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An Examination of Structural Changes in Employment and Wages in Japan 1,2

August 2, 2002
Naoto Osawa3
Kazushige Kamiyama3
Koji Nakamura3
Tomohiro Noguchi3
Eiji Maeda3

  1. This is an English translation of the Japanese original paper released on August 2, 2002.
  2. All the opinions expressed in this paper are the personal views of the authors, and do not represent the official views of the Bank of Japan, or those of the Research and Statistics Department. This paper was compiled with the help of the other staff of the Research and Statistics Department, for which we are very grateful.
  3. The authors are the staff of the Research and Statistics Department of the Bank of Japan. The authors can be contacted directly by e-mail at these addresses:,,,, and

Click on ron0208a.pdf (650KB) to download the full text (released on September 11, 2002.)

Introduction and Summary

Examining the recent employment situation in Japan, we see that in the recession starting at the end of 2000, the number of employees quickly responded to the economic downturn and subsequently fell sharply. Industrial production declined more steeply in this recession than those in the past and other signs were seen that the recession had taken a turn for the worse. The worsening of labor market conditions, therefore, appears to some extent to have reflected the severity of the economic downturn. In view of traditional Japanese employment practices characterized by long-term employment and labor hoarding during recessionary periods, however, the quick and clear decline in employment may indicate that structural changes in corporate behavior had taken place.

This paper will examine the relationships between economic fluctuations on the one hand, and employment and furthermore wages on the other, to see how these relationships have changed in recent years, to determine what factors have affected them, and to assess whether these relationships arise from changes in employment practices peculiar to Japan. In addition to macroeconomic developments in employment and wages, we will identify characteristics of employment and wages by industry, and then examine the relationships between the labor market and structural adjustment pressures that are confronting the Japanese economy. To end the paper, we will give a brief discussion of future developments in the labor market, the implications for the macroeconomy, and the perspective of employment policy.

The main points of this paper can be summarized as follows:

