Curse of Life Time Employment

Ichiro Suzuki The U.S. dollar is roaring on the Federal Reserve Bank’s determination to get the surging inflation under control. On the flip side of it, the Japanese yen reached 150 against the greenback by the end of October, exactly halving its value from the all time high of 75 a little over ten years ago. An annual income of 10 million, a dream for many Japanese, is worth only $66,666. Newly minted MBAs from top business schools in the U.S. start with more than twice that amount these days. This annual income figure makes Japan look a hopeless place. At 150, everything in Japan is offered at ultra bargain prices to foreigners, especially to Americans. While optics of a ‘dream annual income’ is in some respect magnified by the volatility of foreign exchange rates, an even deeper problem lies behind the optics. Ten million yen was a dream in the early 1980s and it still is 40 years later. Income earned by Japanese has hardly risen for a generation and a half. In October, the consumer price index in Tokyo hit the 3% mark for the first time in 40 years. Along with resurgence of inflation in North America and Europe, Japan registered the highest CPI since the days of the great inflation in the early 1980s. Unlike elsewhere, however, the highest number in decades is only 3%. A 3% CPI still looks dizzying considering a few decades of mild deflation the Japanese economy had suffered. The spell of deflation is broken now, and mild inflation has returned to Japan at last. It is still only 3% instead of 10% though the Japanese economy is facing the same problems that brought inflation back to the global economy so fiercely: fiscal responses to COVID-19, supply chain disruptions, sharply higher commodity prices, and a weak currency that the U.S. doesn’t have. Inflation in Japan looks well behaved on the surface primarily because inflation expectations are not firmly in place in the economy. Wages and salaries are rising too modestly to build expectations of higher prices. While producers are afflicted with same input cost upswings with those elsewhere, they are unable to pass higher costs to consumers, who might respond with a strike if they could, instead of accepting higher prices grudgingly. Unlike in the United States, COVID-19 didn’t bring Great Resignations to Japan. People essentially have stuck with the jobs they had as much as possible. There is a growing trend of changing jobs in the 21st century especially among young people. Middle-aged men, on the other hand, try to hold onto their jobs, whether they like the jobs or not, amid an unprecedented economic uncertainty. They know they don’t get a better deal elsewhere. It shows they are overpaid for what they offer to the employer. This is what Japan’s labor market is. The life time employment system was once lauded as a key component of ‘Japanese management’ that stormed the business world in the 1980s and was taught at every business school. Employees are on a secure job contract that can’t be violated under the normal circumstances. Such a practice was believed to have fostered trust between management and employees. There is truth to this theory. It worked, since greater trust enhanced the company’s long-term performances, as long as everything was going as expected. In the 1990s the Japanese economy has stopped growing, against all previous expectations. On top of marked slowdown of the economy, the digital revolution has gravely undermined competitiveness of Corporate Japan. With suddenly falling revenue, companies found it impossible to keep all those well paid employees. (They were very expensive including a variety of fringe benefits.) Management had to go through horrible experiences of closing factories, shutting down divisions, selling businesses that were no longer considered a good strategic fit. Those were not normal times and a large number of people were let go with reasonably handsome severance packages. That said, management tried to protect jobs, which were held by middle aged men whose skills were becoming obsolete, and froze new hirings, hitting the younger generation. While practices of lifetime employment were defended as much as possible, it became apparent that the system overwhelmingly favored those who were already in the club of full time employees. To those without a club membership, life got a lot tougher. Club members made a devil’s bargain with their management. Their pay doesn’t rise in return for job security, which looked so precious but has proven to be in jeopardy anyway in the event of their employers’ extreme difficulties. Companies faced such extreme difficulties rather often in a changing world. The life time employment system has outlived its usefulness in the 21st century. Young men and women enter a company upon their graduation from college. In their early years with the employer, in their 20s or early 30s, their salaries are held low, not matching the value they are adding to the employer, and their pay begins to rise in their mid-thirties and keep rising through their 40s, as a reward for long time service, and it plateaus in their 50s. Today, much fewer people make a near 40-year commitment to one company than in the old days. The company that they start with at 22 may or may not be around until they turn 60. The system doesn’t allow large payments to bright young and aggressive high achievers, alienating such talents from the company while embracing non-risk takers and good but not excellent performers who are happy to be settled in a cozy environment, and they don’t quit even if they company doesn’t want them. The system makes it difficult to recruit people with expertise from the outside, and is absolutely unfit to foreign talents who never think about staying with a Japanese company for a few decades. Nonetheless, the tax code even favors the system, allowing deductions on contribution to lump sum bonus that is payable upon one’s retirement after decades of service. Few people disagree that employment practices need major overhauls. To be specific, the lifetime system has to be scrapped. Few people who belong to the club, however, don’t want to have it changed. One of the major features of Japan’s lifetime employment system is strong legal protection on workers from getting fired. Overhauling the system is only possible with eliminating this legal protection to make firing employees easier than it is today. Not surprisingly, getting this done is a long shot. Labor unions strongly oppose a change that makes their members’ jobs vulnerable. Left-leaning opposition parties strongly backs the unions, of course. Former prime minister Shinzo Abe once tried to amend labor laws but only in vain amid fierce opposition from the left. Labor laws are the heart of deregulation that has to take place in the Japanese economy. Nonetheless, there is little scope this can be somehow achieved in the near future. Therefore, Japan remains stuck through the 2020s, and any progress can be made only slowly. About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.