[ Nippon Keidanren ] [ Policy ]
2008 Position Paper on Management and Labor Policy

New Directions for the Japanese-Style Employment System

December 19, 2007
Committee on Management and Labor Policy
Nippon Keidanren
(Japan Business Federation)


Enterprise management and labor are the complementary halves of a whole. The people-centered ethos of Japanese-style management has won broad public trust, and the Japanese employment system, characterized by long-term employment and in-house labor-management relations, generally works well. Management from a long-term perspective predicated on this employment system, which is not overly focused on short-term results, made it possible for Japanese enterprises to compete on equal terms in international markets.

Today, however, domestic business conditions have changed greatly, with increasingly globalized economic activity and a declining birthrate and aging population as Japan's total population is dropping. The public also expects and demands that enterprises fulfill their corporate social responsibility toward all stakeholders by taking positive action on the environment and other important issues.

Changes in the world of work are also far-reaching. Diverse employment types are becoming firmly established, and management and labor are occupied with new issues such as work-life balance, measures in response to the falling birthrate, and workplace and work hour diversity. To respond to this changing business environment, elements of the Japanese-style management and the employment system behind it that must be preserved should be retained, but at the same time there should be awareness that the necessary changes must be made. As they take the initiative to reform Japanese-style management, employers must never forget the importance of their mission.

Spring labor negotiations and consultations are fast approaching. It is our strong hope that management and labor in each enterprise will undertake substantive discussions on the most desirable form of labor relations and management changes for their own company, all the while respecting each other's position and strengthening their positive relationship.

Part 1. The Changing Business Environment

1. Socioeconomic Change

(1) Spreading Globalization

Economic activity has become increasingly globalized in the past few years. Globalization affords all participants in the world economy a chance for economic development and growth on the one hand, but brings intense competition on the other. China and other emerging economies are increasing their exports, thanks to relatively low labor costs, placing cost pressure on Japan. Because of this, enterprises in Japan and all over the world are trying to position themselves as advantageously as possible in the global economy and are rapidly developing cross-border specialization and closer tie-ups.

Against this background, competition among systems for energizing corporate activity is heating up in every country. One of the issues Japan faces is establishing a corporate taxation system to put it on an equal footing internationally so as to keep companies in Japan and also attract high-quality investment from abroad, to create employment and expand income at home.

(2) Changing Demographics: Fewer Births, Population Aging

Japan is certain to be the first country in the world to face real population decline, due to the rapid drop in its birthrate. The productive-age population is also aging, and furthermore the drop in births and the aging of the population are having a serious impact on how individuals live. Because of this, people desire various types of employment and more flexible work options to better match their lifestyles.

The aging of the population will impose a great burden on the economy due to higher social security expenses. Under the current system, expenses for social security, mainly pensions, health care and nursing care, are expected to grow faster than the economy, which could have negative consequences for Japan's economic growth.

2. Issues Facing the Japanese Economy

(1) Boosting Productivity and Making Japan More Competitive

Boosting productivity is vital for achieving sustained growth in our economy. First, it is essential for individual enterprises to do their best to raise productivity. It is also important to promote innovation and expand new investment in cutting-edge areas. For its part, the government should adopt measures to actively support these steps.

Additionally, for raising the economy's overall productivity, a more sophisticated industrial structure is needed that allows the smooth movement of labor and capital to high value-added sectors, flowing seamlessly over enterprise or industry lines. To make this possible, further regulatory reform in a wide range of areas, review of various labor market systems, upgrading of financial and capital markets, and changes to the tax and social security systems are urgent priorities.

Economic growth through higher productivity can help boost employment, reduce wage disparities among industries or among enterprises of different sizes, and generate the funds needed for social security. There is a clear negative correlation between economic growth and income inequality as expressed by the Gini coefficient, and Japan needs to achieve economic growth through higher productivity so that economic disparities do not become entrenched.

(2) Involving Everyone in Society

Given the population's declining trend, it is important to draw on the capabilities of everyone in the country--young or old, male or female--to the maximum, to maintain and boost socioeconomic vitality.

First, employment of young people aged 15 to 35 must be promoted. Active measures in this regard are needed soon, in particular for short-term, part-time or temporary workers, given that these young people are missing out on the chance to learn skills or accumulate knowledge during this time of their lives.

