Dignity of a Nation Analysis Sidebar 1: Income Inequality and Lifetime Employment

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The OECD just came out with their 2006 Economic Survey of Japan, which generally says, Japan’s economy is doing pretty well at the moment, but the nation has to undertake serious steps in managing innovation and reducing inequality to keep up adequate growth for the next decade. The report closely examines the relatively new problem of income equality in Japan. Measures like relative poverty have nearly reached American levels after fifty years of enviably low disparity.

The OECD’s conclusions about the nature of income inequality seem to contradict Fujiwara Masahiko’s arguments in Dignity of a Nation: namely, the age old idea that lifetime employment helps reduce income disparity.

A lot of Nihonjinron writers like to associate Japan’s historically low Gini coefficient with Japan’s unique “lifetime employment” (終身雇用) system, where employees stay with the same company for their entire career. Fujiwara sees this as a key to social stability, claiming that merit-based promotion would cause destructive internal competition within companies. The OECD does back the claim that seniority-based pay — which goes hand in hand with lifetime employment — has helped limit the difference between employees of the same age in different companies. So on that point, the old belief may be true.

The problem is that the old lifetime employment system depends on a very rigid recruitment process (the so-called shuushoku katsudou), and even though young workers are no longer likely to stay around at one firm for their whole lives, they will still start their careers by passing through the very narrow gate of this process. Once within the company, the “regular employees” (正社員) acquired through the formal process will work side-by-side with “non-regular employees” (temps, those on yearly contracts) — but rewarded in completely different pay schemes. Non-regular workers make on average only 40% of the regular worker salaries, which the OECD says cannot be explained just through differences in productivity. And no matter how well the non-regulars perform, they will almost never be able to jump over to the “regular” career track. Participation in that initial recruitment drive now means everything for your future earnings and class status.

For the most part, the regular workers all come from top-notch four-year universities. Those without such credentials can’t get in the front door at recruitment, and even those with degrees who fail to “pledge” a first-tier company in their early 20s may never be able to get back on the mainline track. This creates what the OECD calls a “market dualism” — an elite track and a “non-regular” track coexisting without much chance of non-elite workers movin’ on up.

Why did this system not cause as much income inequality in the past? My guess is that companies hired more of their staff through the formal channels and outsourced work to other smaller firms with rigid employment ladders. Once the Bubble burst, these companies took less and less “formal” workers and used temps and non-regular hires to fill in the gaps at a low cost.

The OECD calls for less legal barriers to firing regular employees. These “Golden Boys/Girls” on the elite track can essentially never be fired, which is not true for their non-regular counterparts. If you get rid of the remnants of the old system and hire based on skill/merit alone, non-regular workers would be able to get hired at a decent pay scale and perhaps move up the career ladder at their companies. As it stands now, those who can ace placement tests at age 17 and look good in a cheap black suit at 21 are the only ones who can stay middle-class. The old traditional Japanese employment system now exacerbates the income inequality problem instead of solving it.

Marxy wrote a lot of essays back on his old site Néomarxisme. This is one of them.

32 Responses

  1. sphinx Says:

    The basic analysis of this system is sound, and your observations on the division between temp workers and seishain is very on point. In my office there are two temp workers who are ostensibly of the same skill as the rest of us but aren’t invited to ‘bu’ meetings and have a shittier pay scale (not like mine’s very good to begin with).

    But just speaking from personal experience, there are exceptions to the larger rule. Capitalism is a system that can adapt itself to the quality of labor available to it. When meritorious candidates are overlooked in order to conform to the standard ‘rireki henchou’, they will find work elsewhere. This is almost always the second tier of the two-tier labor market, where I imagine average monthly salaries float under the 30 man mark.

    To critique this system is however, for me, more than a matter of simply observing its inequalities. The todai graduates get the job because of two things:

    1. Discipline. They are most likely intelligent already, but it’s discipline that counts. Internalizing the juku system, doing sports in both season, being a leader, putting oneself on the long path towards karoushi, this is what employers value. The shamed cringe when confronted, the bone-level agreement to office hierarchy.

