Annual Report on the Japanese
Economy and Public Finance
- No Gains Without Reforms III -
Government of Japan
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Section 4 Impact of Structuring Adjustment on Employment and Wages
Structural adjustment means that resources (including funds and labour force) are transferred from low-productivity areas to high-productivity ones. Smooth transfer is desirable. In fact, however, resources released by low-productivity sectors usually take time to be absorbed by high-productivity sectors. Therefore, some resources may remain unutilized in that process. This loss may be called the cost of structural adjustment. The government must try to minimize the cost to improve the welfare of the people.
This section analyzes how the cost of structural adjustment is emerging for employment and wages and considers what should be done to address the cost.
1. Adjustment Pressures on Employment
Involuntary job leavers leveling off
As discussed in Chapter 1, involuntary job leavers increased sharply in 2001 and slowed down a rise in early 2002 before beginning to level off (see Figure 1-1-23). This change is attributable to (1) a decline in bankruptcies and (2) a lull brought to corporate restructuring.
We will first review the bankruptcy trend (see Figure 2-4-1). The number of corporate bankruptcies in fiscal 2002 declined 5.6% from an all-time high posted in fiscal 2001. The total amount of liabilities and the number of employees at enterprises that went bankrupt indicated a similar trend. Total liabilities peaked in fiscal 2000 and fell in fiscal 2001. They recorded a 17.6% decline in fiscal 2002 from the previous year. The number of employees involved in new bankruptcies reached a peak in fiscal 2000 before dropping 0.9% in fiscal 2001 and 15.6% in fiscal 2002.
Figure 2-4-1 Total Amount of Liabilities and Number of Employees at Bankrupt Enterprises
Next, we will review the trend of corporate restructuring. According to the Survey on Labour Economy Trend, the portion for business establishments that implemented employment adjustment continued to increase until the October-December quarter of 2001 and decreased gradually in and after the April-June quarter of 2002 (see Figure 1-1-25). The solicitation of voluntary retirement and dismissals, the toughest employment adjustment measure, in manufacturing industries peaked in the January-March quarter of 2002 before later declining.
Impact of non-performing loan disposal
There are some factors behind the recent absence of any increase in bankruptcies and displaced workers. As for the declining bankruptcies, we may be able to conclude that measures to improve corporate finance and promote employment have succeeded to some extent. Here, however, we focus on structural adjustment's relations with the recent halt in the expansion of bankruptcies and displaced workers. Especially, we consider how to interpret the relationship between the recent absence of expansion in involuntary job leavers and the progress in non-performing loan disposal.
As discussed in Section 2, major Japanese banks removed some ¥12 trillion in loans to borrowers in danger of bankruptcy or worse from their balance sheets in fiscal 2002, a two-fold increase from the approximately ¥6 trillion in fiscal 2001 (see Figure 2-2-2). The accelerated removal of non-performing loans from balance sheets had been expected to cause a considerable increase in bankruptcies (especially "liquidation-oriented" NPL disposals as discussed in Section 2 of Chapter 2) and in unemployment.(52) But bankruptcies or personnel reduction rates have not increased as much as expected earlier.
Why have bankruptcies or personnel reduction rates not increased as much as estimated earlier? One major reason may be that NPL removals from balance sheets have focused on debt forgiveness and other "reconstruction-oriented" NPL disposals rather than "liquidation-oriented" disposals.(53) Of the major banks' removals from balance sheets of NPLs to borrowers "in danger of bankruptcy" or worse in fiscal 2002, liquidation-oriented NPL disposals accounted for 9%, reconstruction-oriented disposals for 16%, reclassification of NPLs on borrowers' business improvements for 28%, and loan liquidations for 38% (see Figure 2-2-2). Since the reclassification usually accompanies reconstruction-oriented NPL disposals, we may be able to conclude that NPL disposals in the year were primarily designed for reconstruction of corporate borrowers.