To make this possible, systems related to the labor market should be changed and the labor market's demand and supply adjustment function strengthened. The basic steps are to make public and private job placement services function more effectively and promote regulatory reform of the worker dispatching and other systems. At the same time, the public and private sectors should cooperate to offer a wider range of measures for improving employment skills.

Second, while many women and seniors want to work, it is often difficult for them to find jobs. Therefore, providing more job opportunities for such individuals is a vital issue. A broad range of measures on the part of both government and enterprises is needed--shorter work hours, telework or home-based work, along with better child care and nursing care services. Taking comprehensive action from the work-life balance perspective is one important approach.

Part 2. Issues for Employers

1. Developing a New Japanese-style Employment System

(1) Employing and Utilizing a More Diverse Labor Force

Since the days of ever-expanding economic growth beginning in the late 1950s, mainly major corporations have as a rule hired large numbers of new graduates each year. This practice has fostered a spirit of cohesion and competition among members of the same entrant cohort and added vitality to the organization. Premised on long-term employment, training takes place over the long term, allowing workers to exert their capabilities over time and encouraging loyalty and a sense of belonging to the organization. But since the number of hires unavoidably fluctuates with changing economic conditions, overdependence on hiring new graduates causes distortions in employee age composition.

Companies are finding there is a stronger need to have a more diverse work force now, in order to respond quickly and flexibly to rapidly changing and increasingly complex business conditions. In addition to new graduates, they are proactively hiring young workers with a few years of job experience, those who had been working in temporary jobs, and women and seniors. They are also hiring non-Japanese workers, and persons with disabilities, to promote their inclusion into wider society.

(2) Continuing Long-Term Employment with Use of the External Labor Market

Japanese enterprises consider people-centered management, most clearly manifested in the form of long-term employment, their most important management asset. From the employer's perspective, long-term employment has the advantages of fostering employee loyalty and allowing investment in workers by developing human resources through planned training. Workers, meanwhile, can plan for long-term career development if they can count on stable employment. Long-term employment has downsides, however: in some cases, declining job performance ability as employees age; lack of flexibility in dealing with economic change; and weak morale among employees who failed to reach or had to give up management-level positions.

With the labor force expected to decline in the future, enterprises continue to employ workers mainly for the long term, while also making use of short-term, part-time or temporary labor, to secure the workers they need.

(3) Revamping the Wage System

Until now, many enterprises have offered seniority-based pay rising for everyone in accordance with length of service. Together with long-term employment, this has ensured a stable livelihood for workers and contributed to stimulating their loyalty.

Today, however, the spread of ICT and automation have led to both the standardization of many jobs and the emergence of specialized jobs not requiring long years of experience, meaning that there is increasingly less correlation between skills and years on the job. Furthermore, seniority-based pay predicated on years of service means that only long-serving employees benefit from the system. This creates an obstacle for companies that want to switch from taking on mainly new graduates for long-term employment to hiring people in mid-career, or temporary or part-time employees.

As a result, many enterprises are now reevaluating seniority-based pay that simply reflects length of service and instituting wage and evaluation systems based on job, role and degree of contribution to the organization.

(4) Maintaining Enterprise-Based Labor Relations and Improving Communication

Enterprise-based labor unions have greatly contributed to stable management. Companies actively communicate with their enterprise unions or with worker representatives if there is no union. This provides a forum for discussion that helps deepen understanding and nurture mutual trust, allows a flexible response to technological change, and has made it possible to improve living standards in line with productivity increases.

Relations between management and labor in individual enterprises will become even more important for maintaining and strengthening competitiveness, and enterprises are taking steps to improve communication between the two sides.

