Human Capital

01.02.18 Publication:

What is Japan’s biggest economic problem, or at least weakness, as we look ahead towards the 2020s and 2030s?

A lot of people have favourite answers to this question: Governor Haruhiko Kuroda of the Bank of Japan might say it is deflation of prices and wages; others would say it is demography, especially a declining and ageing population; some foreign critics might say it is the country’s enormous public debts; others, perhaps including ‘new economy’ leaders such as Hitoshi Mikitani of Rakuten might say it is a lack of opportunities and openness for entrepreneurs.

My answer is different: human capital. Ever since the Meiji restoration 150 years ago, Japan has been notable for its lack of natural resources, when compared with other big countries, but has always succeeded thanks to its human resources.

The same is true today. Except that while Japan does have excellent human resources, the problem is that it is failing to make good use of them – or, to put it another way around, it is failing to help and enable its human resources to retain, develop and use productively the great skills and talents that it has.

The research and co-ordination think-tank working for all the advanced, developed countries, the Organisation for Economic Co-operation and Development, which is based in Paris and was created in the postwar years to help countries manage their recoveries from wartime destruction, summarises the problem clearly.

In its latest study of Japan, published last year, the OECD observes that Japanese students score among the world’s best when measured for their abilities as teenagers in reading, mathematics and science: the key skills for our modern age.

But when those students enter the workforce, something changes. Compared with other advanced countries, Japan has a much larger proportion of employees doing jobs for which they are over-qualified in terms of educational skills.

This is true of both men and women, but the data for women are quite remarkable: in international surveys cited by the OECD, more than 30% of females find themselves in jobs for which they are over-qualified, compared with an international average for women of about 20%.

Over the past decade, following the 2008 global financial crisis, virtually all the advanced countries have experienced a big and worrying slowdown in their growth of productivity. Since it is growing productivity that enables employees to gain good profits while also paying higher wages, this productivity slowdown is clearly bad for the living standards of workers as well as contributing to slow expansion of household consumption.

When considered alongside the revolution in information technology of all kinds, including automation and artificial intelligence, this productivity slowdown looks very surprising. However, it should not really be surprising given that the 2008 financial crash created high levels of unemployment, and so labour surpluses, all over the rich world. If labour is abundant and cheap, employers have little incentive to invest in labour-saving automation.

That was also true of Japan for a long time. But it is certainly no longer true today. Japan now has a labour shortage, thanks to the declining population. That shortage has been mitigated by a big rise in female participation in the workforce and by the decision by large numbers of men over the retirement age to return to the labour force by working part-time or on short-term contracts. But the shortage is still there, and getting more extreme.

Japan’s productivity slowdown is not especially dramatic compared with slowdowns in Britain, say, or the United States. But it is dramatic compared with Japan’s past record in productivity, and it is highly surprising given the labour shortage. In theory, we should be seeing productivity in Japan growing more rapidly as more employees use automation, including robots, to substitute for scarce humans.

So far, however, this is not happening. The reason is that corporate human resources policies are no longer geared sufficiently towards the development and retention of the fine human capital that Japan’s schools and universities produce at great cost to taxpayers.

Instead, such policies have for nearly 30 years been geared towards obtaining cheaper short-term and part-time labour, while cutting corporate spending on training and development.

The rise to nearly 40% of the labour-force of non-regular employees is the key indicator of this change. Nearly 70% of those non-regular employees are women. Although nowadays slightly more women than men aged 25-35 have university degrees, those skilled women are disproportionately employed in roles that do not use the skills they learned in school and university, and do not allow them to develop further skills.

It really is Japan’s biggest weakness. The superb human capital that both men and women have when leaving school and university is being both wasted and steadily eroded once they join the workforce. Reforming labour laws and reforming HR policies should be the number one priority for Japan, in the coming years.