Personnel reduction rates resulting from liquidation-oriented NPL disposals are different from those resulting from reconstruction-oriented disposals. Personnel reduction rates are estimated at 100% for liquidation-oriented NPL disposals and much lower for reconstruction-oriented disposals. For example, enterprises that filed for reconstruction under the Corporate Reorganization Law or the Civil Rehabilitation Law from fiscal 1999 to 2001 reduced their employment by an average of 38.1% by the end of March 2002.(54) The focus on reconstruction-oriented NPL disposals should have worked to reduce overall personnel reduction.
Reasons for increasing reconstruction-oriented NPL disposals
One reason why NPL disposals focus on reconstruction of corporate borrowers is that their restructuring and continuation of business operations could increase their value.
In other words, even excessively indebted enterprises, if they have steady business operations, can be expected to improve their debt-repaying capacity in the future by continuing such business operations. As far as such borrowers are concerned, reconstruction-oriented NPL disposals to allow the continuation of their business operations to increase their value over a medium- or long-term should be favorable for banks than liquidation-oriented disposals. This is the reason why banks adopt the reconstruction-oriented approach for such borrowers. In fact, enterprises that received debt forgiveness or debt-for-equity swap support from banks between fiscal 2000 and 2002 accelerated job cuts in exchange for such support. They thus have made visible efforts to improve their profitability (see Figure 2-4-2).
As discussed in Section 3, another factor behind the focus on reconstruction-oriented NPL disposals is the development of frameworks by the government and the private sector to turn around viable enterprises while preventing the dispersion of their business resources.
Figure 2-4-2 Personnel Reduction Rate for Enterprises Receiving Debt Forgiveness
Many displaced workers join the unemployed
As discussed above, the acceleration of NPL disposals has not necessarily worked to sharply increase corporate liquidations or worker displacements. Rather, corporate reconstruction efforts have been intensified. As far as industrial structure adjustment is going on, however, sound enterprises as well as excessively indebted companies are required to reallocate human resources in the course of their rebuilding. Worker displacements are thus expected to continue.
On the other hand, 48.1% of workers displaced on corporate liquidations or employment adjustment have joined the unemployed, according to the Labour Force Survey Detailed Tabulation by the Ministry of Public Management, Home Affairs, Posts and Telecommunications.(55) The high percentage indicates that displaced workers have had difficulties in finding new employment.
There are some factors behind such difficulties. First, many enterprises have remained in restructuring or rebuilding processes, failing to positively expand employment. Some enterprises have become successful turnaround models, beginning to aggressively expand business operations after successful restructuring following severe job reductions in initial phases of reconstruction plans. If such enterprises become able to increase employment, the percentage of displaced workers failing to obtain new jobs may decline.
Second, the skills, qualifications and ages of displaced workers may be failing to meet employment requirements. Displaced workers may have little trouble if they can work in the same sector as they had worked before losing their job. As seen in Figure 2-4-3, however, the portion for displaced workers taking jobs in the same sector as that including their former employers differs from one sector to another. Such portions have declined for many sectors. Displaced workers in these sectors must find jobs in other sectors. Consequently, the problem is whether their existing skills and qualifications can meet employment requirements. Irrespective of differences between sectors, rapid innovations and enterprises' growing demand for skilled workers have made it difficult for displaced workers to find new employment unless they consistently improve their skills and qualifications to meet employment requirements. Even if labour demand is balanced with labour supply, unemployment can coexist with unfilled job vacancies with employers failing to find job seekers meeting their requirements. This is called an "employment mismatch."
Such phenomenon has been demonstrated in the Labour Force Survey Detailed Tabulation. Unemployed respondents were asked to cite reasons for failing to get employed in the survey.(56) Among householders, 40% cited age requirements. Among spouses, 30% cited age requirements (nearly 30% also cited working hour and holiday requirements). Among householders, children and their spouses, more than 40% cited problems regarding types and details of jobs. By age group, the most frequently cited reason for those aged between 15 and 44 was related to types and details of jobs. Some 30% to 40% of them chose these reasons, while those citing other reasons were far fewer. Among those aged between 45 and 65, 40% to 60% cited age requirements.
