RIETI Report September 2010

Growing Employment Instability under Globalization

This month's RIETI Report investigates the growing instability in the Japanese employment structure, with particular focus on globalization. Hitoshi SATO, a Fellow at RIETI and Visiting Professor at the Graduate School for International Development and Cooperation, University of Hiroshima, discusses the rapid increase in the proportion of non-permanent workers in the workforce since the 1990s and observes that Japanese manufacturers, up against fierce price competition in the international market, are becoming more dependent upon these workers in order to achieve a reduction in labor costs. Mr. SATO also argues that it is crucial for an institutional mechanism to be put in place to ensure that the risk the non-permanent workers have to bear is efficiently distributed, otherwise the labor market could become extremely polarized, resulting in even further social division.

We also invite readers to take a look at our new series, "Perspectives from around the world - A message for Japan from foreign analysts." To commemorate its start, we are honored to present contributions from Joseph S. NYE, Jr. (Sultan of Oman Professor of International Relations, Kennedy School of Government, Harvard University) and Stephen S. COHEN (Professor, Regional Planning, University of California at Berkeley and Co-Director, Berkeley Roundtable on the International Economy (BRIE)). To read, please scroll down to Recommended Reading.

This month's featured article

Growing Employment Instability under Globalization

SATO HitoshiFellow, RIETI

We have witnessed a rapid increase in the proportion of non-permanent workers in the Japanese workforce since the 1990s. This tendency holds in all sectors. In what follows, I discuss the implications of the growing dependence of Japanese manufacturers on non-permanent workers, in particular focusing on the context of economic globalization.

There has been much debate on the need to revise the Worker Dispatching Act and create a more equitable social safety net, particularly in response to massive layoffs of non-permanent workers that occurred in the course of the recent world economic crisis. In proceeding with such discussion on the design of institutional systems, a deep understanding of underlying economic factors is essential. In particular, in addressing the issue of non-permanent workers in the manufacturing sector, we need to pay attention to the fact that Japanese manufacturers have deepened their involvement in the world economy.

Increasing employment instability in the manufacturing sector

According to the Establishment and Enterprise Census, the proportion of non-permanent workers in the total workforce (hereinafter "non-permanent ratio") in the manufacturing sector increased from 23.6% in 2001 to 29.4% in 2006.(*1) During the same period, the non-permanent ratio for all industries increased from 35.2% to 39.0%, meaning that a permanent to non-permanent shift in the composition of the workforce occurred at a greater pace in the manufacturing sector than in the economy as a whole. A significant reason for the manufacturing sector's accelerated pace is a rapid increase in the number of workers dispatched from staffing agencies and individuals working as subcontractors. In the period of 2001-2006, the total number of employees in the manufacturing sector decreased 5.5% (by approximately 570 thousand), but the breakdown shows that the number of dispatched workers and individuals working as subcontractors increased 62.5% (by approximately 400 thousand) while the number of permanent employees decreased 12.8% (by approximately 1 million). Thus, roughly speaking, about 40% of the permanent employees who left jobs have been replaced by dispatched workers and subcontractors.

Now, to what extent is such a permanent to non-permanent shift in the composition of the workforce attributable to the globalization of the economy? While it is said that Japanese companies have become more inclined to maintain workforce flexibility and are more sensitive to the cost of personnel because of the pressure of globalization, no rigorous analysis seems to have been undertaken to verify this causal relationship.(*2) However, by looking at data from the Establishment and Enterprise Census along with data from RIETI's Japan Industrial Productivity (JIP) Database, we can, to some extent, observe the relationship between the permanent to non-permanent shift in the Japanese manufacturing sector and the globalization of the economy.

In the figure below, I plot changes in the non-permanent ratio from 2001 to 2006 and the export to production ratio as of 2001 for each industry in the manufacturing sector. From this, we can see that industries more reliant on external demand as of 2001, replaced permanent employees with non-permanent workers more aggressively in the years that followed. Of course, this is not enough to conclude that globalization has been responsible for the permanent to non-permanent shift in the labor force in Japan's manufacturing sector. However, we can at least say that the correlation in the figure is consistent with the argument that Japanese manufacturers have built up resilience to adverse conditions - such as the risk of profit margin volatility arising from significant dependence on external demand and fierce price competition in the international market by replacing portions of their permanent employees with non-permanent workers, thereby making workforce adjustments easier and reducing labor costs.

Figure: Export to production ratio and changes
in non-permanent ratio
Figure: Export to production ratio and changes in non-permanent ratio

Source: Created by author based on data from the Establishment and Enterprise Census and from the JIP database.

One reason why we pay attention to the replacement of permanent employees with non-permanent workers from the viewpoint of international trade is that the competiveness of companies in the international market is affected by what kind of labor market they can access. More specifically, cross-border business activities, such as trade and foreign direct investments, are greatly affected by cross-country differences in social systems including laws, regulations, and customary market practices. For instance, Cunat and Melitz (2007) points out that cross-country differences in labor market flexibility (e.g., restrictions on layoffs) affects the pattern of comparative advantage. In the longer term, labor market characteristics may also impact the pattern of comparative advantage by affecting workers' skill dispersion. According to Grossman and Maggi (2000), in cases where a production unit is composed of multiple workers, countries with a more homogeneous workforce tend to have a comparative advantage in industries in which worker complementarity is important. If an increase in the proportion of non-permanent workers is to result in greater skill gaps among workers and, in the long run, contribute to the polarization of the labor market in terms of skill distribution, the competitiveness of those industries with a comparative advantage at present may be undermined in the future as a result of ongoing changes in their workforce profile.

