Pay Differentials: The Case of Japan

By Evans, Robert, Jr. | Monthly Labor Review, October 1984 | Go to article overview

Pay Differentials: The Case of Japan


Evans, Robert, Jr., Monthly Labor Review


In review of industrial relations research conducted during the 1970's, James G. Scoville writes that, in both Japan and the United States, size-of-firm wage differentials are explained by differences in employees' human capital. However, two recent studies suggest that human capital differences do not completely explain the differential in this country. Using data for 1979, Wesley Mellow found that wages in firms of 1,000 more workers were 8 percent greater than those in firms with fewer than 25 workers when a number of factors, including education and experience, were held constant. Martin E. Personick and Carl B. Barsky, who studied pay at various experience and responisbility levels of professional, technical, and clerical occupations, reported size-of-firm differentials for all but 1 of 25 job levels. Typically, these were only for the largest corporations (more than 10,000 employees), where differentials were 10 to 15 percent for professionals and 20 percent for clerical and technical occupations over pay in firms with 500 or fewer employees.

If elements of human capital do not completely explain size-of-firm differentials in the United States, is Japan a similar case? This article explores that issue, and suggests an answer based on data from the Chingin Kozo Kihon Tokei Chosa [Wage Structure Survey]. The employment decision in Japan

The model employment relationship in Japan is that of Shushin Koyo ]lifetime employment]. Under this system, workers are initially employed upon graduation from school. Once a worker is hired, the firm goes to great lengths to provide continuous employment until the individual retires, sometime between the ages of 50 and 60. In return for the understood employer commitment to long tenure, the employee is expected to devote himself fully to the firm and to allow management considerable flexibility as to the type and geographical location of work assignments.

Remuneration consists of a basic wage, various allowances, a semiannual bonus, and a number of fringe benefits. The basic wage depends upon the employee's education, age, and job abilities. It is increased annually based upon decisions made in collective bargaining. The annual increase consists of two parts, one of which recognizes an additional year of service to the firm, new job abilities, and merit, and another that is a general increase in the base wage.

Given the employment opportunities and wage patterns faced by the graduating student, what pecuniary variable should be used in making the employment decision? Clearly, it is some subjective assessment of the present value of future earnings with the various firms. Such a present value calculation would incorporate growth of the firm relative to the economy, the pattern of wages associated with long tenure, the pattern of wages if tenure is short because of voluntary mobility or the firm's economic difficulties, and so forth. For the observer trying to approximate such individual calculations, the most desirable data would be those on wage and bonuses by worker age, education, and length of service, and, for the question at hand, the size of the employing firm. Fortunately, these data are available in the annual Wage Structure Survey. It is thus possible to account for the principal elements of huamn capital that economists believe are important for wage determination, and to differentiate these among three size-of-firm categories. (Of course, the individual graduate also considers other, unquantifiable factors, such as his preference for risk, the prestige of the firm, and subjective probabilities of advancement, in making the final decision.) Differentials by size of firm

Table 1 presents monthly wage and wage-plus-bonus relationships by size of firm and by workers' age and educational attainment for Japanese men who have been continuously employed by the same firm. (In 1980, about one-fourth of the regular private-sector labor force were employed by firms of 1,000 workers or more, and another one-fourth were in firms with 100 to 999 employees. …

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