Generally, age requirements are the biggest constraint on employment for relatively old householders. For householders' children and spouses, types and details of jobs are the problem.
Figure 2-4-3 Ratio of Job Changes within Each Industrial Sector
UV curve indicates expansion of employment mismatches
Employment mismatches can be indicated by a UV curve(57) showing the relationship between the unemployment and job vacancy rates. The UV curve slopes downward as a rise in the vacancy rate leads to a fall in the unemployment rate and as a fall in the vacancy rate leads to a rise in the unemployment rate. The curve usually follows the economic situation. Since 1995, however, the UV curve has tended to shift upward rather than following the economic situation. This indicates that unemployment has remained high in spite of the increase in job vacancies. Such trend may be interpreted as an expansion in "employment mismatches" (see Figure 2-4-4).
Vacancies tend to remain unfilled for specialist, engineering, sales and other jobs that require sufficient experience and advanced skills. In contrast, seekers of administrative and clerical jobs are in surplus. Mismatches are thus seen between job offers and seekers (see Figure 2-4-5).
Figure 2-4-4 Unemployment-Vacancy Curve
Figure 2-4-5 Labour Surplus or Shortage at Each Job Category
Young and long-term unemployment has been increasing
While employment mismatches have been expanding, young and long-term unemployment has been increasing.
The unemployment rate for the 15-24 age group has been higher and has risen faster than for other age groups. It stood at 9.9% in 2002, almost twice its level from a decade ago (see Figure 2-4-6). The rate is also high for the 24-34 and 55-64 age groups. Unemployment rates for other age groups have remained below average.
Those who remained unemployed while seeking jobs for a long time (one year or longer) accounted for an average of 30.9% of unemployment in January-March 2003 and the percentage has been rising slowly (see Figure 2-4-7). Long-term unemployment's share of total unemployment for the 65-or-older group has been conspicuously high, standing at an average of 50% for January-March 2003. The second highest shares are for the 55-64 and 45-54 age groups, standing in the 36-40% range. The shares for younger groups are generally lower, standing at levels in the 20-30% range.
Figure 2-4-6 Breakdown of Unemployment Rate by Ages
Figure 2-4-7 Share of Those Remaining Unemployed for One Year or Longer
The rising figures for young unemployment apparently indicate (i) that, during the economic slump, enterprises have reduced employment of new graduates, employment mismatches have expanded on job offers' concentration in part-time and high-skilled jobs, and (ii) that some young people lack job consciousness or willingness to work and tend to change jobs frequently. The increasing young unemployment could lead to serious problems for Japan. The problems are not limited to personal ones including (i) the absence of income for many young people and (ii) their failure to accumulate key experiences and knowledge for their future career. (iii) If young people, who constitute a precious workforce in the aging Japanese society, fail to develop professional skills, it will restrain growth of the Japanese economy. In addition, (iv) the tendency to remain unmarried or delay marriages and the falling birthrate would become more serious problems and (v) there would be a decline in the numbers of those supporting the social security system.
The increase in long-term unemployment apparently indicates (i) that it has grown more difficult for displaced workers to find jobs in the same sectors as those where they had worked, as some sectors have been reducing the number of personnel amid rapid economic structure changes, (ii) that displaced workers cannot meet job requirements in unfamiliar sectors or job categories, and (iii) that workers' skills grow more outdated during long-term unemployment, prompting their unemployment to be extended even further. Long-term unemployed people might have lost income since unemployed people can receive unemployment benefits for up to one year. This may be a major social problem. (How to address such problem is addressed in "3 Desirable Employment Policy.")
2. Adjustment Pressures on Wages
Wage cost reduction
Structural adjustment pressures are affecting wages as well.
Wages in Japan have been flexibly determined to reflect corporate profit, etc. in various phases of an economic cycle. Overtime work allowances and bonuses have been flexibly changed while basic wages have remained stable.
As noted in Chapter 1, however, wage adjustment in 2001 and 2002 featured cuts in basic wages also, reflecting (i) part-timers' growing share of workforce and (ii) wage system revisions. We will now discuss the two factors below.