2. Employers' Stance Toward Labor Negotiations and Consultations

(1) Labor Cost Management Predicated on Productivity; Rebuilding the Wage and Evaluation System
  1. 1) Managing total labor costs in line with productivity
    Three factors are especially important when determining wages and other working conditions.
    The first is global competition. Japanese corporations always face stiff competition in the world economy, and we need to be aware that Japanese wage levels continue to be among the highest in the world, which can hinder enterprise competitiveness.
    The second is total labor costs. The main issue discussed in spring labor negotiations is changing cash earnings, such as scheduled earnings and bonuses. However, it is important to remember that any increase in scheduled earnings causes total labor costs to rise 1.7-fold. Given that statutory welfare expenses, over which enterprises have no control, are expected to continue rising in the future, total labor costs must be carefully managed.
    The third is stable growth of the economy in the face of a future declining population. Although the Japanese economy has continued growing in real terms for the past five years running, growth could be negatively affected because of an anticipated slowdown of the U.S. economy and weak personal consumption, as workers' income will stagnate due to the gradual phasing out of the fixed-rate temporary income and resident tax deduction. In these uncertain times, an economic structure based on corporate and household spending is needed to ensure stable growth.
    Taking these three factors into consideration, individual enterprises must continue to base determination of wages and other elements of total labor costs on their ability to pay. Any increase in total labor costs should be determined within the rate of change for added value generated by individual enterprises' workers and capital, in negotiations by management and labor in accordance with that company's circumstances. A portion of the added value amount generated by constantly raising productivity should be set aside to cover higher total labor costs, including for personnel increase or retention, while temporary improvement in corporate performance due to short-term fluctuation of supply and demand should be reflected in bonuses paid to employees.
    Across-the-board base salary increases that raise wages regardless of each enterprise's ability to pay are a thing of the past and are out of the question. Although it is up to labor and management in each enterprise to determine total labor costs, there are considerable discrepancies among enterprises by size, industry or region despite the fact that earnings and profits are generally increasing for all industries and all sizes of enterprises. We thus foresee that a sizable number of companies will decide that wages cannot be increased.
    From this perspective, it is clear that management and labor face the common issue of raising productivity in individual enterprises. The two sides should work together and, building on their relationship of trust and smooth communication, adopt measures to improve productivity.
    Some hold that labor's share has been declining and that wage levels should be raised to bring labor's share back up. In both historic and international terms, labor's share in Japan is high on the macro level. Changes in labor's share are a cyclical phenomenon everywhere. In general, dividends and internal reserves dip when there is an economic slowdown, but wages and employment are relatively stable and labor's share increases. The reverse holds true: in an expanding economy, labor's share dips. On the other hand, labor's share at the micro level differs by industry and company and is not a benchmark for adjusting total labor costs.

  2. 2) Creating an unbiased wage system
    Reevaluating the wage system continues to be an important topic for labor and management. The shift from pay based on age or length of service to a system based on jobs, roles and contributions by individual employees must be speeded up further. Creating wage systems that do not depend on age or years of service is fairer for mid-career hires vis-?-vis current employees and gives everyone the same opportunity. Adoption of this type of wage system by more companies can also lead to expanded employment.
    When creating new wage systems, one alternative is to have a range rating system that allows pay flexibility within respective job categories, rather than having pay tied to specific jobs, to make it easier for employees to transfer to different jobs. In cases where length of service has a direct bearing on the value of labor or productivity, a complementary system weighted for length of service or degree of contribution by individuals can be used in addition to range rate pay. It may also be worth considering the adoption of multi-track wage systems with different wage-setting standards for different job categories.

  3. 3) Establishing clear personnel evaluation systems
    A vital issue for personnel evaluation systems in the future is how to reconcile remuneration with individual workers' results and contributions in accordance with enterprises' management policies. Evaluation must not look only at short-term results but also consider work performed on long-term projects, appetite for taking on difficult assignments, work performance process, training of younger workers, and so on. As far as implementation of personnel evaluation systems is concerned, duties and evaluation criteria must be clear, evaluation results must be explained to the individuals, and more extensive skill development programs linked to evaluation results are needed in order to motivate employees to work and learn.
    Adopting and implementing a personnel evaluation system must be done after careful consideration by enterprises as to which model suits their particular company best. The most important point is that the company's senior management should underline why such a system is being introduced.

  4. 4) Nurturing highly skilled workers; passing on skills
    Human resources are an enterprise's most important source of corporate vitality and competitiveness. Globalization has set off a "war for talent," with companies vying with each other to attract talented workers. Particularly valuable to companies are self-directed individuals who can accurately determine the nature of a problem by seeing beyond existing values or practices and who can think autonomously and lead in value creation and business innovation. Nurturing self-directed workers requires that companies create systems to support career development focusing on individuals, in addition to the existing uniform career development framework. Workers, on the other hand, should take proactive steps to develop their own careers.
    But highly qualified human resources are not the only important factor. Given that Japanese enterprises' competitiveness originates in the field, enterprises need to maintain and improve the abilities of their workers to detect and solve problems in that setting. The decline in field-oriented experience is not simply competitiveness-related. It can also lead to more industrial accidents, or large-scale disasters that affect surrounding communities, with a resulting negative impact on safety and peace of mind. Enterprises must act soon to pass on the skills and techniques that form the basis for excellence in the field.