    2. Family background. This is still a major factor since the family registry still exists. A powerful business family and its connections speak for decades of reliability, and this is another important factor that the business elite are after.

    Gotta go eat Udon.

  2. Momus Says:

    I think it’s also worth considering “the exponential explanation”: in a society which is moving towards social inequality, every social institution and practise will increase inequality, even those social institutions and practises which once decreased inequality (like the lifetime employment system).

    That’s because inequality is, itself, an exponential phenomenon: the larger inequality gets, the faster it grows. Soon every social mechanism becomes a filter, a magnifier of inequalities.

  3. dzima Says:

    The OECD calls for less legal barriers to firing regular employees. (…) If you hire based on skill/merit alone, non-regular workers would be able to get a decent pay scale and perhaps move up the career ladder

    If you have lived in a few different countries and have a good memory, you’ll most certainly remember this line “less legal barriers for firing employees” being uttered not in words but in the actions of politicians and employers all over the world . It is the poltergeist dogma in the machine of capitalist countries. And there’s one place where Japan’s uniqueness got watered down.

    I don’t agree or I don’t think it’s likely that non-regulars employees are going to get a better pay or fairer conditions; companies and corporation’s objectives are obviously to slash everyone’s pay while making everyone’s job less secure.

  4. n Says:

    There are also key differences in hiring practices and worker retention in large vs. small companies. The bulk of Japanese workers have been not in the huge corporate but rather in the 中小企業 and the like. Of course, many of those are subcontracting for the biggies though…..
    I neglected to read the OECD report–is it Tokyo-centric? I wonder about the case of regional universities and companies. Some people hired in Tokyo get dispatched for sure, but there are lots of Japanese who don’t come up to *the* big city but still get (or got) relatively long-term employment.
    Lastly, I wonder about the inablility to switch to the “regular” track. I have had numerous friends who were temping at relatively large (but not huge) companies who were offered regular spots, but didn’t want to give up a) the ability to leave at 6pm or get paid overtime, b) take vacations without fear of penalty, and c) avoid being pulled in to other company-based activities that they were able to avoid due to the non-permanent status. I guess I am just saying some people aren’t looking to switch to a permanent position.
    ….und what about the 外資系/non-外資系 divide?

  5. marxy Says:

    every social institution and practise will increase inequality

    So you are saying that heavily progressive taxes in a country with income inequality makes worse income inequality.

    companies and corporation’s objectives are obviously to slash everyone’s pay while making everyone’s job less secure.

    This may be somewhat true, although not as simple as ABC. In the case of Japan, you have the top jobs – white collar in big corporations – with great security and those in smaller companies and in lower positions with none. Is this more fair than nobody having security?

    I guess I am just saying some people aren’t looking to switch to a permanent position.

    I can look it up again, but i think that the OECD has stats for how many want a full time position.

  6. Momus Says:

    So you are saying that heavily progressive taxes in a country with income inequality makes worse income inequality?

    In theory, no. But in practise, yes, we all know that the rich can afford much better accountants than the poor, and tend to get around just about any tax system, especially if they know the right people in politics. High Gini societies know all about this kind of scenario.

    Hey, another thought. Isn’t the yakuza another of these endangered Japanese institutions which ensures equality, just like lifetime emplyment? What better way out of the “elite universities” system you’re describing than a system which allows the not-so-bright to make lots of money? (Okay, by means of extortion, money laundering, corruption, and, allegedly, micro-management of the creative industries. But still, you can’t sniff at the levelling going on there.)

  7. marxy Says:

    I am not sure the yakuza steal equally from the rich and poor. In practice, they are probably making money from those at the bottom indulging on their vices: credit, drugs, gambling, etc. Are leeches good for blood circulation?

  8. nate Says:

    temp agencies have a lot to gain in keeping people on staff at a company. A regular employee of X co doesn’t send any money to Manpower staffing, but every minute a Manpower temp works Manpower takes home as much as 20% (or more) of his pay. It’s pretty hard to justify paying a temp full price when you have to pay their staffing company a premium.