Part-timers' growing share of workforce
As enterprises have become more cost-conscious since the mid-1990s, they have tended to reduce their numbers of full-time workers while increasing their number of cheaper part-timers.
Part-timers' growing share of the workforce can exert downward pressures on wage averages including those for full-timers.
However, part-timers have not necessarily been employed in replacement for full-timer. Nearly a half of the full-time job reduction rate(58) is attributable to business offices that had failed to flexibly adjust employment in the absence of part-timers and have been forced to reduce the number of full-timers (see Figure 2-4-8). The remainder may be attributed to business offices that (i) have replaced full-timers with part-timers, (ii) have reduced both full-timers and part-timers, or (iii) have kept part-timers employed while reducing the number of full-timers.
Overall, the number of full-timers has declined while that of part-timers increased.
Figure 2-4-8 Breakdown of Full-time Job Reduction Rate
Wage system revisions
Basic wage adjustment became clearer in 2001 and 2002 as enterprises expanded adjustment to cover basic wages, which had been kept stable.
Asked to cite personnel cost reduction measures in polls, many enterprises have cited wage system revisions as well as overtime work cuts and employment of part-timers (see Figure 2-4-9). They have also cancelled or delayed basic wage increases and bonuses while their business performances and the employment situation have remained severe (see Figure 2-4-10).
Figure 2-4-9 Measures to Reduce Personnel Costs
Figure 2-4-10 Basic Wage Increase and Bonus Payments
How are wage systems being revised as a result? The wage curve (covering gross wages) has shifted downward for slumping sectors like finance and insurance, transportation and communications, and construction. (See Figure 2-4-11 and Appended Figure 2-3).
While rising average ages of employees and increasing higher-educated workers at many enterprises have exerted upward pressures on personnel costs, enterprises are required to hold personnel costs down to levels meeting earnings. Therefore, they have tended to set stricter conditions for promotions, lift promotion ages and lengthen the terms per post. As a result, share of executives in their 20s and 30s has been falling, ages for executive in their 40s and 50s have risen, and executives as a whole are aging slightly (see Figure 2-4-12).
Enterprises have also revised seniority-based wage systems, allowing the wage gaps between executives and non-executives to shrink (see Figure 2-4-13 and Appended Figure 2-4). They have also been introducing performance-based wage systems to link wages to capabilities and business performances (see Figure 2-4-14), leaving position and wage gaps to emerge and widen between employees of the same age depending on performances and capabilities. The combination of seniority-based wage system revisions and performance-based wages can cap wages for middle-and-older employees and allow younger employees to get faster promotions and higher wages depending on their capabilities.
Figure 2-4-11 Changes in Wage Curves
Figure 2-4-12 Changes in Executives' Share
Figure 2-4-13 Change in the Wage Gap by Position and Age
Figure 2-4-14 Wage System Revisions Regarding Reflection of Performance Ratings
As reviewed above, structural adjustment has caused pressures on employment and wages. Unemployment has remained at high levels, and younger and longer unemployment has become evident.
How should employment policy be under such conditions? Finally, we will now consider this point in comparison with foreign countries.
3. Desirable Employment Policy
(1) International Comparison of Employment Policy Comparison and Japan's Desirable Policy
Employment policy's financial features
First, we look at the financial features of employment policy.
We begin with general "employment policy expenditures." These expenditures cover policy management, public employment services, labour market training, subsidized employment, measures for the disabled, unemployment compensation, and early retirement. The ratio of these expenditures to nominal gross domestic product is higher for Germany, France, Finland and other European Continent countries, and lower for the United States, the United Kingdom and Japan (see Figure 2-4-15).
Figure 2-4-15 Employment Policy Expenditure as Percentage of GDP in Industrialized Countries
We must give considerations to the effects of other expenditures as well as such employment policy expenditures. This is because Japan implemented economic measures, including public works, frequently during the economic slump in the 1990s. Since public works eventually contributed to maintaining employment, considerations on the employment-maintaining effect of public works may allow us to grasp employment policy more comprehensively.
