JILPT Research Eye
Changes in the Employment System over the Course of History

December 20, 2018
(Originally published on March 29, 2018 in Japanese)

Takahiko KUSANO

Associate Researcher

I. Background of the reports out of “Employment Systems and the Law” project

We have compiled a research report “Formation and Transformation of Japan’s Employment System: How They Are Related to Labor Policies” (Research Material Series no. 199). This report constitutes part of the “Employment Systems and the Law” project that JILPT launched in 2014. This initiative, led by Professor Kazuo Sugeno (JIPLT President from March 2013 till March 2018), was planned to focus on the following three issues intensively for the first three years beginning in fiscal 2014: (1) identifying and enumerating changes in Japan's employment system in recent years, from multiple angles with a focus on the "Japanese-style employment system”; (2) observing the interaction between the employment system and legal policy, and identifying the functions and issues of legal policy in its relationship with the actual situation of employment system, and (3) searching for issues and political implications of Japan's employment system based on the state of change mentioned above. (For details about the project, see The Employment System Project and Research by JILPT Research Eye 2015.)

Of these issues, the research result of (1) above were summarized in The Future of the Japanese-style Employment System (Project Research Series no. 4, JILPT 3rd Midterm Project) in December 2017. Result for (2) addressing changes in labor policy since the early 1990s collapse of the economic bubble, were compiled the related materials for reference (JILPT Research Material Series no. 183) in March 2017.

The Research Material Series no. 199 is another half of the above-mentioned research result of (2) which deals with changes to, and interactions between, employment systems and legal policy from the Edo Period (1603-1868) until the end of the economic bubble, collecting and organizing related materials and information based on the existing literature. We believe this serves as a useful reference material though our goal is to fulfill the aim (3) above, extending to the present day.

This article outlines the report as follows: background to formation of the employment system (II), characteristics of the employment system development (III), relationship between employment system and policy (IV), and societal changes (V), and future research and studies (VI).

II. Background to formation of the employment system

The Japanese-style employment system, practiced typically in large companies, had developed in stages in a long-term historical context, and came to take its currently recognized form in the late 1960s and early 1970s.

Let us briefly review the directly relevant aspects of this historical development. After World War I, some large companies began introducing payment of allowances intended to foster internal skill training and incentivize continued employment, as well as pay raise systems, mutual aid programs, and welfare facilities, while they adopted new technologies and introduced direct employment accompanied by the establishment of a labor management framework. These mechanisms became prevalent, to a certain extent, in large companies as the establishment of a skilled labor force progressed in tandem with the Showa recession of the 1930s. During World War II, the labor force became fluid again due to rapid inflation. Under an imperially directed labor system, however, companies were considered as single production collectives, blue-collar and white-collar together. That brought about mandatory full-fledged adoption of a regular pay raise system and living wages, as well as the Sangyo Hokokukai, an association whose aim is to prevent labor-management conflict through labor-management talks and also to improve productivity. While this system only lasted a short time, it had a major impact on the employment system thereafter.

After World War II, democratization led by GHQ (General Headquarters, the Supreme Commander for the Allied Powers) brought about rapid expansion of labor unions established in workplaces or enterprises. Amid rapid inflation, there were fierce battles over dismissals and wage increases that extended to workers’ control of production. Labor unions struggled to obtain such as living wage systems as represented by that of the electric power industry. In the 1950s, as long-term employment became more prevalent, intense labor disputes continued, albeit with management at an advantage, and seniority-based treatment of workers, including long-term incentives such as periodic salary increases accompanied by assessments, gained prevalence. The mechanisms known as the “three sacred treasures” (enterprise-based labor unions, lifetime or long-term employment, and a seniority-based wage system) were nearly in place. The shunto (annual spring wage offensives) began in 1955, and the previous political and confrontational character of nationwide industry-based labor unions was diluted as they became more focused on labor-management relations within companies, and specifically on wage increases to supplement workers’ incomes and overcome economic adversity. In The Japanese Factory (published 1957, Japanese edition 1958), James Abegglen outlined Japan’s distinctive lifetime employment practices differing from those of Western countries, and the resulting success of the nation’s industrialization, overturning existing stereotypes of Japanese companies’ employment systems as backward.

