Japan´s Labour Dilemma

22.09.14 Publication:

The most fashionable topic in economics
right now is labour markets. That’s quite a change: nobody has paid
much attention to labour for many years. But in three of the world’s
biggest and richest economies – the United States, Japan and
Britain – the key to working out what will happen in the near
future is now an understanding of the labour market. It isn’t easy,
as Japan has showed.

The most important question in all
three of those countries is this: when will economic growth encounter
a shortage of labour? At that point, wages and inflation can be
expected to begin to rise. In America and Britain, that will be a
signal that the central bank will need to tighten monetary policy.

In Japan, by contrast, with its long
deflationary history, it will be a signal that monetary policy is
working. It should mean that household spending is now able to rise
more rapidly, boosting overall demand and perhaps providing an
incentive for businesses to invest more money. It will be a sign that
Abenomics is finally working.

Since Japan’s government has set
inflation as one of its main economic goals, and as Prime Minister
Abe himself has forecast an imminent “wage surprise”, in which
companies raise salaries sharply, this is a particularly important
question. A common answer has relied on labour-market and demographic
statistics. These indicate that the country should now be
encountering a labour shortage, so wages should be rising. The puzzle
is, however, that wages are not in fact rising.

The way in which labour has become a
central issue was demonstrated in August by the annual get together
for central bankers and economists that is hosted in Jackson Hole,
Wyoming, by the Federal Reserve Bank of Kansas City, one of the
regional institutions that form America’s central banking system.
This is always an important event, since it combines speeches by the
world’s top central bankers with some thoughtful discussions led by

What the presentations showed,
however, was that deciding whether or not there is a labour shortage
is not at all straightforward. It sounds obvious: count the number of
workers, and if the number demanded by companies matches or exceeds
that total, then there is a shortage. The trouble is that human
behavior is never that simple. The number of workers is actually
rather difficult to count.

Naturally, one of the top central
bankers who gave presentations at the event was the governor of the
Bank of Japan, Haruhiko Kuroda. The charts he used to explain and
analyse the Japanese labour market can be found on the Federal
Reserve Bank of Kansas City website.

The most instructive of those charts
is one showing the growth of the number of full-time workers on
regular contracts and the growth of part-time workers and others on
irregular, short-term contracts. There is a steady rise in the number
of part-time and irregular workers, which shows no sign of ending.
Such workers now account for nearly 40% of Japan’s labour force.

It is worth combining that statistic
with some others on Japan’s labour market. It is well known that in
recent years Japan’s population has begun to fall and the number of
people over the age of 65 has been rising. Both these facts have been
expected to lead to the famous shortage of labour. Yet they haven’t,
not yet.

Japan’s total labour force,
according to the official count, peaked in 2001 at slightly more than
67 million people. It has now fallen to slightly more than 66 million
people. The unemployment rate has been falling too, currently to 3.7%
of the labour force. So there must surely be a shortage of labour.

Well, perhaps, but what do you mean by
“labour” and “shortage”? These days, people move in and out
of what economists define as “the labour force” more than they
used to. They have more choices.

The male labour force, according to
the official definition, peaked in 1999 at a little over 40 million
and is now 37.6 million. Back in 1999, the female labour force was
27.4 million. Now however, more than 28.4 million women are in the
labour force, an all-time record. There are fewer women in the
Japanese population than before, but more of them are working.

Older people are especially hard to
assess. Are “retired” people in the labour force or not? It
depends on whether they want to work and can find a job. The
proportion of those over the age of 65 who are in work has risen
steadily: in 2003, only 34.7% of those aged 65-69 were in work, but
in 2013 the figure had grown to 39.8%. Given that the absolute number
of those in that age group has risen, this implies a substantial rise
in the supply of labour.

What does all this mean? It means that
Japan does not at present have a shortage of labour. That is why
wages are not rising.