Most notable in Kataoka’s speech was the latter. Japan’s headline unemployment rate recently fell to 2.2 per cent. This should indicate labour market tightness and lead to wage and price increases. But according to the BoJ in its July 2019 Outlook Report, year-on-year consumer price index changes are forecast at 0.8, 1.2 and 1.6 per cent for fiscal years 2019, 2020 and 2021 respectively. This is below the BoJ’s 2 per cent stable inflation target.
Kataoka and the BoJ believe that the headline unemployment figure is misleading — that the labour market has excess slackness. Specifically, Kataoka argues that the labour market will tighten only if the following conditions are met: an increase in the male labour force participation rate; a decline in male unemployment; and an increase in female working hours.
Kataoka and the BoJ’s analysis seems correct. The labour force participation rate has been declining since the early 1990s — it rebounded after 2012, but remained lower than the start of the 1990s. The long-term decline has been driven by Japan’s ageing population, with the rebound coming from a greater number of women and pensioners entering (or rather, re-entering) the workforce. According to Kataoka, herein lies the source of labour market slackness. Due to labour market reforms made by the Japanese government in 1999 and 2004, firms have been replacing full-time workers with cheaper part-time and temporary workers.
In Japan, working age males typically make up the bulk of the full-time labour force. If the long-term decline in the participation rate was reversed by females and seniors entering the workforce, then there still exists a decline in the male labour force participation. So the reduction in the unemployment rate must have also been driven by more females and seniors entering employment.
Data from the Japanese Ministry of Internal Affairs and Communication’s January 2018 Labour Force Survey shows significant underemployment rates, particularly amongst female workers. Given that women are over-represented in part-time and temporary work, a tightening in these areas should lead to wage and price increases.
Another prescription may lead to a rise in wages and prices: improving and maintaining worker productivity as an individual transitions from young working age to seniority. Data from the Japanese Ministry of Health, Labour and Welfare’s (MHLW) Basic Survey on Wage Structure shows that the earning profiles of Japanese workers sharply decline after reaching an age of approximately 60 years. In other words, earnings drop as workers get older.
The decline is particularly pronounced for males. For example, monthly earnings for males in the 55–59 age bracket in 2017 were over 400,000 yen (US$3700), yet males in the 60–64 age bracket earn on average below 300,000 yen (US$2770). Females see a smaller decline, as their earning profile across the life-cycle are flatter compared to their male counterparts — mostly because they are proportionately more likely to enter into part-time and temporary work. MHLW data shows that female monthly earnings drop from approximately 260,000 yen (US$2400) to 225,000 yen (US$2080) on average for the 55–59 and 60–64 age brackets respectively.
Using basic economic theory, explaining the sudden decline in wages is straightforward. The drop is attributable to a decline in marginal productivity as an individual transitions into old age. That is, once the average full-time Japanese worker enters senior age and leaves their company of employment, their productive capacity and output drops sharply as they may undertake part-time or temporary work elsewhere. With that decline they accept lower wages for their services.
The macroeconomic effects of this life-cycle wage decline are potentially striking. If workers anticipate a sharp fall in their wage-earning profiles in their twilight years, then they will save aggressively throughout their youth in order to fund consumption through retirement. This will result in lower real interest rates and inflation. But if workers believe that they can transition into old age while maintaining high wage-earning potential, then they will save less and consume more in their younger working years.
So in addition to the three conditions outlined by Kataoka and the BoJ, wages and prices may rise if workers can remain productive well into their old age. But achieving this is no trivial task. Both public and private initiatives must be put in place to retrain and re-skill older workers. Where feasible and productive, allowing workers to continue full-time employment into their older years ought to be encouraged.
But Japan has little time to act and implement these important changes. According to the United Nations’ World Population Prospects: The 2017 Revision, Japan’s population growth rate is projected to fall below -0.2 per cent in 2020, and life expectancies are forecast to increase. As people expect to live longer, barring productivity improvements and wage increases for the elderly, young Japanese will save more aggressively. This will lead to further deflationary pressures, keeping prices and wages low.
David Murakami is an MPhil Candidate in Economics at the University of Oxford.
Perhaps it was a lack of space but the author failed to suggest another approach to this situation: using public policy like tax incentives to incentivize private corporations to hire woman as full time permanent employees. This would afford them higher salaries which could translate into more spending. Private corporations are loathe to do this because it might affect their profitability. PM Abe has talked about Equal Pay for Equal Work. But he has done little to really try to implement it.
Likewise he could instruct governmental agencies to hire or transition more women into full time permanent employment. That might set a good example for the private sector.
A very nice article, but I have one problem. In arguing for allowing seniors to remain employed without a wage decline, the author is assuming that the salary they earn in their late 50s is commensurate with their productivity. This is questionable — may well be an artifact of the traditional life-long employment system that taxes the young and subsidizes relatively senior workers. One can argue that all workers, young or old, should be paid reflecting their current productivity. This may be desirable in the sense that it is closer to textbook economics. But its actual impact on aggregate consumption and the average wage is not clear. It is quite possible that the senior workers, now paid less than before, consume less, while the young, seeing that they cannot expect salary increases in their later working life, save a lot though their current income is higher.