(2) Work-Life Balance

As the Japanese economy has matured, public attitudes and values have changed. Today, more workers want to fit their work into their way of living or to have more free time. Making work-life balance possible gives workers stronger job satisfaction and motivation, leading to higher productivity. It also helps enterprises attract talented people.

Work-life balance contributes to enhancing life for everyone, since it makes it possible for individual workers to lead fulfilling family lives, participate in volunteer work in the local community or carry out other activities. Work-life balance can be achieved by taking the following steps:

  1. 1) Promoting efficiency
    Existing work procedures themselves should be thoroughly revamped so that work can be performed efficiently and in full during work hours. This requires clear goal-setting, appropriate evaluation when goals are reached, and fair remuneration based on this. Management and labor must also work together to change the workplace culture to place more value on efficiency.

  2. 2) Encouraging flexible employment
    Promoting flexible employment, such as shortened hours, telework, home-based work or other types of employment that are not time- or location-specific, is important for making work-life balance possible. More flexible ways of working can also open more job opportunities.
    What is needed now is for management and labor to work out for themselves how to reevaluate ways of working. Laws mandating shorter hours across the board are not truly useful for achieving work-life balance.
    A "Work-Life Balance Charter" and action guidelines were recently drawn up by the Japanese government. The numerical targets in the action guidelines should be shared by all of society as the ideal to work toward. It could be effective if the government encouraged companies to take measures in this direction and in particular offered better support measures for SMEs while actual progress is measured. However, setting or raising targets for specific industrial sectors or enterprises, or adopting policies intended to force meeting the targets, must be avoided at all costs, as this will have the opposite effect of interfering with enterprises' voluntary commitments and hampering flexible employment.
    Senior management has an important role to play in encouraging labor-management cooperation for achieving work-life balance. Employers must have direct communication with employees to secure their understanding and support for changing the corporate culture.

Part 3. Productivity Improvement and Flexible Employment Systems

1. Improving the Functioning of the External Labor Market

(1) Labor Supply and Demand Adjustment
  1. 1) More effective employment offices
    "Hello Work" public employment offices function as an employment safety net and should be maintained as a nationwide network providing services free of charge. The government should improve efficiency of delivery of the minimum level of employment referral services while at the same time increasingly opening the employment referral field to the private sector.
    Japan is undergoing rapid social change today. There are limits to what schools alone can do to help their students find jobs. Having schools work together with "Hello Work" offices would be an effective solution.

  2. 2) Private job placement services
    Private sector job placement services must be used much more extensively in order for the public and private sectors to complement each other and strengthen the labor market's demand-supply adjustment functions. Although private job placement services handle fewer applicants than the public system, they have a better grasp of employer and job-seeker needs and use that information for job placement. To promote more extensive use of private job placement services, further revisions should be considered to expand the range of situations in which they are allowed to charge job-seekers using their services.

  3. 3) The temporary worker system
    The worker dispatching system for temporary workers, which matches job-seekers with companies needing labor, plays an important role in adjusting labor market supply and demand. Further improvements to the worker dispatching system could help boost overall supply-demand adjustment functions.
    The temporary-to-permanent employment system could be very effective for shifting to direct employment, if it matches the needs of both employers and job-seekers. In this context, regulations pertaining to dispatch period (currently a maximum of six months) should be reviewed so that this system can be used more widely. In the case where workers are employees of temporary work agencies, employment of temporary workers is stable. Except for regulations necessary for worker protection because workers receive direction or instruction from a different company, restrictions pertaining to dispatch period or user enterprises' obligation to offer regular employment to temporary workers after a certain period of service should be abolished.

  4. 4) Human resources development
    In addition to strengthening the labor market's supply-demand adjustment function, an employment safety net geared to helping people find jobs should be created by providing more opportunities for upgrading job skills. To this end, the public should be kept better informed about opportunities for acquiring or developing skills through public vocational training organizations and more extensive use made of this resource.
    In addition to the public vocational training organizations designated under the Law for Promoting Human Resources Development, other bodies such as universities or technical colleges should be used effectively. Better coordination among administrative authorities is also important.