In the 1960s, the prolonged conflict at the Mitsui-Miike Mine lent momentum to even greater emphasis on employment stability by both the labor and management camps, both income increases and long-term employment advanced further in the context of ongoing rapid economic growth and strong corporate earnings. And with reorganization of tasks and establishment of blue-collar labor frameworks within companies accompanied by technological innovations, differentiation between blue-collar and white-collar workers in terms of wages and treatment was abolished, uniting all employees in a single system. In the late 1960s, a company-centered mentality and organizational unity were further strengthened through the practice of hiring new graduates en masse, methods of in-house skill development such as deliberate personnel transfers and OJT, and more active labor-management communication. In the 1960s and 1970s, courts established doctrines prohibiting “abusive dismissals” while granting management broad discretion with regard to personnel matters, and the employment systems specific to large companies were codified as the general Japanese-style employment system.

Thereafter, after surviving the oil crisis of the 1970s without forced dismissals thanks to close labor-management cooperation and policy support, the focus of labor policy turned to support for and utilization of employment frameworks. This “Japanese-style employment system” gained acclaim from international organizations such as OECD and took on the role of a bedrock underpinning Japanese society as a whole. In the 1980s, the system also survived a recession triggered by the Plaza Accord and ensuing yen appreciation, and superficially at least thrived until the collapse of the economic bubble, accommodating structural issues such as aging of the working-age population, advances in women’s equality, and a rapid increase in irregular workers.

III. Characteristics of the employment system development

Japan’s employment system was established and developed as outlined above, and although there have been many calls for reform and arguments pointing to the system’s inefficacy since the collapse of the economic bubble, its basic framework has been maintained to this day with the support of both labor and management. There are following three notable characteristics of its development.

Origins of the labor market and corporate organizations

First, the social conditions for the labor market and corporate organizations that underlie Japan’s employment system were cultivated over many years, going back to the Meiji Era (1868-1912) and earlier.

For example, during the Edo Period, the shogunate exercised control over the organization of, and granting of privileges to, groups of artisans and merchants such as guilds and trade unions, and curtailed their autonomous development. In particular, because the guilds of master artisans known as nakama lacked the strict authority to regulate a craft or grant qualifications to individual artisans which an European guild had, the labor market for artisans in the late Edo Period was engulfed by a fluid and ill-defined labor market that included miscellaneous occupations. From the Meiji Era onward the labor market thus lost its horizontal organization according to occupation, vocation and so forth, which the influence of the pre-Meiji labor market cannot be ignored.

Also, in terms of organizational structure, early state-run companies adopted a qualification (grading) system of personnel management, which was inherited by the pre-World War II conglomerates known as zaibatsu and formed the basic framework for subsequent qualification and grade-based personnel systems. Within the zaibatsu there were important developments related to future corporate organizations and operations, such as mechanisms of separation of ownership and management inherited from large Edo Period merchant houses, and internal promotion mechanism.

Development and expansion of the internal labor market, and its contributing factors

Second, the Japanese employment system is characterized by stable, long-term utilization of human resources through lifetime employment and internal skill development and promotion programs. Over the course of history, this system has applied generally in stages from management, to engineers, to white-collar workers, to in-house trained engineers to the entire workforce including blue-collar workers.

Reasons for the trend above before World War II include (1) introduction of treatments and a patriarchal model of management to incentivize stable, continued employment amid a fluid labor market, (2) suppression of political activities outside the company, and conversely, promotion of labor-management cooperation within the company via factory committees, etc., (3) transition to direct employment and introduction of in-house training systems accompanying advances in technology, and (4) remarkable prevalence of primary education and high quality of on-site work performance. Additionally, application of treatment such as regular salary increases and living wages to all employees, and the experience of workplace discussions in the context of the Sangyo Hokokukai during wartime, had a major influence on postwar developments.

After World War II, under the policy of democratization led by GHQ, a labor movement developed advocating the establishment of labor unions including both white-collar and blue-collar workers and the abolition of systemic distinctions between them. Consequently, these distinctions were virtually eliminated in terms of labor agreements and rules of employment. With the introduction of new technologies such as mass production systems during the rapid economic growth period (1954-1973), junior high school graduates and high school graduates worked side by side due to the placement of high school graduates on assembly lines. Also, divisions between these groups and between white-collar and blue-collar workers collapsed, as blue-collar workers were increasingly brought into assembly lines as exemplified by the foreman system, and work grades were reorganized so as to ensure workers in general had paths to promotion. Mechanisms such as personnel transfers and reassignments, and a universal monthly wage system, were applied to blue-collar workers, and a comprehensive employment framework for all workers was established.

