The Japanese Labor Problem

By: Fred Jankilevich

Lawyer / Consultant

February – 2018

Japan suffers from an unusually high proportion of aging population. A recent study from KeyoUniversity predicts nearly 12% increase of aging population between the year 2000 and 2050, the largest increase in the developing world. The lifespan of Americans is only surpassed by the Japanese. In this sense, while in the U.S.A the average lifespan for men is 75 years of age and for women 81, Japan enjoys an average population lifespan of 80 and 86 years of age respectively.

 

The Business and Commerce Faculty at such said institution proposes as a result that in the mid-term, in the long-term, a “lifelong active society” can be created, so that “the will and ability of older people can be fully utilized.” Professor Atsushi Seike, in his article “Towards a Lifelong Active Society” explains:

Towards a Lifelong Active Society: Coping with Japan’s Changing Population

Re-Transmitted From: 

© 2016 The Asia and the Pacific Policy Studies published by John Wiley & Sons Australia, Ltd and Crawford School of Public Policy at The Australian National University. All rights reserved.

Abstract

In order to cope with Japan’s globally unprec- edented ageing population, it is extremely im- portant to promote the employment of older people. By taking advantage of the strong mo- tivation among Japanese older people to con- tinue working, Japan will be able to establish a lifelong active society in which the will and ability of older people can be fully utilized. In order to promote a lifelong active society we need to revise our public pension scheme so as not to discourage older workers to continue working. The mandatory retirement practice should also be revised along with the seniority based wage system to promote the employment of older workers. The creation of a lifelong ac- tive society should substantially reduce the burden on future generations, and in particu- lar the social security burden. If Japan can es- tablish a lifelong active society, it will have valuable implications for other countries fac- ing population ageing.

Keywords: demographics,economicpolicy, intergenerational, Japan

1. Unprecedented Population Ageing

Japan’s ageing population is globally unprece- dented in both its level and its speed, as shown in Figure 1. The proportion of people aged 65 years and over is now one quarter of the to- tal population of Japan, making it already the largest proportion in the world. This proportion is projected to be one third of the total popula- tion in 2035, when today’s newborn children will be adults.

It took only 24 years (from 1970 to 1994) for this proportion to increase from 7 to 14 per cent in Japan. In European countries, this took from 50 to over 100 years. Japan’s ageing has been twice as fast as that of Germany and more than four times as fast as that of France.

Japan’s ageing population is also unique in its depth. That is, within the older population, the proportion of very old people (aged 75 years and over) is increasing particularly rapidly. According to Population Projection for Japan published by the National Institute of Population and Social Security Research, the proportion of people aged 75years and over is expected to be 20 per cent in 2035.

This rapidly ageing population has had and will continue to have an enormous effect on the Japanese economy and society. Its most significant impact is on social security. As I will discuss in detail later (see Table 1), total expenditure on social security in Japan reached almost 110 trillion yen (approximately US $924 billion) in the 2012 fiscal year, which amounts to 22.8 per cent of GDP. Approxi- mately half of this amount is spent on public pensions, and one third is spent on medical and long-term care.

The other effect of an ageing population is a smaller work force. Productivity will decrease unless there is substantial improvement in pro- ductivity per worker. It also leads to lower earnings from work, thereby decreasing con- sumption unless there is a substantial increase in income per capita.

Japan should take every possible measure in order to cope with an ageing population. Of course, one measure is to stop, or at least mod- erate population ageing. This includes taking adequate measures to reverse the trend of the decreasing fertility rate.

However, even in the unlikely event that Japan’s fertility rate recovers drastically, new- born babies today are not able to contribute to the Japanese economy until they reach adult- hood, in other words, in 20 to 25 years’ time.

Instead, Japan must be forward-looking in its response to the structural changes presented by an ageing population.

In these circumstances, one potential solution is to promote the employment of older people. More elderly people must continue to work to sustain Japan’s economy and soci- ety. In order to make this possible, Japan should establish a society in which the will and ability of older people can be fully utilised. Henceforth, I will refer to this as the ‘lifelong active society’.

2. Ageing as the Result of Economic and Social Success

An ageing population is partially the result of economic growth. In Japan, as in other developed countries, two major driving forces of the ageing population are closely related to the increase in per capita income.

One is, naturally, an increase in life expec- tancy. In 1947, soon after World War II, Japan’s life expectancy was only 50 years for males and 54 years for females. Sixty-five years later, it has now reached 80years for males and 86years for females, as shown in Figure 2. Without substantial improvement in living standards, which is only possible through economic growth, such a drastic im- provement in life expectancy cannot occur.

A decreasing fertility rate also leads to an ageing population. As shown in Figure 3, Japan’s fertility rate was approximately 4.5 births per woman in the late 1940s. This de- clined to 2 in the 1960s and early 1970s. It be- gan to depart from this level in the mid-1970s and recently fell as low as approximately 1.4. Although it has recovered slightly, this is still one of the lowest fertility rates in the world, even among Organization for Economic Coop- eration and Development countries.

