The changing landscape of Japan’s labour market: how companies should adapt

By Robert Half on 11 October 2016

The labour market in Japan has seen some interesting shifts in recent years. With the unemployment rate improving, and participation rates changing, companies appear likely to face labour shortages in the coming years.

In addition, as the new governor of Tokyo, Yuriko Koike, places equal pay for equal work’ firmly on the nation's agenda, the changing role of women in the workforce will impact how companies recruit and retain talent. Liquidity in Japan’s labour market remains low, impacting companies’ abilities to get the right talent into the right job.

At the recent annual 2016 Robert Half Japan Leadership Forum, Robert Half talked to Robert Alan Feldman, Chief Economist at Morgan Stanley MUFG Securities, to understand these issues and the ways companies should adapt to these unique challenges. Feldman is an esteemed thought leader in the domestic and global economic landscape, and as part of Morgan Stanley’s global economics team, is responsible for forecasting the Japanese economy, financial markets and policy developments.

Brexit impact to Japan’s labour market more likely to be felt long term

As the United Kingdom starts to map out how it will withdraw from the European Union, the world is watching to understand the impact for the rest of the world. For Feldman, however, the impact of Brexit on Japan will be relatively small.

“I think the direct effects of Brexit, will be very small,” says Feldman. “Japanese exports to Europe are about 15% of the total. It’s a relatively small amount, so to the extent that Brexit helps or hurts Europe as a whole, there is some impact on Japan, but not a very large one.”

Longer term, however, an important implication of Brexit for Japan is the likelihood of immigration and emigration patterns changing. Where highly skilled European immigrants were previously attracted to the UK to work, they will now start to look elsewhere. Japan will be an attractive option for highly skilled professionals to advance their career. Says Feldman: “There could be some very interesting impacts on the immigration front as Japan loosens its immigration rules, particularly for highly skilled professionals.”

Top trends to impact Japan’s labour market in 2017

For Feldman, the key trends to impact Japan’s labour market in the next year are threefold; the participation rate for women, equal pay for equal work, and hiring the right person in the right job.

Domestic labour shortage anticipated as participation rates for women in the workforce increase

In 1970, the participation rate for women aged 25-29 was about 50%. Now, it is about 80%. Indeed, in every age group of women, except the 15-19 group, there have been sharp increases in participation rates. “If you look at the participation rates for women in the labour force, they have gone up very very sharply in the last fifty years,” says Feldman. “There has been a very large shift for women across the board in all age groups.” As participation rates for women increase, and the participation rates stay high, a labour shortage appears likely.

“It’s going to be very difficult for Japan to secure extra domestic labour.” As available competition for talent in Japan becomes limited, companies will need to look for alternative methods of recruiting and retaining highly skilled professionals.

Equal Pay for Equal Work

In Japan, it’s not a glass ceiling – it’s "steel," according to Tokyo’s new governor, Yuriko Koike, when interviewed by CNN. "it's more rigid, more chauvinistic, it's really hard to crash."

Japan was ranked by the World Bank as 101st out of 145 nations in gender equality. As more women enter the workforce in Japan, offering equal pay for equal work will become an increasing area of focus for companies wanting to secure the right talent through gender equity.

For Feldman, not only is gender inequality an area of focus, but “it’s also a phenomenon of large companies vs small and medium-sized companies. The average personnel cost for a large company is about 7.1 million yen per year; while the average personnel cost for a medium-sized company is about 4.2 million yen per year. Now, I have a hard time believing that the productivity differential between large and small companies is nearly that large.” Companies need to review their budget allocation for staffing costs to ensure they are competitive against all competitors large and small, and consider reviewing their remuneration policies to attract and keep top talent.

Getting the right person in the right job

According to Feldman, “Liquidity in Japanese labour markets is not nearly as high as it should be, particularly in large firms, because of the lifetime employment system.” The Japanese wage system of nenkō joretsu is an arrangement which encourages young workers to join a company straight after school and remain with them for their lifetime, rewarding them with higher wages as they age. The value of a worker is measured based on how long an employee has worked for a single employer, whereas in other international markets, value is placed on experience and skills.

Feldman reflects: “There is a larger share of people who understand that lifetime employment is kind of a poisoned chalice. If something else comes along or you turn out not to be interested in that industry, you are kind of locked in. Workers and employees are increasingly skeptical of whether lifetime employment is actually a good thing for them.” Whether the notion of nenkō joretsu undergoes a radicalisation or evolves gradually is yet to be seen; however as long as liquidity remains low, getting the right person in the right job remains a challenge for Japan.

How companies can stay ahead of the game: adapting to changes in the Japanese labour market

Feldman recommends three key ways in which companies can adapt to these trends; pay competitively for highly skilled talent; automate; and take advantage of foreign labour.

Pay up for good talent

For Feldman, companies need to be prepared to offer competitive salary packages to attract and retain highly skilled talent. “With a labour shortage,” says Feldman, “you will not be able to retain high-quality workers unless you pay them competitively.” For Feldman, it also follows that companies should pay women fairly. “There is an opportunity there for companies to take advantage of this situation and hire better talent if they are gender neutral.”

Embrace automation

Says Feldman: “What is interesting about labour markets now is the ability to substitute capital for labour in industries where that was never possible before.” For Feldman, automation is increasingly a viable option to reduce or remove labour-intensive tasks and improve the efficiency and effectiveness of processes across all sectors.

To stay ahead of the game, review your companies’ processes and identify ways to automate. Then, work with highly skilled IT specialists to strategise and implement the changes.

Capitalise on foreign labour

For Feldman, as immigration policies slowly shift and the immigration implications of Brexit come into effect, companies should look for alternative solutions to source highly skilled employees. Foreign labour is one alternative to consider; employees from outside of Japan bring new experience, process and fresh perspective to help achieve business goals.

Says Feldman, “Take as much advantage as you can of foreign labour. If you can, then you are in a little better shape.”

As the Japanese labour market shifts and changes, it’s important for companies to be proactive to recruit and retain highly skilled employees. Attracting top talent - increasingly more challenging in a protracted labour market - requires a competitive and flexible approach, through offering attractive, gender-neutral remuneration; looking across geographical borders to attract highly skilled workers; and carefully selecting and retaining the right talent in the right jobs.

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