Japan’s Labor Market Challenges

Giovanni Ganelli, Deputy Head of Office

IMF Regional Office for Asia and the Pacific Tokyo, January 2016

Overview

Boosting the labor force

Labor market duality and productivity

Labor market duality and wage-price dynamics

Boosting the Labor Force

Population and labor force are shrinking

Actual and Trend Labor Force (In million)

Source: Ministry of Health Labour and Welfare, Ministry of Internal Affairs and Communication, and Cabinet Office and IMF Staff Calculation.

Population Growth Rate (In percent)

Source: National Institute of Population and Social Security Research.

Demographics will weigh heavily on potential growth

Employers are facing the worst labor shortage in 20+ years

-60

-50

-40

-30

-20

-10

0

10

20

30

40

1985 1988 1992 1996 2000 2003 2007 2011 2015

All industries

Manufacturing

Nonmanufacturing

Excess

Shortage

(D.I.; “excess” minus “shortage”)

Bank of Japan Tankan Survey

Employment Condition by Industry Type

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1985 1990 1995 2000 2005 2010 2015

Nationwide Job-to-Applicant Ratio

Source: Bank of Japan Source: Ministry of Health Labour and Welfare.

Note: 2015 data is Jan-Oct average

But there are signs that there might still be some slack in the labor market

1000

1200

1400

1600

1800

2000

2200

2400

2600

2800

3000

1980 1986 1992 1998 2004 2010

Average Annual Hours Actually Worked per Worker (Hours)

France

Germany

Japan

Korea

United States

OECD countries

2014

25%

21%

18%

12%

8%

4% 12%

Flexible working hours Income supplement

Regular jobs unavailable Balancing with houseworks Leveraging specific skills Shorter commute Other

Reason for Working as a Non-Regular

Employee, 2014

Source: OECD.

Note: Germany is represented by West Germany until 1990 Source: Ministry of Internal Affairs and Communication

Policy options to address labor shortages

Increase labor inputs through supporting the shift from part-time to full-time

Boost female labor force Raise female labor participation rate Abolish tax wedge and social security disincentives Terminate spouse allowance payment

Increase take-home pay Support wage increase Lower social security premiums subject to fiscal space

Foster continuing attachment of older workers Raise pensionable age Reduce over-generous benefits

Increase the supply of foreign labor

Female participation has been rising 9

20

30

40

50

60

70

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014

Japan United Kingdom United States

Germany Korea

Female Labor Participation Rate (In percent)

Source: OECD

20

30

40

50

60

70

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014

Canada Germany

France G-7

United Kingdom Italy

Japan Korea

United States

Source: OECD

Older Worker Group Employment Rate (In percent; 55-64 year-olds)

Older workers’ participation is relatively high

10

Source: OECD.

(In percent, age 55-64)

Older Worker Group Employment Rate

Percentage of foreign workers in Japan is the lowest among OECD countries

0.3 1.3 2.2 2.73.9 4.8 5.4 5.6 6.6

7.8 7.99.6

8.29.4 9.5

13.4

21.8

66.7

0

10

20

30

40

50

60

70Ja

pan

Hu

ng

ary

Ko

rea

Fin

lan

d

Neth

erl

an

ds

Den

mark

Cze

ch R

ep

ub

lic

Fra

nce

Italy

Un

ited

Kin

gd

om

Gre

ece

No

rway

Sp

ain

Germ

an

y

Belg

ium

Au

stri

a

Sw

itze

rlan

d

Luxe

mb

ou

rg

Stocks of Foreign Labor Force (percent of labor force; 2008)

Source: OECD “International Migration Outlook 2010”

Labor Market Duality and Productivity

Labor market duality is deepening

31.4

32.6 33.0

33.5

34.1 33.7

34.4

35.1 35.2

36.7

37.4

28

29

30

31

32

33

34

35

36

37

38

2004 2006 2008 2010 2012 2014

Ratio of Non-Regular Workers (In percent)

0

5

10

15

20

25

2004 2006 2008 2010 2012 2014

Number of Employees by Employment Type (In million)

Regular - male

Regular - female

Non-regular - male

Non-regular - female

Source: Ministry of Internal Affairs and Communication.