    So you hire your temps full time, right? Sure, and as the contract says, you pay a premium… depending on the field and yearly salary the (former) temp is entering into, that premium can go into the 10s of 1000s of dollars.

    You have to figure this has a pretty immense impact on inequality in any country where it appears. If you count all the temps that pass through Manpower in one year, they wind up in the running for “world’s largest employer”, all built on the business model of the pimp.

    btw, traditional headhunting has also been replaced in large part by temp agencies that will enjoy a portion of your check for as long as you stay with a given company.

  9. Mulboyne Says:

    Marxy wrote: “Why did this system not cause as much income inequality in the past? My guess is…”

    It is better to look at what happened. Labour was in short supply so non-lifetime employees often earned higher monthly wages than lifetime employees. In 1987, some of the highest earners in the bubble were shabu-fuelled truck drivers. The “triple merits” ensured that they could capture the main share of any increased prices that their firms were imposing on their customers because they were the largest cost. Many brokers at financial firms opted out of the lifetime employment system to work on a commission-only basis.

    This was only income however. There was a well-known Asahi cartoon at the published just after the listing of NTT (no link) indicating that an aspiring bride should ditch her previous ideas about a Todai graduate and look at whether a guy owned an apartment, Nippon Steel shares or NTT.

    Part of the reason for this is that firms doing well were never initially the choice of the best university graduates. A good student might have chosen Mitsubishi Shoji but his less-qualified counterpart in Daikyo or Hanwa was blowing him away

    That’s one of the reasons why the internet bubble, although much shorter in span, felt similar. US graduates dictated terms to employers because the big firms no longer felt certain that they offered the best terms compared with a start-up.

  10. marxy Says:

    A lot of companies tend to hire temps at a higher wage rate so that they can cut the temp firms out of the business.

    Labour was in short supply so non-lifetime employees often earned higher monthly wages than lifetime employees.

    Yes, this is an important point. There is yet a labor shortage in Japan, although a lot of people think that the lack of children should match up nicely with labor demand in the next decade.

  11. Mulboyne Says:

    Companies may have to rethink the employment terms for their current non-contract employees if the labour panel decision in this case takes hold:

    http://mdn.mainichi-msn.co.jp/national/news/20060724p2a00m0na015000c.html

  12. marxy Says:

    According to this OECD report, in a 2003 survey 76% of men non-regular workers and 69% of women wanted to be come regular employees.

    Also, only 23% can switch over now, opposed to 30% in 1990.

    It would be also good to state that non-regular employees do not get medical insurance etc., which brings down their overall costs.

  13. Slim Says:

    “non-regular employees do not get medical insurance.”

    with national health insurance, how much of a cost difference is this for employers? (certainly less than an SF bay area company shelling out at least $1k a month to cover a worker and family, right?) I believe i paid a mere $100 a month for the insurance when I lived in Japan, admitedly on an underdeclared freelance income, but still…

  14. Momus Says:

    You know, while Marxy appears to be vaguely Marxist here, deploring gorwing inequality, I sometimes wonder if there isn’t a subtext that says: “The world is tough on the excluded, so you really have to conform these days.”

    In other words, I wonder if “Marxism” isn’t being used here as a proxy for the “hard-headed realism” that makes people accept the world, shitty though it is, rather than try to change it? We could think of this “hard-headed realism” as — in an inversion of Gramsci’s famous phrase — “pessimism of the intellect, pessimism of the will”. And Marxism without some element of transformational praxis really isn’t Marxism at all. It’s brute economism.

  15. marxy Says:

    On a social level, I think income inequality is bad. On a selfish aesthetic level, I also think it is bad for art/product diversity. I do not however think that things are so simple as “corporations are bad and are causing this.” Post-industrial economies are subject to this kind of natural gravitation towards paying more for higher skillsets. Some structures make it worse. Some gov’t intervention could even it out.

    I do think Marx’s ideas of economic substructure are very applicable to society and culture, but I am not sure his solutions are the best or his predictions the most accurate. I think you can be “Marxian” in analysis without being “Marxist” in proscribing answers.

