Uptick in Productive Jobs Needed to Spur Growth

Seeking to revitalize the Japanese economy, the government has recognized that it is urgent to create a labor market in which workers are encouraged to strengthen their abilities by reskilling at their own initiative, to facilitate a shift in the labor force to growth sectors. This point is included in the annual Basic Policy on Economic and Fiscal Management and Reform that was approved by the government at a Cabinet meeting in June.

Unlike the West, the United States in particular, the portion of Japanese workers who move from company to company or from industry to industry has remained so low it has impeded economic growth. Recognition of this labor mobility problem isn’t new — it’s been pointed out time and again for more than 30 years.

Let’s examine mobility from the perspective of labor productivity, which measures the economic value — the product, or sum, obtained by multiplying the quantity and value of goods and services — each employee creates per unit hour of labor. For example, if a worker employed by Company B, which has a productivity score of 2, moves to Company A, which has a score of 5, and similar labor shifts occur across Japan, the overall economic value would in theory increase by the equivalent of this 3-point improvement.

If wages change in proportion to productivity levels, the new wage of the above-cited worker could jump by 150%. In other words, this hypothetical case would benefit all three sides — the more productive enterprise, Company A, can employ the right worker for a particular job; the worker is highly paid; and the Japanese economy consequently grows.

That’s the theory, but reality isn’t as simple. If certain companies offer better employment terms, people choose on their own — without being told by others — to switch to such companies. Wages are a top concern for everyone. If things work in accordance with the three-way satisfaction theory, people are likely to land jobs at highly productive, high-paying companies. But what is actually happening in Japan in this regard?

A 2021 survey on employment trends by the Health, Labor and Welfare Ministry showed that among workers who changed their jobs, only 34.6% saw their wages increase, while 35.2% ended up with lower wages and 29.0% saw no change. It is clear from this data that only a minority of Japanese workers get higher wages after job changes. This situation has remained unchanged for a quarter of a century, dating back to 1998 when Japan plunged into a financial crisis.

According to wage-change data, people ages 49 and younger who get higher wages when they change jobs outnumber those in the same age group who receive lower wages. The situation is reversed for people ages 50 and older, with a surge in the portion of people who get lower wages. In the case of people of advanced age, there is no need to explain why it is difficult for them to change careers.

Lack of skills not only cause

The government has thus begun emphasizing that workers need to reskill to get higher-paying jobs. This narrative originates from the perception that a lack of necessary skills is preventing Japanese workers from changing jobs as they would like to.

Senior workers looking for new jobs are more likely to get lower wages. But it is doubtful that a lack of competence is the real cause of their disadvantage. Now that Japan is finally witnessing the onset of a severe labor shortage, the circumstances surrounding senior workers are changing drastically.

Of all companies in the country, 22.2% have already extended the mandatory retirement age of employees to 65, while nearly 40% now allow employees to keep working until they are 70 or older. The time has therefore arrived to review the existing practice of lowering the income of employees who are given an opportunity to be rehired at age 60. Indeed, companies are paying renewed attention to senior workers’ capabilities.

Caution is required, too, regarding how to define the productivity gap that has triggered the ongoing debate about the necessity of reskilling. It isn’t wrong to perceive that higher productivity can be achieved through a workforce that is competent enough to fully utilize cutting-edge equipment and information technology. But that doesn’t necessarily explain everything.

For instance, the productivity of an attendant assigned to a building’s parking lot is measured by how many vehicles are guided per hour or day. The number of vehicles varies, depending on how many use the lot during any given hour or day — a factor that has nothing to do with the facility itself or the worker’s expertise.

As in this case, productivity reflects both increases and decreases in demand for goods and services. In fact, the overall economy’s productivity tends to show an uptick in a boom phase and a decline in a bust cycle. It should be noted that major changes are unlikely to occur to technology or workforce expertise during either phase.

For the parking lot attendant, the key to improving productivity isn’t the worker’s prowess but an increase in the number of vehicles coming to the facility, which reflects the company’s ability to attract customers.

Productivity is determined by supply-side and demand-side factors. The supply-side determinants include whether cutting-edge technologies are used in each pertinent sector, industry and enterprise, and whether capital has been augmented to develop next-generation technology. On the other hand, productivity growth hinges on the extent to which demand can be increased. As such, higher productivity in technological terms doesn’t always mean a spike in demand.

Raise productivity in services

In the overall economy, productivity is high in manufacturing and low in nonmanufacturing, especially the services sector. So, is it advisable to stimulate a workforce shift from services to manufacturing? No, it isn’t. Demand in manufacturing is so limited that the sector cannot afford to make full use of certain productivity gains enabled by technology.

The Japanese manufacturing sector’s workforce decreased from 14.96 million in 1994 to 10.44 million in 2022. To ensure employment in the sector, manufacturers need to develop new demand across the global marketplace through technological innovation essential for future “monozukuri,” or the making of things.

The services sector must cope with a much greater challenge.

It is currently enjoying a tailwind, with demand shifting from goods toward services, reflecting the ongoing change in the economic system. Nonmanufacturing output now accounts for three-quarters of Japan’s gross domestic product. Demand for medical and nursing care services keeps increasing in the face of the graying of Japanese society.

Nonetheless, the services sector’s productivity is regrettably not high. The novel coronavirus pandemic exposed an array of problems facing Japan, including a delay in digitization. The fact that productivity in the services sector is high in certain advanced countries means that services sectors elsewhere are not necessarily inferior to manufacturing in terms of productivity. The challenges facing Japan’s services sector are related to broadly defined technologies.

As long as the increasingly prominent services sector remains low on productivity, there can be little prospect for the emergence of a workplace environment that is so good for workers in the rest of the labor market to feel induced to switch to it. Workers in Japan remain indisputably unenthusiastic about changing jobs.

The government’s Basic Policy calls for revising a set of related practices and systems that hinder labor mobility, such as a reduction in retirement benefits in the event of early resignation for personal reasons. However, it should be noted that such revisions alone can hardly provide a complete solution.

One key issue is geographic labor mobility, which refers to people’s ability to work in certain locations. When Japan experienced its postwar period of high growth, numerous boys and girls left their regional birthplaces for metropolitan areas under so-called mass recruitment programs. But the number of such young people moving from their hometowns to other areas for employment has been decreasing. Moreover, a growing number of young people now are inclined to stay in their native areas because of the need to provide nursing care for their parents.

So, what should be done to address these circumstances? Companies in both the manufacturing sector and the nonmanufacturing sector should promote innovation in response to the emergence of regional challenges, with a view to creating highly productive jobs.

Hiroshi Yoshikawa

Yoshikawa is a professor emeritus at the University of Tokyo. He has served as the chair of the Fiscal System Council, an advisory panel to the finance minister. He is the author of “Reconstruction of Macroeconomics: Methods of Statistical Physics, and Keynes’ Principle of Effective Demand.”

The original Japanese article appeared in the Aug. 20 issue of The Yomiuri Shimbun.