One notable point in Japan’s fertility rate trend is the sharp drop in 1966. This is be- cause, in accordance with the Chinese astro- logical cycle, 1966 was a hinoe-uma year, and there is a superstition that women born in a hinoe-uma year will exploit their husbands.

In order to avoid possible risks for young women in the future marital market, parents refrained from having children that year. This demonstrates the incredible impact of supersti- tion on human behaviour.

The combination of rapid wage increases and the unchanged, traditional gender division of work as seen in Japan, South Korea, and some southern European countries usually cre- ates an extremely low fertility rates. This is be- cause of the higher opportunity cost faced by women who have children under these conditions.

3. The Creation of a Lifelong Active Society

The ageing population is essentially an un- avoidable phenomenon in developed coun- tries. Every effort should be made to reverse the trend of the decreasing fertility rate. How- ever, even if the fertility rate recovers drasti- cally, today’s newborns will still not be able to contribute to the Japanese economy for two decades. The trend of ageing cannot be re- versed overnight. Japan must accept that the existence of an ageing population for at least two decades or a quarter of a century hereafter. Social systems, in particular, should be revised to cope with the change in population structure from a pyramid-shaped structure to a reverse pyramid.

To cope with such a significant ageing population, it is extremely important to promote the employment of older people. The current retirement age in Japan is 60 years old. If older people with the will and ability to continue working beyond retirement age are able to do so, the average per capita burden of the ageing society will be reduced. The increase in the number of active workers and consumers in their old age could also prove a driving force of economic growth on the supply and demand sides of the macroeconomy. This is why the creation of a lifelong active society is vital.

Of course, people should not be made to work against their will. In this respect, Japan—where older people are particularly motivated to continue working—has an advantage.

As shown in Table 2, the labour force participation rate of Japanese people in their 60s is significantly higher than in other developed countries. Fortunately for Japan, this means that the percentage of people who have the will to work in their 60s is relatively high. The same is true in South Korea.

Japan’s government has basically been consistent in its ongoing promotion of the employment of older people. As a result, the labour force participation rate of older people in Japan has become significantly higher than that of other developed countries, as shown in Table 2. However, in Japan there remain some obstacles preventing the promotion of a lifelong active society, both in the social security system and in employment practices.

4. Institutional Reforms Necessary to Establish the Lifelong Active Society

One major obstacle lies in the public pension system. Naturally, the pension benefit induces retirement, as it is a benefit designed to make retirement possible. However, the current pub- lic pension system includes a component encouraging pension-eligible workers to retire or reduce their working hours.

This component is the public pension’s earn- ings test. Through this mechanism, a person’s pension benefit can be reduced even after they have reached the pension-eligible age. The extent of the reduction depends on their earn- ings from work. Therefore, pension-eligible workers tend to restrict their earnings by reduc- ing working hours, in order to avoid the pen- sion benefit reduction as much as possible. In some cases, these workers retire completely in order to receive the full pension.

Japan must revise its public pension system so as not to discourage older people from con- tinuing to work. The United States and the United Kingdom have already repealed the earnings test to prevent this potential negative impact on labour supply. Sweden revised its pension plan to make its effect on labour sup- ply more neutral. Japan should also consider such a revision.

In the workplace, mandatory retirement practices are still dominant in Japan. Accord- ing to the Employment Management survey conducted by Japan’s Ministry of Health, Labour and Welfare, more than 90 per cent of Japanese firms with 30 or more employees now have mandatory retirement practices. Be- cause mandatory retirement requires severance simply because of a worker’s age, it has a double negative impact on the utilisation of an older workforce.

One effect is that it reduces the motivation of older people to continue working. Mandatory retirement from primary employers does not necessarily mean complete retirement from the workforce. Many older workers go on to secondary job opportunities. However, as has been repeatedly confirmed by empirical analy- sis, mandatory retirement is also a major deter- minant of complete retirement from the labour market. Researchers, including the author, have estimated labour supply functions and found that mandatory retirement reduces the probability of labour force participation in men aged 60 to 69 by approximately 20 per cent, assuming other conditions are constant.

The other negative effect of mandatory retirement is a reduced utilisation of the abilities of older workers. According to empirical re- search, as shown in Figure 4, those who have experienced mandatory retirement have a statistically lower probability of working in their 60s in the same occupation as they did at age 55 (Seike and Yamada 2004). If one assumes that a worker’s ability can be fully utilised when that person works in the same occupation for multiple years, workers subjected to mandatory retirement have a lower probability of working where their abilities are fully utilised.

Japan must revise mandatory retirement practices by lifting the legal minimum age of retirement or by introducing an anti-age dis- crimination act like that of the United States or European Union. Further, in order to comprehensively revise age-oriented employment practices like mandatory retirement, it is necessary to revise the seniority-based wage and promotion system. If an employer lifts the age of mandatory retirement with seniority-based wages unchanged, they will be employing more costly older workers. Employers and unions should begin to discuss revision of retirement practices, including revision of the seniority-based wage system, as soon as possible.