Management and production systems and their relation to the education system

Third, the employment system developed in the context of interrelation among systems of corporate management and production, and the education system.

With regard to management system, after World War II, there emerged a governance structure relatively independent from the stock market, with mutual shareholding among companies belonging to corporate groups and financing and involvement from main banks. In addition, a board of directors promoted from within, made it possible for companies to adopt a business stance of pursuing long-term prosperity and providing stable employment. This environment had developed an employment system based on autonomous labor and management within companies, and long-term employment.

In terms of production system, during the 1960s in particular, a Japanese-style system of TQC (total quality control) involving all workers emerged, entailing thorough elimination of waste and building quality into processes through full integration of on-site workers and engineers. This Japanese-style production system arose in conjunction with the employment system applying to all employees, including personnel transfers and OJT aimed at developing skills, and frequent labor-management consultations on a wide range of matters.

As for connections with the education system, hiring of new graduates en masse became common practice from the rapid economic growth period onward, forming two halves of one coin with the Japanese-style employment system. And a view of workers’ capabilities developed, emphasizing “latent and general potential” and a “cooperative, group-oriented stance” necessary for collective execution of tasks. As a result, companies have tended toward preferential hiring of new graduates from higher-ranking schools. And against a backdrop of rapid increases in the employment and higher education enrollment rates, entrance examinations for universities leading to desirable employment place became more intensely competitive. This built a solidly education-oriented society in Japan where employment and education systems are closely interrelated.

IV. Relationship between employment system and policy

Japan’s employment system, formed as described above, has had a strong influence on the modern national policies governing employment, labor-management relations, minimum wages, social security, and education. Thus distinctive political framework had built that supports, utilizes, and supplements employment system primarily within companies.

First, in terms of employment policy, when Japan faced potential widespread unemployment due to the oil crisis, the unemployment insurance law, which had thus far emphasized payment of allowances, was amended to support companies’ efforts to maintain stable employment: a policy shift that aimed to stabilize employment by utilizing companies’ internal labor markets. Regarding measures for elderly workers, as well, there was a shift from employment promotion measures based on employment rates via the external market, to in-house employment extension policies. Afterwards, there continued to be reinforcement of countermeasures such as maintaining employment within companies, extending the retirement age, and supporting for skill building programs: thus the internal labor market support policy was sustained and developed.

Second, with regard to labor-management relations, the Labor Relations Commission performed a coordinating function in settling fierce labor-management disputes after World War II. Also, with the amendment of the Labor Union Law in 1949, involvement of politicized industrial unions in company unions was eliminated and there was a shift from management councils in which management participated to a primarily collective bargaining-based model. As a result, labor-management relations became less politicized and the focus shifted to in-house labor-management relations. Thereafter, while the spring wage offensives shunto aimed to transcend divisions among companies, it did not lead to establishment of wage tables by industry, and instead stable labor-management relations were built on the two main pillars of primarily in-house collective bargaining and labor-management consultation.

Third, as for wage policy, the Minimum Wage Act was enacted in 1959, and in the 1970s the minimum wage system was implemented nationwide through a council format. However, it had the character of an “occupation lumped” industry-based generalized minimum wage, and with the influence of wage systems based on single-person’s low wages, it was primarily applied for low wage levels of new graduates and part-time workers. In the late 1980s there was an attempt to transit to “occupation-specific,” “new industrial minimum wage system” designating individuals’ wages in accordance with occupation, but the effort was primarily focused on shifting away from the “occupation lumped” industry-based wage system, and the aims were not achieved in real terms. Around this time, companies’ internal labor markets had become deepened, making it difficult to set individual wages across entire industries or occupations.

Fourth, in terms of social security policy, the system was rapidly developed during the period of robust economic growth. And in 1961, universal pension and insurance coverage were achieved, while in 1973, termed the “dawn of social security,” medical treatment for the elderly was made free, and pension payments to an elderly couple were set at 50,000 yen per month. However, social security was heavily weighted toward those late in life, including pensions, benefits for bereaved families, elderly medical care and so forth. The social safety net for the working-age generation was mainly entrusted to employers (job security, seniority-based wages and allowances, welfare benefits such as company housing, retirement benefits and so forth) and families (child rearing and nursing care), with governmental social welfare primarily supplementing these. Meanwhile, a qualified pension system and a welfare pension fund system were established to strengthen companies’ retirement and pension systems.

