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September 1, 2003

The Evolving Shape of the Job Environment

Atsushi SEIKE (Professor, Faculty of Business and Commerce, Keio University)

Prof. SeikeEconomic and social structural changes will be decisively influencing employment in Japan over the years to come. The single most important exogenous change will be the aging of the Japanese population. To prepare our country for tomorrow's gray society, we must cease to rely on age as a standard embedded within employment systems and practices.

Even as the ranks of older workers swell, the population of younger workers will plummet, making it difficult to secure necessary labor power and maintain a stable social security system. This means that people with the will and ability to work need to be kept in the workforce longer. The same need is present in all developed countries currently undergoing a graying process. Luckily in Japan's case, a larger number of older people still have plenty of will to work. If we take advantage of this by making it possible for such people to remain meaningfully employed until an older age, the declining number of younger workers will not cause such an acute labor shortage as it would otherwise, nor will the financing of social security become as difficult.

Rethinking mandatory retirement

The problem is the existence of employment systems incompatible with this social need and with the eagerness of older Japanese to work. The largest obstacle is the widely utilized practice of imposing a mandatory retirement age. Japan's retirement systems force workers to leave their jobs when they reach whatever age the company bas decided on for retirement. This arrangement, which disregards whether employees wish to retire or have the ability to go on working, is out of line with the times. According to the Ministry of Health, Labor, and Welfare, some 90% of all companies with 30 or more employees make use of a mandatory retirement system and of them, 90% have chosen 60, the youngest age legally approved, to be the age of retirement.

The ideal of lifelong participation in society cannot easily be attained as long as businesses require workers to stop working when they reach a certain age. At a minimum, since the government is implementing a phased program to lift the age at which people become eligible for public pension benefits to 65, business ought to follow suit for the retirement age.

To be sure, companies have good reasons for easing older employees out. One is that these personnel are expensive, since seniority-based wages give workers more pay the older they grow and the longer they serve. Another is that older personnel monopolize the supervisory and management positions, since promotions are also based on seniority. If a firm did not have a way of weeding workers out at some age, it would find itself shackled by escalating personnel costs and a lack of positions for the promotion of young personnel. Thus the seniority system will have to be radically revised in order to make good use of older workers with the will and the ability to work.

The age of value-added competition

Another structural change reshaping Japan's employment environment involves the structure of competition. Japanese wages have reached the level of the world's highest. If companies are to go on paying such large wages to their Japanese employees and still remain sufficiently competitive to turn a profit, they will have to produce goods and services with a large measure of added value.

In the past a firm could get by with an employment system suited to an age of competition in which the only need was to cut the costs and raise the quality of things that were sure to sell once they were produced. But now firms must modify their employment practices in ways conducive to the creation of new values consumers are as yet unfamiliar with, for we have entered an age of "value-added competition."

In the age of value-added competition, the jobs of workers engaged in production and sales can only be guaranteed if their goods and services embody high added value. For that reason, firms must prepare packages of employment terms capable of attracting and motivating highly creative individuals, people who can come up with the kinds of products needed. In specific, these employees will have to be amply rewarded. The arrangements for paying, promoting, and otherwise treating workers must allow for wide discrepancies depending on an employee's contribution to value creation.

Equipping workers with marketable skills

Once such changes in employment get underway, the nature of employment security will also change. When it becomes customary for people with the will and the ability to work to go on working, careers will get longer. Already the age at which public pension payments commence has begun to be lifted, so it should not be long before people continue to remain fully employed until their mid-60s.

For the individual company, though, the alteration in the structure of competition is making it difficult to provide workers with long-term job guarantees. With value-added competition taking place on an international footing, the company faces a constant threat of losing its edge to rivals, and its cycle of prosperity and decline is bound to grow shorter. Even should management stick to a policy of keeping all employees on the payroll until retirement, the company will have no choice but to let everybody go if market competition drives it out of business.

The old employment security setup featured job guarantees provided by each business to its employees. What will be needed henceforth, though, is a setup centered on job security provided through the labor market. That is, employment will be safeguarded by having workers move through the labor market from firms that no longer have the capacity to retain them to firms that ate eager to hire and are expanding their personnel.

In this setup, each individual worker will need to polish marketable skills of use to other companies in addition to his or her current employer. Probably the company will find that as a matter of social obligation, it must strive to provide its workers with opportunities to acquire marketable skills. And without doubt the country as a whole will become obligated to upgrade the infrastructure of the labor market. The government will have to make ample information about employment available to each individual and business, and it will need to help people who wish to improve their skills enter retraining programs outside of companies. And when middle-aged workers interrupt a career with one firm to move to another, there must be social rules in place to prevent them from being deprived of reemployment opportunities on account of their age.

Human resources have been the single most important factor powering the growth of the Japanese economy. Therefore, the future of the economy crucially depends on further development of human capital. In this respect, it is important for us to reform employment systems so as to cultivate a yet more talented workforce and achieve a better allocation of human resources.

(This commentary first appeared in June, 2003 issue of Focus Japan, a publication by JETRO)

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