The Bank of Japan believes that the labour market is tight enough to bring about a sustained increase in real wages. It is not in our view. Since the depths of Japan’s economic crisis in the late 1990s there has been a marked switch away from full-time into part-time work. The old ‘job-for-life’ culture is just that. The switch has been driven by employers, who have lacked confidence in Japan’s economic recovery. And it has occurred, by and large, against the wishes of Japan’s workforce. There are more people now working part-time in Japan who would rather work full-time than there are unemployed people. On that basis Japan has a much larger ‘underemployment’ problem than either the US or the UK. We are unlikely to see a meaningful pick-up in wage growth in Japan until employers have the confidence to take on more full-time workers, thereby reducing the pool of hidden unemployed.
Basic pay is at last rising in Japan, but only in cash terms. After adjusting for inflation, real wages are falling rapidly. If Abenomics is to succeed the household sector must play a part in the recovery. At a minimum, that requires that increases in wages more than keep pace with increases in prices. In Japan, the ratio of job openings to applicants now stands at 1.10. It is not only above its pre-crisis peak of 1.07, it is at its highest level in more than 20 years. The Bank of Japan hopes that a tighter labour market will put upward pressure on wages, encouraging more consumption.
In this week’s News in Charts we dig a little deeper into the Japanese labour market and find a considerable amount of hidden unemployment. Since the late 1990s, when it became clear that the Japanese economy was in crisis, the Japanese labour market has undergone a significant degree of structural change that is not readily apparent in headline indicators, such as the unemployment rate. Employers are increasingly looking to offer only part-time work, to a labour force that still yearns for the security and the income offered by a full-time job. That means that the jobs on offer are less well suited to those looking for work than they used to be. In the economics jargon, the degree of mismatch in the Japanese labour market has risen, and upward pressure on wages is less than indicators such as the ratio of job openings to applicants might suggest.
Japan’s ageing population means the supply of labour is falling …
Japan’s demographic problems are well recognised. From the mid-1990s the dependency ratio – the number of people under 15 or over 64 as a proportion of the number of people between 15 and 64 – has risen sharply. With older age groups less likely to look for work, the consequence is a dramatic fall in the participation rate – and by extension a dramatic fall in labour supply. As our chart shows, the bulk of the fall in participation since the mid-1990s is a consequence of the ageing population.
But Japan is not the only country that has an ageing population. US participation started to turn around 2000 as the post-war Baby Boomers began to move into retirement. Most of the decline in US participation in recent years is also a consequence of demographics. Looking across countries, Japan’s participation rate hardly looks extreme. Its participation rate is close to that of Germany, and higher than that of the euro area as a whole.
… but the demand for labour is falling faster
Average hours worked in Japan have been on a downward trend since at least the 1970s. This is a common feature of developed economies. As people become better off, they chose to work fewer hours. Nevertheless, there is a cyclical as well as a structural element to average hours, and the levelling off of average hours over the past two to three years hardly suggests a labour market that is in danger of overheating.
A shift towards part-time working accounts for a good part of the decline in average hours beyond the late 1990s. Contrary to common perception, nearly 40% of Japan’s workforce is now employed part-time. The protected ‘job-for-life’ culture, by which graduates used to enter companies and stay there for the rest of their careers, is not the current ethos. The chart below shows that the share of part-time workers in total workers has more than doubled over the past 30 years. And this is not purely a consequence of increased female participation. Women are more likely to work part-time, yes, but the proportion of males that are working part-time has more than doubled since the late 1990s.
According to an occasional survey undertaken by Japan’s Ministry of Health, Labour and Welfare, much of the rise in part-time employment has been involuntary. The survey finds that the proportion of part-time workers who would rather work full-time has more than doubled since the late 1990s, from around one in ten to almost one in five. As the chart below shows, the number of part-time workers in Japan who would rather work full-time – the so-called ‘underemployed’ – exceeds the number of unemployed people by almost 50%. In that regard, Japan’s underemployment problem might be considered larger than that of either the US or the UK.
A mismatched labour market
Japan’s rising underemployment problem is mirrored in an increase in labour market mismatch. Changes in the efficiency with which unemployed workers are able to match with vacancies is often assessed using a simple scatter plot of the unemployment rate against the unfilled vacancy rate – known as the ‘Beveridge Curve’. The sample in our chart is divided into two periods. The orange dots represent the period before the depths of Japan’s economic crisis in the late 1990s. The blue dots reflect the post-crisis period. Since the crisis hit, there has been a notable rightward shift in the Beveridge Curve. At any unemployment rate, the level of vacancies associated with a given degree of wage pressure will tend to be higher because the jobs on offer are less well suited to the pool of unemployed workers.
The degree of mismatch in the Japanese labour market, with an excess supply of part-time jobs, and an excess demand for full-time jobs, resulting in a significant degree of underemployment, is evident in wage rates. For the past 15 years, hourly wages offered for part-time work have been rising, while hourly wages offered for full-time work have been on a clear downward trend.
The BoJ believes that the labour market is tight enough to bring about a sustained increase in real wages. In our view it is not – at least not yet. The existence of a significant amount of underemployment means that Japan’s labour market is less tight than it might at first appear. Since the depths of Japan’s economic crisis back in the late 1990s, there has been a move away from the old ‘job-for-life’ culture, to one where the focus is on more part-time and temporary employment. A meaningful pick-up in wage growth is likely to be preceded by a switch from part-time into full-time employment. There are signs that this is happening in some industries, such as catering and construction, where there are severe labour shortages. But for now it is the exception, rather than the norm. The trend towards more part-time work that has been in place since the late 1990s remains. Real wages continue to fall sharply. And if next year’s planned increase in the rate of VAT from 8% to 10% goes ahead, this will only add to the woes of Japan’s struggling household sector.
This research note is provided by Fathom Consulting. All of the charts below and many many more, covering a range of topics and countries on both the macroeconomy and financial markets are available in the Chartbook to Datastream users at www.datastream.com. Alternatively you can access Fathom’s Chartbook at www.fathom-consulting.com/TR.
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