We will now analyze public works expenditure in this respect. The ratio of public works expenditure(59) to nominal GDP in Japan has been higher than in other industrial countries (see Figure 2-4-16). This indicates that public works as the pillar of economic measures have served to maintain employment under the view that Japan's social infrastructure has been underdeveloped.
Figure 2-4-16 Government Fixed Capital Formation as Percentage of GDP
Comparing employment policy and public works expenditures, public works expenditures' ratio to nominal GDP stood at 1.8% against employment policy expenditures' ratio at 3.6% in Germany in 1998. Thus, employment policy expenditures doubled public works expenditures in Germany. In Japan, however, the ratio for public works expenditures came to 5.5%, about seven times as much as the 0.76% for employment policy expenditures, even in 1998 when the unemployment rate began to rise. Japan had thus placed great expectations on the economy-boosting and employment-maintaining effects of public works.
Eventually, however, Japanese economic measures like this have cost efficiency. Comparing growth rates of labour productivity (= real GDP/employment) in Japan and some other countries (see Figure 2-4-17), growth rates in the other countries in the 1990s were generally higher than in Japan. This may indicate that the Japanese economic measures, while keeping employment more stable than in other countries, eventually resulted in delay restructuring and maintaining inefficient industries.
Comparing changes in the labour share (compensation of employees' share of national income at factor cost) (see Figure 2-4-18), the share in Japan rose in the first half of the 1990s and remained high in the second half, while shares in other countries fell or leveled off in the 1990s.
Figure 2-4-17 Changes in Labour Productivity (real GDP/employment) in Industrial Countries
Figure 2-4-18 Labour Share Changes in Industrial Countries
Features of European and U.S. employment policies
What employment policies have been taken in foreign countries? We start with reviewing how the United States and Europe responded to rises in unemployment rates and discussing what Japan can learn from U.S. and European experiences.
The United States and Europe, though having different labour markets, commonly give priority to measures for developing workers' skills and knowledge. Let us discuss specifics of U.S. and European employment policies.
U.S. employment policy
The U.S. labour market is very flexible. Workers failing to meet employers' skill and knowledge requirements are dismissed and wages are based on skills and knowledge. Therefore, various measures have been taken to help workers improve their knowledge and skills.
While the widening income gap between university graduates and non-graduates has prompted individuals to become more willing to proceed to universities, those who have financial difficulties in going on to universities are given government support ranging from financial assistance to counseling and information services regarding entry into university and the related financial burden. Furthermore, community colleges and other regional community-based educational institutions provide higher education to young people and adults who cannot go on to four-year universities.
The United States not only provides unemployment benefits and other life-supporting measures to unemployed people but also gives priority to helping these people obtain sufficient vocational capabilities for employment. The Workforce Investment Act, as effectuated in March 1998, provides for one-stop career centers where employers and workers can receive comprehensive services regarding employment, education and training. It also calls for services that allow people to get information on various existing training services via the Internet.
European employment policy
In Europe where labour markets are rigid and employment mismatches have expanded, it has grown more important to improve workers' skills and capabilities to meet industrial structure changes. Therefore, Europe gives priority to the improvement of workers' employability and is shifting from "passive employment policy" including unemployment benefits to "active employment policy" including education and training.(60)
In order to improve people's employability, European countries have launched programs to help people get information technology-related skills at a time when skill gaps have widened on IT's growing presence. Sweden has introduced computer workshops and activity centers as new vocational training programs for young unemployed people. These programs have participants work half a day while learning about computers. They are expected to enable unemployed people to take advantage of working experience for increasing opportunities to find jobs.
Features of Japan's employment policy as compared with U.S. and European policies
Comparing Japan's employment policy with U.S. and European policies, their active employment policy features a greater weight on education and training. Especially, the ratio of education and training is high in the active employment policy (see Figure 2-4-15). This is because the United States and Europe have positively adopted measures to develop workers' skills and knowledge.