(2) What Enterprises Can Do to Support Youth Employment
  1. 1) Cooperate with the "job card" scheme
    Enterprises should use a trial employment system to obtain the labor they need, evaluating the suitability and abilities of job-seekers who have trouble finding work because they lack experience. To promote further use of this system, the trial employment period should be extended from the current three months to one year.
    Enterprises should also actively cooperate with the "job card" scheme, a new set of measures for developing job skills that will be adopted in fiscal 2008. To ensure that this system spreads and becomes well established, companies must do their part by providing opportunities for on-the-job training.
    On the other hand, the government should structure the "job card" scheme in such a way that as many companies as possible, and particularly SMEs, can take part.

  2. 2) Provide internships and support schools
    To eliminate mismatches in employment supply and demand, enterprises must actively cooperate by offering internships and working with schools to incorporate programs for teaching children what working is all about and stimulate their desire to work.
    Schools have an important role to play in supporting their students as they make the transition to working life. To improve the skills of teachers in charge of vocational guidance, employment counseling and job referral, corporations should offer teachers corporate training programs organized by economic organizations and other bodies.

2. Changing Laws and Infrastructure to Promote Various Employment Types

(1) Personnel Administration for Flexible Employment

Flexible employment in the form of shortened hours, telework, home-based work or other types of employment has become more established in recent years. To make full use of a diversified workforce, enterprises have been creating fair and well-accepted evaluation systems focusing on performance. Employers are also taking steps to improve mental health support for workers and adopt measures against overwork, and providing information or consultation services to improve workplace communication.

From the perspective of facilitating various employment types, the government should take actual conditions into consideration and be flexible in applying work hour legislation, which was originally predicated on work on the employer's premises.

(2) Systems Promoting Self-Directed Work

Allowing workers with specialized, creative or coordinating skills to control their own work hours rather than work under uniform work hour administration can help improve their skills and capabilities and give them a means of self-expression through the production of high-quality work. This will ultimately contribute to maintaining and improving corporate competitiveness. Working efficiently can also make healthy work-life balance possible.

A system should be considered that allows employees involved in highly specialized or creative work to administer their working hours themselves, outside the framework of existing laws regulating work hours or the occupations for which discretionary work hours are allowed.

(3) Support for Families with Young Children

Due to the lack of adequate child care resources, many women today are being forced to take part-time jobs. From the viewpoint of ensuring everyone's participation in society, measures are needed so that women are not forced to abandon their careers due to motherhood. Some enterprises have set up child care facilities on work premises, support continued employment of women or promote their re-employment, allow telework, and are taking action to change workplace attitudes. Further steps, both qualitative and quantitative, are needed in this direction.

The government should provide a more extensive range of support measures for families with children.

3. Raising Productivity

(1) Support for SMEs

Profitability is improving for the corporate sector as a whole, but SMEs continue to have difficulty establishing a sound financial footing. Raising productivity is essential for boosting SME profitability, although this should basically be achieved through each company's own efforts. But given the tough business environment for smaller companies and their important role because they account for 70 percent of all employment, active support measures by the government are essential.

(2) Revitalization of Regional Economies

Within the Japanese economy, there are pronounced regional disparities in terms of business sentiment and the employment and earnings picture. Affluent living cannot be achieved without energizing regional economies. The regions themselves must start by attracting domestic and foreign industry and revitalizing local industries to create jobs and boost income.

Large companies with local operations should actively cooperate with local enterprises. At the same time, the government should broaden its range of ministry-specific measures into an overall regional economic strategy. Reforms devolving authority from the central to local governments, and from the public to the private sector, should also be continued.

It is also time to take the ultimate step in structural reform and create regional blocs extending beyond the boundaries of existing prefectures, where the regions would carry out independent regional management and increase their areas' affluence by creating broad economic zones.

(3) Review of the Minimum Wage System

The minimum wage system represents a safety net that gives working people peace of mind about their livelihood. Raising the minimum wage without regard for productivity will only worsen the cost structure for SMEs, making it difficult for enterprises to maintain employment and ultimately having a negative impact on workers' livelihoods.

Raising the minimum wage should go together with higher productivity and should be carried out over the medium and long term. The industry-based minimum wage system, which is redundant and unnecessary, should be abolished.

Home Page in English