Female labor participation is skewed toward non-regular contracts

69.3

10.3

50.5

37.9

51.6

62.2

48.6

0

10

20

30

40

50

60

70

80

90

100

Regular employees

Part-time workers

Temporary workers

Dispatched workers

Contract employees

Entrusted employees

Other

2007 2014

Female Representation by Employment Format (In percent)

Source: Ministry of Internal Affairs and Communication

Labor market duality has reduced investment in human capital

Labor market duality reduces training opportunities for non-regular workers

Only 42 percent of companies provided training for non-regular workers, where as 92 percent of companies provided training for regular workers (Kawaguchi and others, 2006)

Workers productivity improves 5 percent per year if a worker receives training

Additional 5 hours of training will allow the worker to take up one additional operational task (Ariga and others, 2013)

53.1 50.3 49.4

37.5

29.3 27.3 25.5

20.0 19.2

0

10

20

30

40

50

60

2010 2014

Issues Related to Non-Regular Workers

(In percent of total employers)

Source: Ministry of Internal Affairs and Communication

Contract reform to reduce duality would boost efficiency through higher productivity

Excessive Duality can reduce Total Factor Productivity (TFP) through various channels (e.g. training, motivation)

20 percent of the productivity slowdown in Spanish manufacturing (1992-2005) is attributed to reliance on temporary work (Dolado and others 2011)

Deregulation of temporary contracts negatively influences TFP growth in a panel of 14 EU countries (Damiani and others 2011)

Labor Market Duality and Wage-Price Dynamics

Labor market duality has also suppressed wage growth…

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0.0 0.5 1.0 1.5 2.0

Real w

ag

e g

ro

wth

Labor productivity growth

Sources: OECD, and IMF staff calculations.

Real wage and productivity growth (In percent, 1992-2014)

27

29

31

33

35

37

-3

-2

-1

0

1

2

3

2001Q3 2003Q3 2005Q3 2007Q3 2009Q3 2011Q3 2013Q3 2015Q3

Changes in part-time wages

Composition effect

Change in full-time wages

Share of nonregular workers (right side) 1/

Sources: Haver Analytics; and IMF staff estimates.

1/ Yearly Average.

Nonregular Workers and Wage Growth (year-on-year percent change) (% of staff)

…notwithstanding labor shortages

Manufacturing

Construction

Real Estate

Wholesaling &

Retailing

Electric & Gas

Utilities

Transportation

Info.

Communication

-3

-2

-1

0

1

2

3

4

5

6

-40 -30 -20 -10 0Changes in Employment Conditions

Wag

es G

ro

wth

Changes in Employment Conditions and Wages Growth 1/(2010Q4-2015Q3)

Source: Haver Analytics.

1/ Diffusion index. More negative indicates more tightening.

-6

-4

-2

0

2

4

6

8

1990 1995 2000 2005 2010 2015

Wage Growth(In percent, YoY)

Shunto wage growth Nominal wage growth

Source: Ministry of Health, Labor and Welfare

Findings from Porcellacchia (2015)

If

1. the economy is in the liquidity trap and

2.workers’ bargaining power deteriorates

then

1. prices decrease regardless of monetary policy and

2.real wages decline below productivity.

If

1. The decrease in workers’ bargaining power is large,

2. The inflation target is low,

3. The economy’s discount rate is low (due to population aging or a deleveraging shock)

then

the economy is more likely to fall in the liquidity trap.

The Labor Market Policy Trade-Off: Reflation vs. Employment

In the liquidity trap, it is possible to reflate the economy by increasing workers’ bargaining power with a labor-market reform (in Japan’s case, by reducing labor-market duality)

However, the benefits of reflation must be weighted against the

downside of a reduction in employment This is an unusual trade-off: an inverted Phillips curve relation.

Porcellacchia (2015) is the first to make a clear theoretical case that structural reforms can be inflationary in the short term in certain countries (i.e., Japan)

A labor market reform should be accompanied by corporate governance reforms to strengthen the incentives for firms to pass on the higher costs (from higher wages) into prices

Policy options to raise wages

Raise public and minimum wages

Provide/further strengthen tax incentives for employers that rose wages

Increase the frequency of the wage rounds

Apply “comply or explain” rules for wage hike, backed up by penalties if needed

Reduce labor market duality

Reform labor contracts and laws to balance job security and job flexibility

Thank you