Demographic Crisis and Labor Shortage in the Industrialized World: Japan and the US

Nicholas Engler (University of Southern California, USA)

Many of the world's industrialized countries are beginning to realize the grave implications of their inherent demographic situations. The reality is that populations in many affluent societies are aging. Baby boomers in the developed world are, or shortly will be, retiring from the workforce. They will be replaced by the next generation which is far smaller. The resulting labor shortage will have both domestic fiscal implications and poses an economic threat. First, countries must grapple with the dilemma of funding a large population of older retirees who will require financial assistance, pension plans, and medical expenses. Younger generations will be financially overburdened if governments' don't find a solution fast. But a second threat of the labor shortage is its effect on industry's that need a growing, substantial labor force. As labor decreases, firms could become less productive and industries could fail.

Japan, and to a lesser extent, the United States are no exceptions to these demographic changes. Japan is facing a shortage in skilled labor which many analysts agree would be best solved by opening the country up to more foreign labor. But burdensome immigration laws, anti-immigration sentiment and increased competition to attract skilled foreign labor are major obstacles to this potential solution. Japan should learn from the US, which successfully employs and educates many foreign skilled workers. However, while the US may have success in its skilled labor sector, it may face a labor shortage in unskilled sectors. While the need for unskilled workers continues to be met by immigrants from Mexico and Central America, recent anti-immigration sentiment in American politics threaten to curb the flow of unskilled labor into the country. The US should learn from Japan's problems and realize the importance of foreign labor to the US economy.

Japanese skilled labor shortage

Japan's long-standing role as a leader in information and communications technology is supported by the industry's skilled labor sector. The industry requires skilled labor to provide services and foster growth. Skilled labor is also paramount for contributions to research and development which keep the industry in Japan globally competitive. Current demographic trends that predict a skilled labor shortage are, therefore, a serious threat to the IT industry as well as other industries in the Japanese economy.

Anthony P. D'Costa explains this dilemma in his essays. He cites the aging population, declining fertility rates, and decreasing enrollments in science and engineering programs as contributing to the labor shortage threat. A report by the Pacific Council, entitled Can Japan Comeback?, warns that a shrinking population combined with the current net outflow of Japanese citizens is making the problem more serious. The report alarmingly points out that the average age of Japanese leaving the country is 38.5—a highly productive age (Pacific 16). The combination of all these forces will become a huge obstacle to firms in many Japanese industries that rely on highly trained workers.

The Pacific Council Report also points out another contributing factor to the labor shortage. According to the report, Japan's relatively high level of unemployment is due to its educational process which produces the wrong kind of labor. It educates citizens as generalists as opposed to educating trained professionals. "The shortages reflect a mismatch between the generalists that the Japanese educational system produces and the specialists its economy now requires—from nurses to engineers to lawyers"(Pacific 16). This point is similarly related to D'Costa's argument that enrollment is science and engineering programs is also contributing to the skilled labor shortage.

Because these demographic forces are already underway, D'Costa and others conclude that turning to foreign labor is ultimately necessary, at least as part of the solution to this problem. Due to a domestic shortage of skilled labor, Japan has no choice but to start looking outside its borders to fill its economic needs. And in today's globalized world, many other countries already have. The Pacific Council estimates that "only 0.2 percent of Japan's population is foreign-born—compared with 20 percent of Australia's and 12 percent in the United States—despite the fact that the United Nations estimates that Japan will need 600,000 immigrants per year to fill its labor shortages"(17). Furthermore, it points out that regions such as Hong Kong and the US already turn to foreign labor to support many skilled industries. Japan must follow the rest of the world in taking advantage of today's interconnectedness and greater access to freer flows of foreign labor to capitalize on these global opportunities.

But Japan faces several obstacles to attracting foreign labor. First, Japanese nationalism and an insular culture have supported laws and regulations that are burdensome and unfriendly to foreign labor. According to the Pacific Council report, "Japan has always been an insular nation and has generally tended to make immigrants feel unwelcome"(17). The report cites government regulations that have forced foreign workers underground and prevented more from coming. These types of inward-looking policies need to be changed to accommodate and attract foreign labor. Otherwise, these policies and attitudes will continue to deprive "Japan of a potential gold mine of human capital […]"(Pacific 17). But even if Japan does reduce restrictions and reform regulations on foreign labor, global competition for highly skilled labor has increased and will be an obstacle for Japan. D'Costa's points out that Chinese and Indians—both important potential candidates for skilled foreign labor—are already being recruited by countries such as the US. As countries all over the world develop IT industries, demand for skilled labor and highly trained workers from these countries will increase and Japan will have to face competition to attract this labor.

