Vol.34-No.10 October 1,1995
Untill recent years, labor market performance in Japan for youth has been regarded as very good compared with that of other countries. This was because the rate of unemployment of Japan's youth was low, reaching only 5% or so even in recession years and Japanese enterprises were evaluated highly for the large investments they made in training young workers (Kochan & Osterman, 1994: p.38) and for their effective OJT systems (Koike & Inoki, 1990).
The favorable performance of Japan's labor market regarding the employment of youth was thought to be closely related to "Japanese employment practices," faithfully followed by the large and medium-sized enterprises. This thinking explains the relationship between youth employment and employment practices in the following way. Because of such traditional practices as the "pay scale based on seniority" and "promotion according to length of service", enterprises preferred to hire young workers. The abilities needed for the job were developed internally, after employment, through corporate training systems. Enterprises preferred new graduates from high schools and universities with no preconceived ideas and specific occupational skills. Thus, there were many job openings for new graduates and youth unemployment rarely became a social problem.
However, this argument is not without its defects. Another pillar presumably supporting "traditional Japanese employment practices" is the "lifetime employment system." At the core of this system is the practice of "employment security," under which enterprises try to avoid dismissing their employees even when forced to reduce production and labor inputs. Under this practice, in an economic recession, when a company must reduce its workforce, the first measure taken, and an effective measure in terms of quantity, is to hold back hiring new employees and allow attrition to adjust the workforce. When the situation grows more severe and attrition is insufficient, employees are shifted out of the company to subsidiaries or other companies. A final measure to reduce the workforce is to offer incentives such as increased retirement/severance allowances to induce "voluntary retirement /severance." Because the allowance is computed based on service length (so the older workers receive higher payments), and because of the need to curtail labor costs, workers nearing mandatory retirement age whose wage levels are the highest are the ones that normally are expected to leave the company. Therefore, this kind of employment adjustment tends to weigh heavily on the older workers.
However, considering the quantitative impact on the labor market, this form of employment adjustment is not dominant even in the worst recessions. It is far more effective to cut down on hiring new employees. Then employment adjustment most heavily affects new graduates seeking jobs. It is only natural that in an economic recession, a large number of new graduates just out of the universities and high schools should be left jobless. Contrary to arguments by some economists who claim that "Japan's economy had continued on a steady upward slope till the collapse of the bubble economy," our economy has experienced several serious recessions since the 1970s, and each time, industries had to undertake difficult employment adjustments. The most critical of the economic recessions was the one following the first oil crisis. What happened to job prospects of new graduates in the face of such a severe recession?
Past Experience and Its Implication
Table 1 will be useful in answering this question. The table shows that the distribution of hiring of new graduates from high schools and universities among different sized firms is directly related to the economic cycle. When the economy slows, large enterprises hold back on hiring of new employees, while small and medium-sized companies, which usually cannot attract competent and malleable new employees sufficiently, take the opportunity to hire more new graduates. As a result, unemployment of youth is prevented even in a recession. Of course, for things to work well, the macro economic mechanisms to adjust employment levels must be functioning to prevent large scale unemployment. For example, efforts should be made, especially by large enterprises, to control overtime work and reduce total labor input, to hoard labor and lower labor intensity. Further, the rate of participation in the labor force adjusts down the 'peripheral workforce,' consisting of married women and older people to the period of economic recession.
Since there are wage differentials depending on firm size, this shift in the employment of new graduates to smaller enterprises will result in an actual lowering of wages from the macro economic point of view. This is part of the mechanism that gives wage flexibility to Japan's labor market. As new graduates shift to smaller enterprises, however, they are deprived of the opportunity to receive well-funded and well-equipped job training provided by the larger enterprises. This means that in the future, they may not increase their productivity and income. As a result from this perspective, one may question the performance of the Japanese labor market, regarding the development of occupational ability among young workers. Looking at past experience, however, at least until now, there seems to have been no serious problem. Why is this so?
