discussion from the legal system and the economy to systems within individual companies. Motohiro Morishima, professor at Hitotsubashi University, said the question of how to ensure organizational justice to employees is garnering attention as an increasing number of Japanese companies adopt performance-based personnel management systems and raise the proportion of non-regular employees. Thus procedural justice, the fairness of the decision-making mechanism for resource allocation, is increasing in importance, he said. Using data obtained in a survey conducted by the Japan Institute for Labor Policy and Training (JILPT), Professor Morishima showed that establishing an internal mechanism ensuring procedural justice, such as a permanent council for labor-management consultation and a complaint-handling system, can boost sales and that disclosure to employees of their performance evaluation results leads to greater acceptance and understanding of the results.

Yoichi Shimada, professor at Waseda University, noted that Japanese companies have undergone substantial organizational change, incorporating market-oriented factors in various aspects of operations. He said labor law scholars need to develop a theory that considers the organic relationship between companies and the labor market. He said it is imperative to build a national consensus on a suitable replacement for corporate society underpinned by traditional Japanese employment practices. He also emphasized the need to develop a labor market that offers support for displaced workers in finding new employment.

Toward further dialogue between law scholars and economists

Lastly, Yoshio Higuchi, professor at Keio University, offered comments on the entire symposium. He noted that labor law scholars and labor economists, too separated to find any common ground for discussion about 10 years ago, seem to have finally begun to talk and make sense to each other, and he said the symposium had been extremely valuable. Reforming labor market institutions improves the quality of the labor market by establishing an integrated market infrastructure composed of public awareness, ethics, customary practices, organizations, and labor law, he said. In seeking this reform, Professor Higuchi said it is necessary to actively focus on friction and inertia encountered in the reform process. In addition to dispute-solving by means of labor-management dialogue and negotiations, he said, ex-post monitoring is also important; for instance on whether the minimum labor standards have been enforced according to law and whether or to what extent targets have been achieved. The two methods of dispute-solving and ex-post monitoring should be used prudently in accordance with needs and objectives.

*Translated from the original Japanese summary published on April 15, 2008

View Dr. Tsuru's column, "Labor Market Institutions Reform in Japan: Changing the Ways People Work"

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