  1. Examining recent developments in employment and wages per employee in Japan in relation to economic fluctuations, we observe that employment and wages recovered at a modest pace during economic upturns, and dropped sharply during economic downturns. To grasp this point more accurately, we examine the statistical relationships between economic fluctuations, and employment and wages for two periods: from the 1980s to the first half of the 1990s, and since the mid-1990s. In the period since the mid-1990s, we confirm that employment and wages have become more responsive to economic fluctuations, and that growth rates have been structurally lowered for both employment and wages.
  2. As the statistical results show, Japanese companies have increased their flexibility with regard to employment and wages, and have reduced labor costs as a whole. There are several factors behind these changes. First, environmental changes such as globalization, progress in information and communications technologies, and the ageing of Japanese society, have undermined the economic rationale for the Japanese employment practices, which are characterized by seniority-based wage profiles and long-term employment. These changes are promoting the reevaluation of seniority-based wage profiles, and the increased flexibility of the employment system itself. Second, with the protracted sluggishness of the economy in the 1990s, the labor share rose sharply, due partly to Japanese employment practices, and the need to correct excess employment and high wages became a major issue. Third, increasingly active international capital flows have led to heightened scrutiny of corporate profitability. Fourth, under balance sheet adjustment pressures after the burst of the bubble economy, many companies were forced to reduce labor costs to raise funds to repay debt; in extreme cases, companies went bankrupt, which led to the total restructuring of their workforces.
  3. Companies, seeking to increase flexibility in their labor costs, have become more dependent on non-regular employees. While many of these non-regular employees are still part-time workers, the number of contract and temporary workers has been rising. In terms of the type of jobs, the number of non-regular employees has been increasing not only in office and retail jobs but also in high value-added professional and technical positions. Companies are increasing non-regular employees for the following reasons. First, they find it difficult to change traditional employment practices quickly with regular employees, so they are compelled to increase the weight of non-regular employees to realize their goals of increasing labor cost flexibility. Second, progress in information and communications technologies has made it feasible to use a larger number of unskilled workers. Third, institutional improvements such as deregulation of temporary employment services have made it easier to smoothly match supply and demand in the labor market.
    The share of non-regular employees is particularly high in Japan by international comparison. In terms of the relationship between the economy and the overall number of employees, however, the responsiveness of employment to the economic fluctuation in Japan is still much weaker than in other countries such as the U.S. Thus, the flexibility of Japan's labor market is mainly due to adjustments at the margins and is still low by international standards, although it has increased to some extent. Therefore, it would not be appropriate to conclude that Japan's employment practices have been fundamentally changed.
  4. Regarding wages, flexibility has been high in Japan due to great flexibility in bonuses. Recently, however, regular wages, the largest component of total wages, have become more flexible compared to the period before the mid-1990s, when there was little flexibility in regular wages. To a great extent, this reflects the higher weight in total employment of non-regular employees, whose wages change depending on the number of hours or days they work. At present, it is hard to conclude that the flexibility of nominal wages as a whole is much higher than the period before the mid-1990s. However, the increasing flexibility of regular wages could lead to a higher flexibility of nominal wages as a whole, and thus a higher flexibility of real wages, even if prices continue to fall. In that sense, we must keep a close watch on how the process of regular wage determination for regular employees, which already shows signs of changing, continues to change in the future.
  5. Looking at developments in employment and wages by industry, we can observe the impact of the structural adjustment pressures that confront the Japanese economy. One of the most obvious features is the increased competitive pressure on labor-intensive manufacturing industries, which has stemmed from the expanding supply of labor in East Asia. Labor-intensive manufacturing industries such as textiles and electrical appliances have reduced employment most conspicuously. Construction contractors, financial services companies, wholesalers and other non-manufacturing companies also face changing business environments; deregulation, fiscal reform and balance-sheet adjustment pressures have contributed to weakness in the employment and wages of those industries. In these environments, the two sectors, manufacturing and non-manufacturing, have shown slightly different approaches to reducing labor costs. While manufacturers have made deeper labor cuts than non-manufacturers, the latter have lowered wages more than the former. Some background factors for the difference are as follows. First, in the past, wages were relatively high in many non-manufacturing sectors because these sectors were more protected by regulations. Second, non-manufacturers also generally found it more difficult than manufacturers to change their labor-intensive structure. Third, non-manufacturing companies employed a relatively high number of unskilled workers, for whom the supply-demand conditions became significantly loose, partly because of globalization.
  6. While restraints on employment have become severe in many industries, new employment opportunities are beginning to arise. This is because new industries gradually grow, and newly emerging companies expand their businesses even in traditional industries. New job offers and employment are relatively high in social welfare-related and health care industries as a result of Japan's ageing society, and also in information services and outsourcing business-related industries such as temporary employment services. Overall employment is weak for retailers and wholesalers, but new job offers are on an increasing trend, due mainly to the expansion of newly emerging companies. These new employment opportunities, which could result from firms' making use of low wage workers, may indicate that the wage adjustment mechanism has begun to function in Japan. However, it is still no more than a marginal phenomenon. While new job offers are at a high level in the macroeconomy, overall employment has not been increasing. This indicates a growing mismatch in the labor market: in areas where demand for part-time and professional workers is strong, supply cannot keep pace.
  7. As can be seen in the above discussion, important changes are taking place in Japan's labor market. Japanese employment practices are also in a process of change. As demonstrated by the high labor share, "structural" excess employment and high wages remain, indicating that labor resource allocation is still inefficient. As a result, if the economy heads for a recovery, overall employment and wages are likely to remain under restraining pressures for a long time to come, although some improvement will be observed in the supply-demand balance for non-regular employees. These pressures may also exert negative influences on household spending and services prices. In addition, it will be interesting to see whether the characteristics of Japan's business cycles, which are heavily influenced by business fixed investment, will become more affected by household spending, as the flexibility in employment and wages increases.
  8. We believe that Japan's labor market will continue to undergo structural changes, and that in the medium- to long-term view, these are an inevitable process that will help make the Japanese economy more efficient. Therefore, it is essential to improve the structure of the employment system for the overall labor market to become more flexible. In doing so, priority must be given to a revision of the institution that limits labor supply for non-regular employees, who are becoming increasingly important in the labor market. While the labor market is becoming more flexible, Japanese companies maintain traditional employment practices with regular employees, and have refrained from hiring new graduates. As a result, a serious problem of rising youth unemployment has emerged. Therefore, in reviewing current labor policies, which have mainly focused on workers middle-aged and older, it would be also important to give a consideration to the formation of the human capital of youth.