Necessity of international comparative studies

A permanent to non-permanent shift in the labor force is not a phenomenon exclusive to Japan. The same phenomenon occurred in France and Spain in the 1980s while South Korea is yet another and more recent example. The case of South Korea is particularly important in that the shift in the labor force accelerated rapidly from the mid-1990s onward, approximately at the same time as in Japan.

South Korean government statistics show that non-permanent workers accounted for 35% of the country's total workforce in 2009. It is often said that the Asian currency crisis and the subsequent economic structural reform implemented under the supervision of the International Monetary Fund triggered the massive permanent to non-permanent shift in the South Korean workforce. However, with respect to export-oriented manufacturing industries such as automobile and electric appliances, I believe that we cannot leave out the viewpoint of international competition.

Many South Korean researchers, specifically those I interviewed last year, share the view that disparities between permanent and non-permanent workers in overall employment conditions, including wages and fringe benefits, have widened to a socially intolerable point.(*3) They also expressed the following concerns:

  • (1) Non-permanent employment has become synonymous with a dead-end job instead of serving as a stepping stone to a permanent post. In the long term, this may result in deterioration in the quality of the labor market as a whole and a rise in labor costs for companies.
  • (2) In recent years, companies have become more inclined to hire mid-career employees and hold back on the recruitment of new graduates for permanent posts. As a result, landing a permanent job upon graduation has become extremely difficult, posing the possibility that a large number of young workers may be stuck in non-permanent jobs or forced out of the economically active population (and hence not showing up in unemployment statistics). South Korea may end up letting young and valuable human resources go to waste. The employment mismatch between available jobs and job seekers is growing specifically, because although the college-going rate or the proportion of those attending either university or college after graduating from high school exceeds 80%, the number of permanent job positions commensurate with the cost of investment in education has been decreasing.
  • (3) Because many non-permanent workers are not covered by employment insurance schemes and are excluded from various safety-net plans offered by employers, the loss of a job often means an immediate slide into poverty for those workers and their families.

Against the backdrop of such concerns, South Korea enacted a law aiming to provide protection for fixed-term employees in 2007. The law has set a limit for the length of period during which an employer may hire a fixed-term employee, requiring employers to offer a permanent position to fixed-term employees if they are to be retained beyond that limit. To a degree, this has paved the way for a change in job status from non-permanent to permanent. The South Korean government has also stepped up efforts to support various job training programs. However, those policies have not entirely solved the predicament of non-permanent workers. Rather, the issue of non-permanent employment remains high on the political agenda today, including problems accompanying the aforementioned law that was intended to protect vulnerable workers. As such, the case of South Korea may as well be taken as a precedent from which Japan could draw some lessons in addressing the problem of non-permanent employment. We would gain much from a comparative analysis of the two and could draw from it when considering the future direction of Japan's labor market.

Impact on support of free trade

Bascially, international trade is beneficial: it not only brings benefits in the form of a broader range of choices for consumers, but also prompts efforts to achieve a more efficient distribution of resources and pursue a greater economy of scale. At the same time, however, it is no easy task to reconcile conflicting interests over the distribution of benefits from international trade. If, as a result of globalization, the labor market becomes extremely polarized and disparities grow intolerably large, it may lead to further social division, generating new conflicts of interest in the form of a divided labor market on top of the existing conflicts of interest between industries that expand and those that shrink through trade. This may have an impact on the formation of consensus on free trade. Along with the benefits it carries, globalization may also pose increasing risks. Should this be the case, the ongoing permanent to non-permanent shift in the workforce will no doubt increase risk at the individual level. Obviously, there are limitations to the extent to which risk can be dispersed on an individual level and it is thus becoming increasingly important to put in place an institutional mechanism for the efficient distribution of risk across society. The government must now play a greater role in the designing of relevant institutional systems.

>> The original column was published in Japanese on June 22, 2010.

Notes:

  1. The Establishment and Enterprise Census, conducted by the Ministry of Internal Affairs and Communication, is a complete enumeration survey covering all private-sector establishments and enterprises. Data for 1991, 2001, 2004, and 2006 are available for use.
  2. Higuchi (2001) is a pioneering work that has extensively examined the impact of globalization on the labor market from diverse viewpoints. Using data from a 1997 survey of small and medium enterprises, it analyzed how changes in the export to production ratio impacted the number of permanent and non-permanent workers employed. However, no clear-cut conclusion was obtained for non-permanent workers.
  3. Since 2008, Yuichi Takayasu, associate professor at the University of Tsukuba, Tomohiro Machikita, researcher at the Institute of Developing Economies, and I have been conducting research on the relationship between globalization and the shifting composition of workforce from permanent to non-permanent workers, particularly focusing on a comparative analysis between Japan and South Korea. What is discussed in the remaining part of the text is based on interviews with South Korean researchers conducted as part of the research.

References:

  • Higuchi, Y. (2001) Koyo to Shitsugyo no Keizaigaku [Economics of Employment and Unemployment]. Nikkei, Inc.
  • Cunat, A. and M. Melitz (2007) "Volatility, Labor Market Flexibility and Comparative Advantage," NBER Working Paper, No. 13062.
  • Grossman, G. and G. Maggi (2000) "Diversity and Trade," American Economic Review, 90(5), 1255-1275.

Recommended Reading

Perspectives from around the world - A message for Japan from foreign analysts

This corner introduces the views of some of the world's leading researchers - or their messages to Japan - regarding various issues including economic policy, security and environmental problems.

"U.S.-Japan Alliance: Present and Future"
Joseph S. NYE, Jr. (Sultan of Oman Professor of International Relations, Kennedy School of Government, Harvard University)

"When Other Countries Have the Money"
Stephen S. COHEN (Professor, Regional Planning, University of California at Berkeley and Co-Director, Berkeley Roundtable on the International Economy (BRIE))

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