RIETI Report March 2009

The Labor Market and Unemployment in Japan

As Japan's leading companies, particularly export-oriented manufacturing firms, continue to suffer from the downturn in the global economy, job losses and rising unemployment have been capturing headlines and the attention of policymakers. If this economic environment should continue for an extended period of time, the mounting job losses could become a major problem for Japanese society, which is not accustomed to anything much less than full employment.

In the article "Japan's 'Flexicurity' Approach: Reforming labor market institutions with a focus on reassurance, training, and flexibility," one of two featured articles in this month's RIETI Report, RIETI Senior Fellow TSURU Kotaro explains how the three-sided mix of labor market flexibility, social security, and active labor market policy with equal rights for the unemployed could better align Japan's labor market with the demands of today's global marketplace.

In the other featured article, "Determining the Cause of Increasing Non-Regular Employment and Long Working Hours," RIETI Faculty Fellow KAWAGUCHI Daiji looks at some of the structural changes that have taken place in the traditional Japanese employment system and considers what effect these changes and the increasing globalization of the Japanese economy will have on Japan's future employment trends.

In addition to these two articles, RIETI is also sponsoring a policy symposium - Working Hours Reform in Japan (in Japanese) - on April 2 to address labor market issues in Japan, where employee compensation typically depends more on time spent at the workplace than on merit. Over the years this policy has led to a system of long working hours and low productivity. The symposium will feature both labor policy experts and experienced practitioners in the field of human resources management.

This month's featured article

The Labor Market and Unemployment in Japan

TSURU KotaroSenior Fellow, RIETI

KAWAGUCHI DaijiFaculty Fellow, RIETI

Japan's "Flexicurity" Approach: Reforming labor market institutions with a focus on security, training, and flexibility

TSURU Kotaro

The Japanese economy has been falling at a far greater rate since last fall than ever imagined amid the spreading impact of the global financial crisis. Japan's gross domestic product (GDP) contracted at an annualized rate of 12.7% during the third quarter (October-December) of fiscal 2008, which was the sharpest drop recorded among developed countries. Employment conditions have been worsening just as rapidly. The initial rounds of job cuts preyed on non-regular workers, resulting in growing job losses among dispatched factory workers and fixed-term workers in export-oriented industries, and are now emerging as a major social problem. If the real GDP for fiscal 2009 (April 2009 through March 2010) declines by 3% or more as forecast by private-sector research institutes, the unemployment rate could rise to above 5.5%.

A hurried and poorly thought-out policy response under such conditions could do more harm than good. For instance, assigning blame for the job turmoil to the dispatch services responsible for placing factory workers, and attempting to protect workers by banning such services could aggravate the unemployment situation even further by narrowing the scope of available job opportunities. In order to properly respond to the current situation, the government needs to develop both a short-term and long-term vision, i.e., it needs to implement emergency stop-gap measures in the short term while redesigning and reforming relevant institutional mechanisms over the long term. As one specific step toward achieving these goals, I would like to propose a Japanese version of the "flexicurity" approach that revolves around the following three words: security, training, and flexibility. These three policies complement each other like the proverbial three arrows that work together to strengthen one another.

Determining the Cause of Increasing Non-Regular Employment and Long Working Hours


According to the recently released December 2008 labor force survey, the seasonally adjusted unemployment rate for December was 4.4%, increasing by 0.5 percentage point from the 3.9% reported for November. It should be noted that much of the month-on-month rise is mechanical and attributable to seasonal adjustments, with the crude rate up only marginally from 3.9% to 4.1%. Yet, the real-life evidence of a rapidly deteriorating employment situation is too compelling to deny.

Particularly drastic job cuts are taking place in the manufacturing sector, where many companies have already reduced or plan to reduce the number of factory workers dispatched from staffing agencies by cancelling or not renewing contracts. According to the Ministry of Health, Labour and Welfare's estimates as of February 4, about 125,000 non-regular workers will lose their jobs before spring. In the face of a seemingly bottomless economic decline, no optimism is warranted regarding the future prospects of the employment situation.

It has often been argued that the changing structure of employment in Japan - i.e., a significant shift from regular to non-regular employment - is the root cause of the ongoing job turmoil. But we must find out what caused such a shift to occur in the first place. Depending on their contractual status and work patterns, non-regular workers can be classified into one of several different categories, such as dispatched workers, independent contractors, and directly-employed part-time or fixed-term workers. But regardless of classification they all have one thing in common: no long-term job security. To read the complete article

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