The mainstream thinking, and therefore labour market practices in Japan, hark back to the rapid growth era in Japan and seem stuck in the past.

Common labour market practice in Japanese large companies includes long-term job security, seniority-based wages and company-based labour unions. They are considered necessary for skill formation and harmonious industrial relations. But there are many problems with the rigid labour market practices.

First, it leads to a dual labour force with inequality between the regular workers with safe employment and non-regular workers serving as a shock-absorber in recession periods. This is a social problem with a growing share of non-regular workers already comprising one-third of total employment.

Secondly, college graduates have more difficulty in finding jobs, because large companies reduce job openings as a means of effecting employment adjustment. The job search period for college students starts in mid-junior year when they begin to sacrifice class attendance to try to find a job. If they fail to find good jobs while they are at college, their chances for being interviewed after the graduation are limited.

Third, many married women face a trade-off between working in fulltime jobs and raising children under long working hours and frequent job rotations in exchange for job security.

Yet the typical view in Japan is in favour of this rigid employment protection and at the same time blames large companies for utilising more non-regular workers at lower costs.  De-regulation of labour law by the Koizumi regime which removed the ban on the use of dispatched workers (those who are employed by a labour-contracting company but sent to work in another company) in manufacturing is also subject of criticism.

Indeed, the Democratic Party in Japan (DPJ), which is supported by labour unions, has submitted a bill for that will limit dispatched workers in professional jobs such as translators or so. This is based on an idea that company executives should maintain rigid job protection and not rely on increasing the number of dispatched workers for short-term profit-maximisation. The government seeks to protect ‘good labour practices’ for their own sake.

This idea is an anachronism. Japanese employment practices were established in a time of high rate of economic growth mainly to entrap skilled workers in large firms. But under the long-term economic stagnation there has been since the early 1990s, hoarding excess workers in recessions becomes more costly. Instead of reviewing the traditional employment practices, firms have gradually increased the share of non-regular workers for the protection of the employment of regular workers under sluggish GDP growth.

Most Japanese companies put a top priority on employment protection of regular workers. This is because, with labour unions tied to companies in Japan, there are no major conflicts of interests between the managers and the labour union unlike in other industrial countries’ labour markets. There is a real conflict of interest between the regular workers within the company and the non-regular workers in the labour markets.

Though the unionised workers accounted for less than 20 per cent of the total workforce, they maintain strong political power, supporting the current government. In their view, labour market flexibility means that a company can easily dismiss employees, and threaten the job security of labour union members. They argue that employment of non-regular workers has to be limited to temporary jobs, so that their employment does not threaten the jobs of regular workers’ jobs.

There is a single labour union organising dispatched workers who demand better protection and fair wages, but strongly object to the idea that most of their jobs be prohibited. Their voice is not reflected at all in mainstream labour unions that mainly comprise regular workers.

Labour market flexibility provides more job opportunities even when companies are disinclined to increase the employment of regular workers when there is low GDP growth. It gives a better chance for those seeking regular jobs, for example, school graduates, married women following child-rearing, and non-regular workers. But, it also means more competition for those who already have safe jobs. In Japan’s company-based labour markets, the voice of non-regular workers are not reflected in policy making because they are not able to organize very well.

Besides the labour unions, many economists are opposed to labour market flexibility. Their ideas were formed in the period of high growth up to the 1980s when these rigid labour practices were successful. Japan had achieved smooth industrial restructuring without causing many unemployed. This is because large companies established many subsidiaries in growing industrial sectors, and shifted their employees from declining sectors within the company groups.

The institutionalised ideas of the past are major barriers to labour market reform now, despite the drastic changes that have taken place in economic and social circumstances. This is a common problem that faces agendas for reform, but it is particularly true for reform of labour markets in Japan.

Naohiro Yashiro is professor of economics in the International Christian University and former president of the Japan Center for Economic Research. More detailed analysis of this subject will appear in ‘Myths about Japanese Employment Practices’, Contemporary Japan 23, later this year.