    I don’t particularly see where your version of post-economics, post-politics post-Marxism is more transformational by choosing to believe that an aesthetically-pleasing goal excuses the questionable process of getting there.

  16. Momus Says:

    I do think that Click Opera, or the stuff I write for Wired, is more “transformation-friendly” than most of the writing on Neomarxisme, because it has a vision of the good life and indicates ways to get there. Sustainability and slow life issues get talked about a lot (this week’s Wired column mentions a scheme for “passive air conditioning”, for instance), but so do ethical issues which shade into aesthetic ones: how do we overcome a destructive mindset focused on “guilty pleasures”? How do we learn to respect the otherness of other cultures? And so on.

    Actually, although Neomarxisme doesn’t seem so partisan or prescriptive or praxis-oriented, in fact it is: in this entry, for instance, you say “The OECD calls for less legal barriers to firing regular employees.” And it seems very much as if you endorse those calls. So your “Marxian” analytical tools are getting coupled to a program we know all too well — a program we see Merkel and Blair and Bush implementing, a program of “market reform” or “incentivization”. Loosening up regulation, giving the market more say. It’s a neo-liberal agenda of the soft right. A “utopianism of that which already is”, we could call it.

  17. ananForNow Says:

    I can’t really comment to the entire article, but from where I sit as a directory of a smallish Japanese tech company in Kyushyu, the large corp, small-midsize corp difference is a major driver in pay inequality.

    Without addressing the major advantages the any major company has when compared with smaller firms, what happens at the local level in the economic downturn, large corporations externalized a lot of their labor costs and risks by freezing hiring and breaking off divisions into seperate companies. These companies were then for the most part dependant on the parent firm of the majority of their work, the overall amount of which had decreased due to the downturn and the price of the work also decreased due to the need of the parent company to pay the high salary of the remaining employees (management etc). The new small companies, with no reserves etc, were formed with minimal admistration positions and switched the majority of employees to a performace based pay scale to stay afloat. While not contract employees per-se (they do get health-care) the pay is generally reduced.

    Companies that did not split off labor into new divisions, generally consolidated and/or relocated around a major metropolitan area (Kanto, Kansai, Fukuoka) and those who didn’t like it quit. The work that couldn’t be relocated is farmed out to local contractors who were forced to compete with one another for fewer and cheaper work. As a result of this compition many local contractors either reduced pay dramatically, switched to contract employees almost exclusively, or went belly up.

    In the IT sector this is starting to turn around due to the general recovery but it’s still a very big pay gap. Another interesting side effect is that the large corporations are now stuck with an average employee age in the mid 40s while the small contractors almost all have average ages below 30.

  18. marxy Says:

    I think Slow Life etc. is great. I definitely think Japan should move in that direction but I am yet convinced that Japanese corporate culture has made any significant movement towards a more employer-friendly, environmental-friendly management system. At least compared to Europe. If things make the leap from marginal magazines to mainstream labor policy, I will buy you a beer and then take off my full month for vacation.

    I don’t think just being able to fire regular employers is the answer. But I think freeing up the labor market and having skill be the criteria for promotion – instead of hierarchial pedigree – could at least lessen the gap. Japan will still have to deal with the fact that the rural areas have absolutely no economic infrastructure and are essentially doomed to be a drag on the income gap.

    Restructuring or not, the days of easy equality are over. If you think it is fair to pay someone 200% more just because they went to an elite college, I am not sure that is so Marxist.

  19. Momus Says:

    I think it’s interesting that Marxy, while claiming to be concerned about inequality, endorsed the OECD recommendation on the relaxation of hiring and firing regulations, but had nothing to say about the article on the unionization of non-contract workers that Mulboyne linked to. In other words, he seems to think the solution to inequality has to come from capital, not from labour.

    Now, if we know one thing, surely, it’s that the market system increases inequalities, whereas trade unions decrease them. So Marxy’s conclusion makes no sense… Unless he’s just using a mock-concern about inequality as a fig-leaf for a generalized belief in the Anglo-American market system for its own sake.

