New Challenges for Japan's Labor Market
Speech at the Japan Summit 2016 in Tokyo
Haruhiko Kuroda
Governor of the Bank of Japan
Introduction
It is my great pleasure to have the opportunity today to speak at this Japan Summit 2016.
Today's summit brings to the fore the new challenges for Japan's labor market in responding
to advances in technological innovation, globalization, and demographic change.
Whether Japan's economy will grow in the long-run depends on whether the country's labor
market can successfully adapt to this changing environment. Indeed, labor market reform is a
vital part of the current government's policy agenda. As for the long-term economic outlook,
given Japan's aging population and low birth rate, an increase in labor force participation and
a further rise in labor productivity are both essential if Japan is to lift sustainable long-run
growth, in other words, to raise its growth potential.
Today, I offer my own vision of the future for Japan's labor market, and look at how it will
strengthen the growth potential of our economy.
Feature of Japan's Labor Market
IT-related developments and globalization have affected Japan's labor market. The
manufacturing industry, in particular, has seen existing jobs being replaced with machines
and outsourcing to other countries, resulting in downward pressure on wages and lost job
opportunities.
However, there is a view that Japan's labor market as a whole has not undergone drastic
changes. Our well-known system of life-time employment and seniority-based wages
virtually continues to this day. This practice prevailed among Japanese firms especially
throughout the period of high economic growth. Legal norms developed to support this
system provided the firm foundations for the job security enjoyed in Japan's labor market.
With the Japanese economy entering a period of stagnant growth in the second half of the
1990s, the economic situation underwent dramatic changes. Nevertheless, despite shifts to
the use of non-regular workers, the employment and wage system for regular workers
remained virtually the same. Indeed, the average number of working years at a specific firm is
about 14 years for Japanese male workers, the highest among advanced economies; this
compares, for example, with five years for those in the United States and nine years in the
United Kingdom. When looking at the evolution of wages over male workers' lifetimes,
wages are seen to approximately double after 30 working years compared to when they first
started working -- once again the highest such figure among advanced economies. In addition,
labor mobility in Japan across firms and industries has been low, especially among regular
workers who tend to stay at the same company or within the same industry throughout their
careers.
The gradual pace of change in the labor market may arise because how we work is closely
related to other aspects of our way of life as well as social values and norms. I believe that the
rapid socio-economic changes of recent years mentioned here at this summit will, however,
bring a significant change to the Japanese labor market over time.
Three Challenges for Japan's labor market
It is my belief that labor markets should adapt to the changing economic environment in a
flexible manner. In this sense, customs and institutions -- which have long structured Japan's
labor market -- must be transformed in order to boost our country's growth potential.
Although further discussion is needed on the nature of these transformations, today's summit
has given us some insightful hints. From now on, I will refer to the three challenges for the
labor market which I think are important.
The first challenge is how our labor market will respond to further advances in technological
innovation. It is often pointed out that recent technological innovations, namely in robots, AI,
and big data, will encourage substitution between workers and machines. There are concerns
that such substitution may extend into a broader range of fields than we have hitherto
experienced -- even into fields previously believed to be "sacrosanct" and reserved
exclusively for humans. However, history tells us that technological innovation generates
economic prosperity in the long run. Technological progress increases income and
purchasing power, as well as demand for new goods and services; furthermore, it creates new
jobs. In this situation, we should ensure the smooth transition of labor to growing sectors with
new jobs so as to reap the benefits of technological innovation. Japan's labor market is,
however, well known for its low labor mobility due to long-standing life-time employment
practices. From now on, our labor market should embrace new practices that accommodate
workers seeking transition from one job to another, with programs for re-training and a social
safety net for the unemployed.
The second challenge is how our labor market will change in the face of further globalization.
Since globalization often goes hand in hand with innovation, it will accelerate improvements
in labor productivity. The next stage of globalization will entail both an increase in the
number of Japanese workers abroad and an influx of foreign workers coming to Japan. Indeed,
government policy has encouraged highly skilled foreign professionals to work in Japan.
Through collaboration and cooperation across borders, firms will take advantage of growth
opportunities overseas, generating new innovation and raising labor productivity. This
process will be accompanied by increased competition, with domestic workers facing
overseas competitors in a much broader range of industries and professions. A labor market
characterized by a variety of workers will require a shift in our thinking regarding how people
work and how they are paid for taking on particular responsibilities. Workers, as well as
goods and services, confront the forces of globalization; the customs and institutions of the
labor market will inevitably be exposed to rising pressure in global competition.
The final challenge is how our labor market will transform in response to demographic
change in Japan. In addition to the policy issues just discussed, I also want to stress the
significance of encouraging labor force participation. This is imperative for increasing
Japan's potential growth rate; and indeed, promoting labor participation of senior citizens and
women is an important pillar of the current government policy. For these policies to be
effective, however, we need to acknowledge that we have reached a turning point with regard
to norms of working style as well as employment and wage structures; these can no longer
exist with the prime-age male worker alone in mind. Japanese firms are already fully aware
that accommodating to changes in the demographic profile while maintaining an employment
and wage system of life-time employment and seniority-based wages is indeed a challenging
task: the aging workforce of baby-boomers has pushed up firms' personnel expenses
substantially in recent years. With new entrants to the labor market in the face of the aging
population, we need to offer a wide selection of choices in terms of working hours and
locations. Furthermore, we should also transform the locus of responsibilities associated with
child-rearing and nursing-care.
Conclusion
The Japanese have long been praised for "working hard," -- in other words, for their diligent
work ethic. I would like us to reaffirm our civic pride in this virtue; however, this time, I mean
"working hard" to have a different sense. From now on, we need to "work hard" to build and
adjust to new customs and institutions that are highly adaptable to a variously changing
environment. It is through providing these new institutional foundations for a remodeled
labor market that we will form the basis for sustainable long-run growth. Finally, though there
is regretfully no time to talk about monetary policy, I can only say that the structural reforms
including labor market reform accompanied by the current easy monetary policy will
contribute to sustainable development of Japan's economy.
Thank you.