V. Societal changes

The era from before World War II to the postwar rapid economic growth period was one of transition from an agricultural to an industrial society, during which employees of enterprises consistently increased as a percentage of all workers. Around 1960 this percentage exceeded half, and around 1970 about two thirds. Significant societal changes occurred in conjunction with this phenomenon.

First, rapid economic growth brought about improvements in income and reductions in disparities, mainly among employees, and the middle class greatly expanded. More and more people, including blue-collar workers, perceived themselves as “middle class,” and there was robust personal consumption. By 1980, average income had become comparable to those in Europe and the United States, with the phase of playing catchup drawing to a close. People’s interest turned toward improvements in quality of life, such as improvement of lifestyle-related social capital and resolution of traffic and housing issues.

Also, during and after the period of rapid economic growth, there was a massive population shift from rural to urban areas especially among young people in response to expanding employment demand accompanied by industrialization. Then there were housing, commuting and traffic problems in cities due to overcrowding, while at the same time rural populations shrunk accompanying the decline of agriculture. That expanded regional disparities, and national development plans were repeatedly launched as resolutions. On the other hand, the increase in the number of enterprise employees was matched by a sharp decline in self-employed workers and family businesses. Society took on a more employer-centered and monolithic character with less diversity.

In addition, in terms of demographics, the 1950s saw a decrease in the number of both births and deaths. The average household size, which had held steady at around five people since before the war, shrank to around four during the rapid economic growth period, and nuclear families consisting only of married couples and children gained prevalence. Family sizes continued to shrink thereafter and single-person households increased in the late 1980s, while the role and bonds of the family started to grow weaker.

In the 1970s Japan’s population began aging rapidly due to increased life expectancy and declining birth rates. And in addition to the serious issue of nursing care for the elderly, a marked decrease in the fertility rate led to concerns about the sustainability of social security, a shrinking economy, and the burden on society as a whole. With a decrease in the number of children and fewer hours spent on housework, the number of households in which both husband and wife work rose, including a growing number of homemakers working part-time to boost the family income, and perceptions of well-defined male and female roles began changing.

In the area of education, the high school enrollment rate had advanced to about 90% of students by the early 1970s, and the university enrollment rate reached approximately 40% in 1975. By this time there was a widespread perception that academic background and school status were significant factors in obtaining desirable employment opportunities such as jobs at large companies, and school entrance exams became intensively competitive.

On the whole, in Japan an affluent and stable society was built on secured employment accompanying the development of the postwar economy and industry. The 1980s saw the phase of economically catching up with the West drew to a close, and the start of a new phase of searching for distinctive lifestyle, including improved quality of life. On the other hand, the size and importance of the family diminished and rural populations shrank and community ties grew weaker due to decline of agriculture and self-employment. The development of intermediary groups and horizontal organizations extending across company boundaries was inadequate to begin with, Japan became a monolithic and homogeneous society in which companies led the economy and society. However, these companies and the socioeconomic framework built around them were profoundly impacted by the shocking collapse of the economic bubble, and Japan’s society and economy underwent significant and long-lasting damage before they were able to find their own distinctive path forward.

VI. Future research

This report focuses on the formation and transformation of Japan’s employment system from the Edo Period through the economic bubble years. In this report, we have focused on formation and transformation of employment systems while aiming to describe related policies and social changes over the course of history. The nature of society and labor markets in the Meiji Era and earlier was also introduced, as an indispensable background to the formation of Japan’s employment system.

Employment system, built upon the actual experience of workers in a sense, has survived political transformations and sustained over the long term, with labor markets that lack horizontal mechanisms and company organizations with in-house systems such as qualification grades.

In a sense, there is a logic in employment system at work distinct from those of politics and economics. Thus, it is meaningful to focus on the socioeconomic situation from the viewpoint of social labor policy and explore a balanced economic society. We will conduct further studies focusing on what has changed and what has gone unchanged in the employment system since the collapse of the economic bubble in Japan, with the aim of suggesting the political implications out of these research studies which is the final goal of this project.

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