Some sectors — including the construction, retail and restaurant sectors — face severe labour shortages. Due to labour shortages in the construction sector, for example, an increasing number of projects for earthquake reconstruction and new public works have not been contracted. Despite increasing demand, some restaurant chains are also unable to fill job positions and are deciding to shorten operating hours — or, in extreme cases, to close stores.

The effect of the labour shortage is compounded by Japan’s economic recovery. The economic recovery — in 2013 the GDP growth rate was 2.3 per cent compared to an average of 1 per cent in the preceding two decades — has led to increasing demand for production and therefore increasing demand for labour. In the last 20 years, when the Japanese economy was suffering from stagnation, the labour shortage problem was not as acute.

A more serious structural issue, however, lies behind labour shortages. Japan’s working-age population — defined as those between 15 and 64 years old — is shrinking rapidly. Since reaching a peak in 1995 of 87.2 million, the working-age population has now entered into a phase of decline. In 2013, there were 1.2 million new entrants to the working-age population and 2.2 million retiring older workers. As a result, the workforce shrank by 1.1 million.

The working-age population is expected to shrink by about one million every year for the next 20 years according to National Institute of Population and Social Security Research. Given that the working-age population will continue to decrease, it is to be expected that Japan will continue to face a labour shortage problem.

So, how does Japan solve this problem?

Although it is difficult to change the declining trend of Japan’s working population, the labour shortage problem can be solved by employing workers more efficiently.

First, Japan needs to reduce occupational mismatch. It is important to note that not every company in Japan is suffering from labour shortage. While the ratio of job vacancies to job seekers in construction was 3.41 in June 2014, in clerical and desk jobs it was 0.28. This implies that mismatch occurs across occupations.

There is also an employment-type mismatch. While the ratio of job vacancies to job seekers for full-time regular workers was 0.68, for part-time workers it was 1.05. Japan needs to address this mismatch problem by enhancing training programs and matching processes between job seekers and job vacancies. Structural reforms to promote the flexibility of the Japanese labour market are also needed to facilitate the movement of workers across industries and occupations.

Second, Japan should increase female labour force participation by providing a more accessible workplace environment. Raising female employment rates is essential to addressing the labour shortage problem. The labour force participation rate of females for ages 15–64 was 65 per cent in 2013, which is about 20 percentage points lower than that of males. The gap in labour force participation rates between females and males in Japan is much larger than those in the US and European countries. Furthermore, the labour force participation rates for married females in their 30s and 40s are also lower than those in other developed countries. The low rate of female labour force participation during child-rearing age is because of institutional problems, such as shortages of childcare facilities and tax systems, and also the inflexible employment policy and practice.

Third, encouraging greater workforce participation by the elderly is important. Compared with the past, Japanese elderly are healthier and thus physically more capable of working until a later age. Yet the Japanese labour market and employment system has been structured to restrict employment opportunities for the elderly. Considering the capabilities of the elderly, and their demand to work more flexibly, establishing working conditions to meet their needs is necessary. This is particularly important as the proportion of the elderly in Japan’s population is increasing.

Promoting the labour force participation of the elderly will not only help solve the labour shortage problem but will also reduce the increasing social security burden.

It is also necessary to raise labour productivity to reduce an adverse effect of the shrinking workforce on economic growth. In Japan, labour productivity in industries protected by regulation and the non-manufacturing sector is low. It is necessary to increase labour productivity in these areas by accelerating the implementation of regulatory reform and thus promoting competition. Enhancing labour mobility so that more workers can shift to growth sectors will also improve the productivity of the Japanese economy.

Japan faces increasingly serious labour shortage problems. It is important for the Japanese government to now push ahead with labour market reform and efficiently employ its labour resources.

Hiroaki Miyamoto is Associate Professor at the Graduate School of Public Policy, The University of Tokyo.