Trésor-Economics No. 65 - Japan's changing labour market and how it is affecting its growth model

Japan's labour market model stands apart from that of other countries by the importance it places on employment, which it seeks to guarantee for life, while maintaining a high degree of wage flexibility. Among others, this has given rise to a system of company trade unions not seen elsewhere, and has led to a situation in which the unemployment rate is not particularly relevant as a variable. Generally, losing one's job in an organisation of this kind, more than elsewhere results in an exit from the working population.

This model of a job for life, moreover, is designed for one category of worker only, namely core workers (male employees, considered by their employers to be permanent). This has been substantially undermined by the expansion of temporary work since the mid-1990s. At the moment, however, the transformation is incomplete: whereas the core workers alone still enjoy a guaranteed job for life, all employees pay the price for this via flexible wages, indexed on that of core workers, and companies' mark-ups have risen steadily overall since the mid-1990s.

Against this background, the recession that began in 2008 could have an extremely heavy impact on wages: employment could adjust even more sharply than in earlier recessions due to the large number of employees on precarious contracts, while wages are expected to adjust substantially. The wage bill could then fall as steeply as, or even more steeply than, the fall in nominal output; if that were the case, this could aggravate the imbalance in the Japanese growth model. This would boost the role of investment and exports still further, to the detriment of domestic demand, posing the question of this growth model's sustainability even more acutely.