Solving Japan’s Wage Stagnation Syndrome

Getting Japan’s companies to raise wages by 3 percent per year is one of Prime Minister Kishida Fumio’s declared goals, just as 2 percent annual hikes was a goal for Abe Shinzo before him. And yet, like Abe, Kishida seems to be doing little more than publicly urging companies to hike wages and offering a different version of a tax break that’s been offered periodically for years. The latter has proven ineffective, partly because it’s just temporary and companies don’t want to make a permanent commitment for a temporary benefit. Unless Tokyo is willing to address the root of the problem, Kishida’s efforts will prove as fruitless as Abe’s.

Japan is hardly the only rich country where real (i.e., price-adjusted) wages have been suppressed in the last few decades. But its performance on this front is second only to Greece, with virtually no growth in a quarter century. Across the mature economies, wages have stopped doing what they had been doing for much of the past two centuries: growing over the long term at around the same rate as GDP. During 1996-2019, productivity, i.e., GDP per work-hour, grew 30 percent in 16 rich countries. However, real hourly compensation (wages plus benefits) grew only 19 percent. While Japan’s productivity growth more or less matched the others, labor income grew a negligible 3 percent, creating the biggest gap between productivity and wages among OECD countries. This performance is particularly shocking considering that, until recently, Japan’s workers got a higher share of national income than workers elsewhere.

This widespread slump in wage growth defies both history and economic theory. For decades, the textbooks have told us that, in order for a market economy to be stable over the long term, consumer demand – and hence labor income – has to grow around the same pace as output. Consequently, ever since the 1800s, the share of national income going to workers as opposed to owners of capital (in the form of profits, interest, rent, and dividends) has fluctuated around a fairly constant level. Then things changed. “In advanced economies, labor income shares began trending down in the 1980s, reaching their lowest level of the past half century,” the IMF reported in 2017. From 1990 to 2009 the share of labor income declined in 26 of 30 rich countries, with the typical decline being from 66.1 percent to 61.7 percent.

One consequence is ever-rising budget deficits. Since suppressed wages result in anemic consumer spending, most rich nations have had to make up for the shortfall in overall demand by spending a lot more than they receive in taxes. It’s no coincidence that Japan, which suffers the worst case of wage suppression, also relies the most on deficit spending.

Is there anything policymakers can do to remedy the situation? While economists disagree, the brunt of the evidence suggests that the answer is yes.

Technology or Political Power?

Some economists contend that the primary culprit in wage suppression is the rise of Information and Communications Technology (ICT). More than past technologies, they contend, ICT has decreased demand for labor, particularly low-skilled or medium-skilled labor, while increasing demand for high-skilled labor. That’s why more of the fruits of growth have gone to owners of capital. The IMF reported, “The decline in the global labor share has been borne by low- and middle-skilled labor. During 1995–2009 their combined labor income share was reduced by more than 7 percentage points.” The IMF estimates that new technology is responsible for about half of the entire decline in the labor share of national income. This effect is amplified somewhat by globalization, but far less than populist politicians claim. If technology is destiny, it would seem that policymakers have little recourse.

Yet, technology surely cannot be the whole story. After all, wage suppression began during the late 1970s to early 1980s: two decades before the marriage of the Personal Computer and the internet sparked the ICT revolution. In Japan, it goes back to at least 1980 (the earliest for which we have comparable data) and probably to the mid-1970s. Moreover, since rich nations have access to the same technology, why do countries differ so much in the size of the wage-productivity gap? Why, for example, has the labor share of income increased in some countries?

Hence, some experts correctly stress the political and bargaining power of labor. As early as 2001, Olivier Blanchard, who would later become chief economist of the IMF, argued that the decline in the wage share resulted from weaker unions, neoliberal deregulation measures, and the ebbing of past alliances between labor and political parties. In the typical OECD country, union membership peaked in the late 1970s at half of the entire labor force. Since then, it has steadily tumbled to just 20 percent. In Japan, a third of workers were in unions during 1960-75; now it’s just 17 percent.

At the same time, as antitrust enforcement diminished, “superstar” companies gained an inordinate share of the market in a growing number of leading industries. That gave them greater bargaining power vis-à-vis both consumers and employees. The labor share declined more severely in such industries.

Institutions and Policies That Make a Difference

To the extent that a balance of power, rather than technology, is at play, then policy solutions are more feasible. One big clue is how much the fate of wages from country to country depends on their institutions and policies. Three of the four countries where wage growth actually surpassed productivity growth were the three Scandinavian countries, where labor has great political strength. On the other hand, three of the four countries where labor’s share of national income declined the most were Japan, the U.S., and South Korea, the three countries with the smallest share of the workforce covered by collective bargaining agreements.

On the policy front, the labor share of income can be raised by several percent of GDP by so-called “active labor measures.” These are measures that help workers who’ve lost jobs find new ones via retraining, programs to match employers and employees, etc. Confidence in being able to get a good new job enhances workers’ ability to resist demands for wage restraint. Not surprisingly, Japan and the U.S. come near the bottom in spending on such measures as a share of GDP, while the Scandinavians spend the most.

What Makes Japan Different?

While global trends are powerful, they don’t explain why Japan’s situation is so much worse than elsewhere. What is different about Japan? The biggest factor is the sharp upsurge of poorly paid non-regular workers. They rose from 15 percent of the labor force in the 1980s to nearly 40 percent these days. Regular workers, on average, earn 2,500 Japanese yen ($21.50) per hour. However, temporaries get just 1,660 yen ($14.30) and part-timers a meager 1,050 yen ($9.05). This practice holds even when regulars and non-regulars work side by side doing the same job. Moreover, the growth of the non-regulars has weakened the bargaining power of the regulars. That’s one reason that, from 2007 to 2018, the real wage of regular workers fell by 1 percent.

Digging still deeper, we find that in France as well, non-regulars make up a third of France’s labor force. Yet, the country suffered only a small wage-productivity growth gap during 1995-2011. Why is the outcome different? In both countries, the law requires equal pay for equal work. France, however, enforces its law, including with use of labor inspectors. In Japan, by contrast, no ministry is mandated to investigate the problem and prosecute violators. Victims have to launch and pay for their own lawsuits and the courts almost always side with the employers. Moreover, virtually all French workers – both regular and non-regular – are covered by union contracts, whether or not they belong to the union. In Japan, only union members are covered by the contracts and, by law, temporary workers are prohibited from joining a union. The result: French regular and non-regulars in the same occupations and companies get the same compensation per hour. Finally, France spends 2.2 percent of GDP on active labor measures, the fifth highest out of 25 OECD countries. To be sure, France’s non-regular workers face many difficulties, from fewer hours of work to denial of certain benefits to great difficulty in moving to regular status, which is also a problem in Japan. Outright pay discrimination, however, is not one of their problems.

If Kishida really wants to change the situation, enforcing the country’s laws would be a very good place to start. That, however, would require stepping on the toes of the country’s powerful employers, key backers of his party. The latter are being short-sighted. Yes, one company can boost profits by cutting wages; when everyone does so, who then has the money to buy their products? Since verbal arguments do not persuade them, there is a need for stronger action.