RIETI Report March 2009 "The Labor Market and Unemployment in Japan"

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

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

KAWAGUCHI Daiji Faculty Fellow, RIETI

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.

When looked at collectively, non-regular workers have been increasing as a percentage of Japan's total workforce in the very long run since the early 1980s. Some people point to the deregulation of labor laws as the reason behind the increase of non-regular workers. But this argument has causality running the wrong way, with cause being confused for effect. The truth seems to be that the relevant laws and regulations were changed to keep up with the changing reality of the labor market.

What then, has been causing the job instability? Professor Henry Farber of Princeton University attributes it to economic globalization. He bases his theory on the premise that under the influence of globalization, U.S. and Japanese companies have been facing increasing levels of uncertainty in regard to future demand for products. In order to adapt to changes in product sales, companies are compelled to make payroll adjustments. In the United States, where dismissing regular employees is relatively easy, such adjustments are commonly made by means of employee layoffs. Professor Farber found that the average length of service for regular workers in the U.S. has declined in every age group that he has surveyed.

As for Japan, where dismissing regular employees is not easy, he found that companies responded to the same uncertainty by transferring regular workers to other jobs within the same company, reassigning them to affiliated companies, and hiring non-regular workers. Thus, Professor Farber pointed out - and I found it very interesting - that U.S. and Japanese companies facing similar challenges have taken different approaches that are consistent with the historical and institutional backgrounds of their respective countries.

Japan's payroll adjustments in recent months have been centered on export-oriented industries, namely, the automobile industry and the electrical and electronics sector. This information suggests that export-oriented companies, regardless of size, had been gradually increasing their proportion of non-regular workers to reduce fixed labor costs in anticipation that they would eventually be faced with a situation such as the one before them today. Prohibiting the dispatch of factory workers from staffing agencies would simply result in the substitution of other types of non-regular workers such as independent contractors, part-time employees, and fixed-term workers, thus providing no solution to the problem of employment instability.

The increasing uncertainty about future demand for products, a problem primarily attributable to globalization, has made it difficult for companies to predict the optimal size of their future workforce, and this has shed light on the fixed-cost component of regular workers. The fixed costs of long-term employment commitments are not problematic in a world where companies can expect steady future demand for their products and services. It is possible that an increasing awareness of the fixed-cost aspect of regular employment has led companies to experiment with non-regular employment and the advantages that it allows for making flexible adjustments to the labor input. This move corresponds to the historical efforts of Japanese companies to adapt to growing uncertainty in the economic environment. In the past, they strived to transform the cost structure of production facilities from fixed to variable by leasing instead of owning such facilities. Meanwhile, it would be reasonable for companies to expect regular workers - those representing large fixed costs - to work long hours.

The theories that I have provided here are hypothetical and have not been subjected to verification. However, I find quite promising this hypothesis that a series of economic phenomena - increasing non-regular employment, increasing lease arrangements, and the increasing number of working hours for regular workers - can all be explained by growing uncertainty. It is needless to say that emergency measures must be implemented to help those who have fallen outside of the social safety net. However, in order to change the underlying trend toward non-regular employment and solve the problem of excessive workload on regular employees, it may be necessary to devise a medium- to long-term labor policy that would reduce the fixed-cost aspect of regular employment.

February 23, 2009

>> Original text in Japanese

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