The answer to this question can be stated as follows. New graduates have the highest mobility and the greatest plasticity, both geographically and occupationally. Therefore, they react most sensitively to changes in the industrial or occupational structures of the labor market. They are more likely to be attracted to the growth industries and occupations. Consequently, they serve to adjust labor supply to the changes in labor demand that arises from changes in the industrial and occupational structures. Large number of new graduates have shifted to enterprises that are smaller in scale but operate in new, growing industrial fields. It was a shift from large enterprises that have "already grown up and matured" to smaller enterprises that are "beginning to grow."
To cite a few examples, chain store operations, adapting to the structural changes in the distribution system after the 1970s, hired many university graduates. Along with rapid developments in computerization, the software industry hired a large number of university and specialized vocational college graduates. In the growing industries and enterprises, the efficiency of investments in training is high, since there are more opportunities to take on new projects and experience new tasks. Also, human capital developed through training will be fully utilized. Therefore, although expenditures on training and education may be small compared with larger firms in more established industries, there was an accelerated development of vocational ability in these types of industries and firms.
Seen from this dynamic point of view, we might say that the traditional Japanese system of a "pay scale based on seniority/age" may have helped to cause industrial changes and to promote economic growth. The concept of a "pay scale based on seniority/age" is troublesome. The definition differs from person to person, and at times, causes confusion. It is not even clear whether "nenko" or "seniority" refers to length of service or to age. If all the employees were hired in the same period right after they graduate from school, there would not be much difference between the two. However, even in the large enterprises, many employees are hired after experiencing other jobs.
Moreover, there is a question whether we consider the "pay scale based on seniority/age" as an employment practice involving the specific enterprise, or do we consider it to be a widely accepted social norm that has found its way into society at large? The impact of the system on the labor market will depend on which way we consider it. I believe that the concept of a "pay scale based on seniority/age" has become accepted as a social norm. It is widely believed that the younger workers should receive lower wages, and that wages should rise as workers grow older. If so, the growth industries that are hiring many young workers are in an advantageous position regarding labor costs. As for output, due to the accelerated and efficient development of human capital, the productivity is comparable, if not equal, to that in the mature industries with a more experienced work force. Therefore, in terms of the labor market, it is considered that these growing enterprises have the favorable conditions needed for further growth. In the past, enterprises that were supported by these favorable conditions grew fast along with the industry itself and rapidly acquired the ability to pay higher wages. Even when the workforce gradually grew older, the enterprise could pay wages to match the age or length of service of employees. Thus, a kind of positive cycle has been formed.
Of course, this scenario is one of a success story. In the competitive market, there have been enterprises that could not grow rapidly enough to keep up and were forced to withdraw from the competition. People working for such enterprises may have been put at a disadvantage in some way. However, for the economy at large, the Japanese system ensured high performance in the labor market and dynamic growth of the economy as gradual transitions took place in industrial structure.
To make the argument simple, I have been focusing on new graduates. However, the same arguments apply to the youth labor market as a whole. Contrary to the popular image of the 'stable and rigid labor market structure' operating on the 'lifetime employment system', even large enterprises with over 1,000 employees have been recording annual severance rates of 5% to 10%. Also, in large enterprises with over 1,000 employees, there is about the same number of job changers from other companies as the number of workers hired just after graduating from high schools and universities. Nearly half of these job changers are young workers under 30. This data shows that young workers are maintaining mobility in the labor market. In fact, without this mobility, the labor market could not have adapted to the shift in demand in the radically changing Japanese economy.
Recent Problems and Policy Measures
Let us now examine the recent situation of the employment of young people in Japan, keeping the previous observations in mind.
First, contrary to reports by the mass media, enterprises have been sticking to "traditional Japanese employment practices" to achieve employment adjustments in the protracted recession. That is, they are aiming at labor hoarding by reducing working hours and by a hiring freeze. As a result, employment adjustment has weighed heavily on job prospects for new graduates, particularly from universities and colleges, and job scarcity has become a social problem. According to the Basic School Survey by the Ministry of Education, those who had found a job at the time of graduation (March) accounted for only 70% of all new university graduates in 1994, about the same level as in 1976 when the impact of the first oil crisis was felt hardest. It is reported that similarly difficult conditions existed for the graduates in 1995. This year's employment situation for new graduates is said to be as bleak as a heavy rainstorm or even an " Ice Age."
