Job Security in JAPAN Is Lifetime Employment on the Way Out?

Article excerpt

Japanese labor markets provide a stark illustration of how varied Labor practices can be in other industrialized nations, as well as some dangers in attempting to enhance employment stability.

Since the 1950s, Japan's labor markets have been characterized by several distinctive features. Perhaps the most notable among them is "lifetime employment," the practice at large firms of hiring workers directly out of school and retaining them until a mandatory retirement age (originally age 55, now around 60 for most companies). The lifetime guarantee is implicit, with no written contracts, but real nevertheless and estimated to cover about a third of all workers. Rather than hiring midcareer managers or blue-collar workers from the outside, firms promote exclusively from within.

A related feature of Japan's labor markets is steep seniority-based pay. As part of the incentive for employees to remain with the firm under a lifetime employment guarantee, wages follow a steep seniority profile. In addition, corporate pensions are not portable.

To absorb those workers not fortunate enough to enter large corporations practicing lifetime employment, Japan's government protected several sectors of the economy (including agriculture, retailing, and construction) from large firms and international competition. These protected sectors, with their characteristically small labor-intensive firms and flexible wages, readily absorbed workers.

A final distinctive characteristic of Japan's labor market is weak company unions. Efforts to create American-style craft unions in Japan shortly after World War II were snuffed out, and unions today are predominantly company-based.

Fraying Badly Around the Edges

For years, many Japanese extolled the virtues of their labor markets. Unemployment was very low (under 1 percent in the 1960s, creeping up to a 2-3 percent range in the 1980s). Strikes were few (at least after a fairly turbulent period in the late 1940s and early 1950s) and eventually reduced to very short-term ritual demonstrations. The lack of craft unions and the guarantee of employment at large firms supposedly made workers more receptive to technical change than their American counterparts. And management believed that a worker's productivity increased continuously with length of employment, justifying their "lifetime" employment commitment.

But as a result of almost a decade of poor economic performance, today the system is fraying badly around the edges. From 1992 to 1997, Japan's economy grew at an average rate of only 1 percent, and since then has entered a real recession. Employment today is no higher than it was in 1992 and is currently falling at about a 1 percent annual rate. Part-time workers make up a rising share of total employment (24 percent in 1998, compared with 20 percent in 1992). Meanwhile, the unemployment rate has more than doubled since 1992, from 2.2 percent to 4.8 percent. In Japan, there is now a bulge in unemployment rates for both young workers (9. …