Reflecting Labor Costs: Essential Step for SMEs to Realize Wage Increases

To overcome high prices and to achieve a virtuous cycle in the economy, it is essential to realize wage increases at small and medium-sized enterprises (SMEs), which account for 70% of overall employment in the nation. Large companies should strive to make appropriate business deals with them so that the trend of wage increases will spread to SMEs.

The government has compiled and released a set of guidelines to enable SMEs to pass the increases in labor costs on to their prices when conducting business with large companies.

The Japan Fair Trade Commission (JFTC) has been urging the large companies on the client side to accept cost increases from SMEs, and the JFTC has taken such measures as announcing the names of large companies that have been hesitant to do so.

As a result of such measures, progress has been made to a certain extent in passing on raw material and fuel costs. JFTC investigations revealed, however, that SMEs have not been able to sufficiently pass on higher labor costs in their prices, so the government has now compiled the guidelines focusing on labor costs.

In order to promote wage increases among SMEs, it is important to create an environment in which labor costs can be accurately reflected in prices.

The guidelines explicitly state that it might be a violation of the Antimonopoly Law for large companies and the like that place orders to refuse to negotiate on prices so that transaction prices are left unchanged, and it also outlines the actions that are required for the ordering side and the fulfillment side.

Order-placing large companies are also requested in the guidelines to have price negotiations with SMEs on a regular basis and have their top management formulate a policy of accepting prices reflective of labor costs and then make this policy known internally and externally.

These measures have been created because it has been argued that, even if the top managements of large companies are willing to accept prices reflective of labor costs, there are cases in which people in charge on the front line do not agree to the price increases for the sake of their own performance evaluations.

The guidelines also requested that prices be set with consideration of the entire supply chain so that the effect of reflecting labor costs in prices will spread across a wide range of subcontractors.

The government also requested that the fulfillment side should make effective use of consultation services provided by organizations such as from the central and local governments and chambers of commerce and industry.

The central government needs to step up monitoring to ensure compliance with the guidelines.

In Japan, prolonged deflation has naturally restrained wage increases because companies have been increasingly conscious of the need for cost-cutting measures to secure profits.

According to a private-sector survey released in October, the percentage of cost increases reflected in consumer prices stood only at 29% in Japan for the service industry, where a high proportion of the cost is labor. This is extremely low when compared to 100% in the United States and 70% in Europe.

The main victims from this situation are SMEs. It is essential for corporate managers to change their traditional mindset of placing the highest priority on cutting costs.

Large companies are performing well, and overall profits of listed companies are at record-high level. There should be ample room for large companies to proactively accept prices reflective of labor costs.

(From The Yomiuri Shimbun, Dec. 4, 2023)