Photographer: Akio Kon/Bloomberg

Japan Is Growing But Wages Have Barely Budged. Why?

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For Japan’s mission to revitalize its once roaring economy, getting wages to rise is crucial. Conditions appear ripe for fatter paychecks: the tightest labor market since the 1970s, eight straight quarters of economic growth and record profits for Japan Inc. Yet economists expect only a 1 percent pay rise this year. This would be the biggest since 1997, but hardly enough to power a consumption boost to sustain stronger economic expansion. So why does Japan so badly trail the U.S.’s latest 2.9 percent increase in salaries and the Eurozone’s 1.6 percent rise? Here are some reasons.

Little Wage Impact (Yet) from Abenomics

Source: Ministry of Health, Labour and Welfare

Average monthly pay (bonuses averaged across a whole year)

Demographics (and Womenomics)

Japan’s aging, shrinking population has squeezed the labor market. The job-to-applicant ratio is at levels unseen since the mid-1970s and unemployment has dropped to the lowest since 1993. One notable success of Prime Minister Shinzo Abe’s so-called Abenomics program -- his broad strategy to revive the economy -- has been to encourage more women to work. Ironically, that may be stifling overall wage increases, since the labor force is now growing even as the population dwindles. What’s more, many of the women workers are in lower-paid jobs, as are the older Japanese who are rejoining the workforce.

Non-Regular Workers

Japan’s labor market is divided into regular workers (with stronger labor laws, higher wages and social security benefits) and non-regular workers (often part-timers with lower pay, fewer benefits and little job security). Since the bursting of Japan’s economic bubble in the 1990s, the ranks of non-regular workers have increased to about 35 percent of the workforce. And while part-time paychecks have been rising faster than for other kinds of work, that change at the margins has yet to filter through to incomes for most workers.

Lifetime Contracts

Historically, regular workers tended to stick at the same company because large corporations offered jobs for life. While that system is breaking down, Japanese are still less likely to move around during their careers -- they average 12 years at a company versus 4.2 years for U.S. workers. An unwillingness to switch jobs reduces leverage in pay talks. And while the old system may provide seniority-based wage rises at the individual level, the effect in aggregate is to keep wages down.

Corporate Cash Hoarding 

Their profits may have risen, but Japanese companies show little inclination to use that money to increase pay. Instead, corporations have hoarded cash: Retained earnings rose by more than half in the five years through December and the share of profit going to labor -- 43.9 percent in the last quarter of 2017 -- has been flat for years, according to the Nikkei newspaper. To combat this, the government will cut taxes for companies that lift spending on wages and investment while raising them for firms that don’t. A word of caution: Economists say the impact may be limited.

Weak Unions

Labor unions have been unable or unwilling to push for substantial wage rises. They’ve valued job security over pay hikes and historically have had less power than counterparts elsewhere. That’s because they’re mostly formed at the company level, rather than across an industry, weakening their collective bargaining power. Nevertheless, for the next round of spring wage negotiations, the Japanese Trade Union Confederation, known as Rengo, said it’s seeking a 4 percent bump for its 6.9 million members. Prime Minister Abe has called on companies to give 3 percent wage rises, a plea that was echoed even by the traditionally conservative business lobby Keidanren.

Productivity Problems

Without productivity gains Japan’s economy will struggle to grow as the population shrinks. And limited growth means limited wage hikes. Productivity in the services sector, which employs almost 70 percent of workers, fell by more than 10 percent from 2003 to 2016, according to Bloomberg Economics. While large manufacturers can afford to invest to raise output per worker, the multitude of small- and medium-sized services sector companies cannot, possibly capping the salary increases they can give their workers.

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