5. Reducing the Burden on Future Generations

Although labour reforms will improve long- term prospects, social security system reform is urgently needed to cope with the current eco- nomic impact of Japan’s ageing population.

Social security benefits for younger people should be increased, particularly those benefits that assist child care. In the late 1970s, when the fertility rate started dropping below two births per woman, the Japanese government should have been concerned about the impending generational decline in population. The government finally started seriously ad- dressing the issue in 1990, when the fertility rate fell as low as 1.57—even lower than the year of hinoe-uma in 1966. This became known as ‘the 1.57 shock’.

The 1.57 shock made Japanese people more conscious of the low fertility rate. The Japanese government introduced the so-called Angel Plan, a package of policies to promote compre- hensive childcare support. Prior to the Angel Plan, there had been virtually no effort to pro- mote an increase in the fertility rate since the end of World War II. This was partly because of the stigma attached to population expansion policies, which were likened to wartime popu- lation policies.

One problem with the Angel Plan was that unlike pensions, medical care and long-term care, which have guaranteed sources of

revenue under the social insurance system, child care does not have any permanent reve- nue source. In recent years, Japan has experi- enced a series of economic crises and budget cuts, preventing any substantial improvement in child care policy.

The report of the National Council on So- cial Security Reform, which I chaired, rec- ommended increasing the social security resources available to younger people. This would include a substantial improvement in child care services (NCSSR 2013). The re- port also recommended the reservation of 700 billion yen of consumption tax revenue as a permanent revenue base for child care, to ensure that no children have to wait for child care.

Reforming the public pension, medical care and long-term care is also necessary. As men- tioned above, the total expenditure on social security reached almost 110 trillion yen in the 2012 fiscal year, amounting to 22.8 per cent of GDP. Table 1 shows this in more detail.

When one is considering reform of pension and medical care, it is important to recognise that the nature of the problems facing public pensions and medical care are quite different. The problem with the public pension is a linear and rather simple one. The problem with medical care is non-linear and much more complex.

As shown in Table 1, expenditure on public pension benefits will rise at the same pace as the increase in the pension-eligible population—increasing only by a factor of 1.1 from 2012 to 2025. The public pension sys- tem can be reformed simply by changing reve- nue and expenditure schemes, for example, lifting the pension-eligible age.

Unlike pension expenditure, expenditure on medical care will increase faster than the growth of the older population. This is because expenditure will rise alongside the increasing proportion of much older people (aged 75 and over) within the older (65 and over) population. Increases in the quality and cost of medicine and care will also play a role. As demonstrated in Table 1, medical care expenditure will increase by a factor of 1.54 from 2012 to 2025.

Medical care reform is not just a matter of money—reformers must also pay close atten- tion to service providers. Without their cooper- ation, it will not be possible to devise effective policy.

In any event, social security expenditure is rapidly increasing. As 60 per cent of this ex- penditure is financed through social security insurance payments and 40 per cent through tax, Japan does not presently have enough tax revenue to cover the expenditure. The gap between total government expenditure and tax revenue has been widening in the past decades. The total amount of public debt in Japan is now more than 1000 trillion yen —more than double GDP.

Social security system reform is highly necessary. These reforms may face some political pushback from beneficiaries and service providers, but Japan must pursue them. Otherwise, Japan will not be able to pass on its social security system, which allowed the country to lead the world in terms of longevity, to future generations.

6. Conclusion

The countries of East Asia are facing the same ageing population problem and have the same policy targets in coping with this problem. For each country, there is much to be learned from the experiences of others.

The creation of a lifelong active society is of particular importance. If Japan is able to establish a lifelong active society, this will have valuable implications for other developed countries facing the same problem. It would

also provide an excellent reference for devel- oping countries, because they too will eventu- ally face similar population changes.

The concept of a lifelong active society could and should be a global standard in an ageing era.

To paraphrase Yukichi Fukuzawa, the foun- der of Keio University: just as the guardian goose cranes its neck to watch for danger, while the rest of the flock peck intently at their food, scholars must calmly analyse the devel- opments of the present and consider what needs to be done for the future.

August 2016.

References

National Council on Social Security Reform (NCSSR), 6 August 2013, Shakai hoshō seido kaikaku kokumin kaigi hōkoku sho [National Council on Social Security Re- form conference report], https://www. kantei.go.jp/jp/singi/kokuminkaigi/pdf/ houkokusyo.pdf.

National Institute of Population and Social Se- curity Research (2014) Demographic Statistics Data Book. Web-site of the Na- tional Institute of Population and Social Research, Tokyo, Japan.

OECD, n.d OECD.Stat, http://stats.oecd.org/. Seike, Atsushi, and Atsuhiro Yamada, 2004, Koreisha Shugyo no Keizaigaku [The Eco- nomics of Older Workers], Nihon Keizai

Shinbunsha.
United Nations, The 2012 Revision of World

Population Prospects.

 

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