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 scholars.

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.