Direction of Japan's employment policy
In order to proceed with structural adjustment, Japan should facilitate workers' moves across different industrial sectors. In this respect, Japan should promote measures to improve workers' skills and knowledge and should enhance labour demand-supply adjustment including measures to support early reemployment and workers' moves across different industrial sectors.
Japan has recently introduced subsidies for people going to vocational schools to develop their skills, as well as other measures to improve workers' skills and knowledge. Pursuing the "realization of society where people's willingness and capabilities are given full play,"(61) "development of safety nets to cope with economic and social structure changes,"(62) and "enhancement of employment and manpower,"(63) the government has implemented various employment policy measures to support early reemployment, eliminate employment mismatches and create good employment opportunities.
Japan should continue to expand and enhance these kinds of employment policy measures.
(2) International Comparison of Young People Employment Policies and Japan's Desirable Policy
Growing young unemployment in Japan
In the United States and Europe, unemployment rates for young people have risen rapidly since the oil crises in the 1970s. This has developed into a serious social problem, prompting their governments to implement employment policy measures for young people far earlier than the Japanese government.
Japan's unemployment rate for young people has remained lower than in the United States and Europe excluding Germany. However, the young unemployment rate in Japan has continued to increase throughout the 1990s and has topped 10% (see Figure 2-4-19).
We here would like to outline employment policy measures for young people in the United States and Europe and discuss what Japan can learn from U.S. and European experiences.
Figure 2-4-19 Changes in Young Unemployment Rates
Young labour market's features, and U.S. and European responses
The young labour market has the following three features in general:
First, young employment are very responsive to cyclical economic changes. This is because young people are vulnerable to an economic slump. As labour demand declines during a slump, employers reduce recruitment of young people who are less skilled than other workers.
Second, young unemployment includes those who repeatedly gain and lose jobs and tend to become long-term unemployed.
Third, young people's unemployment can affect their future working conditions including wages. Generally, workers develop their skills through workplace experience. This enables them to increase their wage and employment opportunities. Young workers' loss of initial employment opportunities means their loss of opportunities to develop their skills, having adverse effects on their future working conditions including wages.
The United States and Europe have taken the following measures in response to the three features:
In response to the first feature, schools and enterprises formed alliances to enable students to develop professional skills and senses to prevent their future employment from being affected by cyclical economic changes. Specifically, the United States has had a long-term internship system for students to take advantage of summer vacations to acquire work experience. Germany has introduced what is called the dual system (see Column 2-3).
Regarding the second feature, Britain has implemented New Deal measures encouraging young unemployed workers to get employed promptly, in order to prevent any unemployment period from being prolonged (see Column 2-3). In addition, advisers have provided connection services to young people called NEET (not in education, employment or training) who have failed to seek jobs or visit public job placement offices while remaining unemployed for a long time.
As for the third feature, young people must be given opportunities to develop their vocational capabilities, in addition to internship training at enterprises. In the United States, community colleges have provided vocational training opportunities for high school graduates, including those who have started working.
Direction of Japan's employment policy for young people
In the United States and Europe, where high young unemployment rates became a serious problem far earlier than in Japan, various measures have been implemented to promote employment of young people. In Japan, the young unemployment rate had remained relatively lower until the 1990s.
Since the 1990s, however, the young unemployment rate has been rising in Japan. In response, the government has compiled "the plan for young people's independence and challenges". It calls for introducing "a Japanese-version of dual system to combine workplace practices, education and training for developing young people". The plan also seeks to develop a fine-tuned employment support system where job supporters at Hello Work (public job placement offices) provide individual consulting services, and one-stop job centers that regional communities manage voluntarily for young people. The "Basic Policies for Economic and Fiscal Management and Structural Reform 2003" call for the promotion of these measures as part of the employment system reform to enhance the young manpower expected to lead Japan in the future.
The rising young unemployment rate endangers sufficient accumulation of human resources for the Japanese economy, exerting negative effects on future economic growth. Japan needs to continue to implement employment policy measures for young people aggressively.
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