Table 2 also shows that the number of new graduates from high schools and universities who have not been promised positions at graduation time increased greatly in 1994. However, the number of new graduates without a job decreased from 240,000 in March 1994 to 50,000 by December. Thus, the current situation has not resulted in large scale and lasting joblessness among young people. The data suggest that the employment pattern in recession years may be appearing again. New graduates who could not find a desirable job in the first round of recruiting are taking less favorable jobs.
Second, looking at the opening to applications ratio, the job shortage is more severe for university graduates than for high school graduates. The increase in percentage of youths advancing to higher education can be seen as an increase in human capital investment. It is, however, becoming harder to recover this investment. One big reason is that we are suffering the aftereffects of excessive recruitment of university graduates into 'white collar' positions during the bubble economy. Another reason is that the second generation of baby boomers have reached university graduation age.
Third, the job shortage among university graduates is more serious for women than for men. This is partly because female university graduates major in limited fields. For example, there are few science and engineering majors. It is also effected by the restructuring of corporate organizations. Introduction of mechanization and advanced information systems has enabled enterprises to reduce the number of workers in the less specialized office work fields. However, it has also been reported that there were firms that gave priority to the hiring of men, violating the principles of the Equal Employment Opportunity Law that requires that men and women be given equal opportunities at the time of employment.
Meanwhile, an increase in the number of those advancing to higher education is observed for women. The job shortage for university graduates is increasingly becoming the issue for female university graduates.
The following measures have been taken to address these problems.
First, the government's job-matching activities for new graduates, which were mostly meant for high school graduates, are being expanded to help university graduates as well. Specifically, the government organized group interview sessions where students expecting to graduate from universities were introduced to and interviewed by companies that want to hire new employees (mainly small and medium enterprises). Over 50,000 students participated in interview sessions sponsored by the Ministry of Labour in 1994. Vocational college graduates are finding it even harder to find jobs. To help them, the Ministry of Labour is encouraging the schools to strengthen communication ties with enterprises.
Second, to further help those who have already graduated and who are without a job by the time of graduation, job placement offices are offering guidance to enterprises and are introducing more aggressively these new graduates to enterprises. In FY 1995, a "Job Experience Program" is being introduced in which wages and training costs will be subsidized for enterprises hiring unemployed graduates on a short-term employment contract and will allow them to work at an actual job and receive training. In addition, group interview sessions will continue to be held periodically during FY 1995.
Third, to prevent discrimination against female students by enterprises when recruiting new employees, administrative guidance was given to the enterprises to observe the Equal Employment Opportunity Law. This will be a priority for the Ministry of Labour this year, too.
The ability to maintain the favorable performance of our labor market with regard to employment of youth has become a major issue for the Japanese economy which is suffering from a long recession and the transition of the economic structure. The solution to this problem will not be found in the establishment of a "mobile labor market," as some economic commentators argue. In the utopia, which they dream of, workers do not stay in one enterprise, but move freely from enterprise to enterprise corresponding to the changes in demand for labor. The emergency measures provided by the government in response to the current problems of youth employment will offer some relief, but will not be a permanent solution to the problem.
If we are to learn from past experience, it seems more important to consider the emerging but amorphous new industrial fields into which numerous young workers will be absorbed. What employment opportunities are those fields offering? What training opportunities will be provided? Will these young workers be able to establish a stable professional career in these fields? The government should consider such points and find ways to provide support. Whether the government should work on deregulation, inducing industrial policies, or a combination of the two is not known. However, we do know that the government must provide leadership as well as a supportive environment so that growth industries can continue innovative activities and create new employment opportunities. The government should set up responsible policies that will solve the financial crisis so that the growth industries can receive financing. The government should also adopt macro economic policies within a feasible range. Based on the precondition that such economic and industrial policies will be established, policy issues concerning the labor market can be addressed in an appropriate way, including development of labor market systems for university graduates and revisions in 'seniority -based' pay systems.
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