Japan should look to the United States as a model for overcoming these obstacles. The US is successful in attracting foreign students into its educational system, providing foreigners with technical and highly skilled training. According to D'Costa, "The US is attractive for students because of excellent, post-baccalaureate science and engineering programs in large, well-endowed university systems, financial assistance for students, professional opportunities, and, until recently, a very receptive attitude toward foreign students based on the broader liberal political culture." But the US also provides professional employment opportunities beyond education. The Pacific Council report points to the Silicon Valley as a successful contrast. It claims that the Valley is "where skilled immigrants played a crucial role in its emergence as the global center for technological innovation"(17). The report also points out that immigrants account for a quarter of the Valley's population and that one in three technology workers there are foreign born. The success of the US in attracting foreign students and foreign skilled workers, best exemplified in the Silicon Valley, is surely a model for Japan to consider.

Much of this success may also be supported by the high level of tolerance for and history of immigrants. The US has long been known as a country of immigrants, been compared to a "melting pot" of different peoples, and has a long history of immigrant success stories. This history and general openness of American liberal society may be the source of relatively friendly reception to immigrants, reflected in both societal attitudes and laws.

America's unskilled labor problem

Despite successes in attracting skilled labor, issues remain with regards to unskilled labor in the US. Many US industries rely on cheap, unskilled labor to grow and to remain profitable. These include agriculture, construction, and hospitality services including restaurants and hotels, and other unskilled services such as cleaning, housekeeping, and gardening. As the economy grows and these industries continue to expand, they are constantly demanding more and more unskilled labor. The problem is that as the demand for unskilled labor increases, the American people are becoming more and more educated and trained as skilled workers. Also, demographics in the US are similar to those in Japan in that as the baby boomers retire, the next generation is proving to be a much smaller replacement. These forces are working to create a shortage in unskilled labor.

The demand for unskilled labor by US firms has been continually met by immigration from the US southern border, most notably from Mexico and Central America. Lucky for the United States, it shares a border with a country with a large population of young, unskilled laborers willing to cross the border to fulfill US labor shortages. The US should consider itself fortunate to be geographically positioned to take advantage of the mutually beneficial relationships it could have with its neighbors. While the US has a shortage of cheap unskilled labor, Mexico has an overabundance of it. Natural supply and demand principles support the flow of labor from Mexico into the US. US firms are able capitalize on this source of external labor, continue to grow and contribute to US GDP while foreign laborers send money back to their home countries in the form of remittances which serve to boost foreign economies. The flow of labor and capital across the US and its southern neighbors is globalization at its best, providing a win-win situation for countries involved.

But many in the US do not see the benefits of the labor flow from the south. In particular, many citizens, politicians, and pundits are raising concerns about the amount of immigrants that illegally migrate to the US. Recent laws have been proposed in many states that seek to curb illegal immigrant rights, strip them of basic services, and increase deportations. These measures, if successfully enacted, could serve to increase the costs of immigrants coming to the US and may slow the flow. This would be counterproductive for the US economy which is demanding cheap unskilled labor in any form—legal or illegal.

In the immigration debate, economists should point out the necessity of foreign labor flows into the US to fulfill unskilled labor demand. Economists should point to Japan as an example of the dangers of anti-immigration atmospheres and their potential threats to the economy. The debate requires more emphasis on the economics of the issue to show that allowing unskilled foreign labor into the country is the solution, not the problem.

Conclusion

While the demographic crisis of a shrinking population is threatening both Japan and the US, the issue is affecting different sectors of their respective economies and both countries have had different experiences in coping. Japan is dealing with a shortage in its skilled sector because of the aging population and lack of training among the next generation. Japan must look to outside sources of trained labor and adopt aggressive measures to attract it in order to compete in the global environment. The US has had success in this strategy and Japan can learn from this example, but the US is not exempt for labor shortage problems.

The US demographic crisis, in contrast to Japan, is most affecting the unskilled labor market. While it has had relative success in fulfilling labor needs with immigrants from Mexico and its southern neighbors, recent political rhetoric threatens to stifle that flow. Politicians, the media, and political pundits seem to be ignorant to the importance of unskilled foreign labor to the US economy and should heed warning signs by looking at Japan's crisis.

In conclusion, the demographic crisis is a far greater threat to Japan than to the US. The US has found relative success in attracting foreign skilled labor while it also enjoys the advantage of geographic proximity to cheap unskilled labor to meet unskilled demand. The Japanese should learn from the US to take advantage of global flows of labor and aggressively seek it out, while the US should be cautious about recent rhetoric attempting to curb global labor flows.

References:
D'Costa, Anthony P.
"Adjusting to Globalization: Japan and the Mobility of Asian Technical Talent - Abridged Version."
"Can India Meet Japan's Technical Worker Needs?"

Pacific Council on International Policy.
Can Japan Comeback? A Pacific Council on International Policy Task Force Report. Nov. 2002. (PDF)