  20. marxy Says:

    Labor unions have not been strong in Japan for 50 years. They had some big wins in the late 40s/early 50s and pretty much got coopted into being non-combattative “company unions” without horizontal links to other workers in similar fields. I don’t know why I should be faulted for not thinking that labor unions are going to somehow rise from a pretty soft history to be the main driver behind a society-wide problem that is squarely within the government’s jurisdiction.

    Or I am just being picked on?

    The McDs union that just formed looks interesting, but is there any reason to believe that companies will just ignore any kind of rogue unions that cause the dreaded “fiction”? Is the judiciary in Japan also going to rise up and wield actual political power?

    Tax revenues have to be increased in Japan. Is it a crazy non-Momus idea to suggest an income tax over a consumption tax? Guess which one the LDP wants…

  21. Momus Says:

    (Also that last answer, which crossed mine, confuses me; you seem to be using “employers” when you mean “employees”?)

  22. anonForNow Says:

    slim:
    As I understand it, the rate varies greatly by insurance type and income level, but the general rate is set at 14.288% of income for 社会保険(syakai hoken) with verious deductions etc. That amount is then split in half between employee and company.

  23. marxy Says:

    I meant “employees.” It’s late in the day.

    By the way, Japan’s national health insurance plan is pretty great. As a student, it was dirt cheap, maybe $300 a year. It goes up once you start working, but probably a better deal than what they take out of your paycheck at a company. Also lets you do freelance without the headache. To say America should have a similar system would be an understatement.

    I am generally healthy and almost wish I could get back to the national plan. Don’t think it covers dental though. Or whether it’s good as a “family plan.”

  24. dzima Says:

    I think freeing up the labor market and having skill be the criteria for promotion – instead of hierarchial pedigree – could at least lessen the gap.

    But Marxy, things don’t work this way! The freer the market, the more skilled workers have bargaining power when dealing with employers while the semi-skilled and plebeains in general become more of a semi-slave class.

    And we know that people who are “skilled” aren’t always necessarily there because of their array of talents or merits. So things are basically turning back to an Aristocracy of capital.

  25. anonForNow Says:

    marxy:
    It does cover dental up to a point.

    IANAA (I am not an accountant) but as a freelancer I believe you would generally pay the lower rate of 8.2% of income (before adjustments etc) for 健康保険(kennko hoken),but as this is not split between you and the company if you run your own business, in certain instances it can be considerable higher than syakai hoken .

  26. marxy Says:

    Again, we are confusing the Japanese system as a step closer to communism when it may be a step closer to feudalism. I am not sure if dismantling a highly structured labor market that protects the elite and only rewards early success is succombing to neoliberalism. I think everyone out there knows successful people who did not “bloom” until their 20s, and I am sure I would personally punish them with a lower wage just because they did not get their act together at age 14.

    In some ways, I am not sure there is an easy solution to this anyway. Japanese firms are going to hire elite graduates at better terms regardless. I don’t quite see why there is something “capitalist” in suggesting that those off the elite track get paid the same, with the same benefits. I am basically calling for a wage increase for 40% of all company employees.

  27. dzima Says:

    I am basically calling for a wage increase for 40% of all company employees.

    Dream on. If I recall right, you were in favour of an increase in productivity in Japan. While this extra productivity doesn’t arrive, I don’t think anyone is going to be getting a larger piece of cake and you’re just contradicting yourself.

  28. marxy Says:

    Isn’t sending people home when they have nothing to do at work an easy way to raise productivity without firing anyone?

  29. dzima Says:

    True, but I don’t see how anyone could be compelled to raise wages because of that.

  30. Dave Says:

    Lifetime of work, in exchange a lifetime of work. Or the freedom to leave (at six), in exchange for the freedom to ask someone to leave.

    Sounds like a fair deal to me, in a dysfunctional kind of way.

    The worst jobs usually have the best pay.

  31. Mulboyne Says:

    The following article from the Asahi yesterday is another in the increased coverage of firms’ labour practices:

    http://www.asahi.com/english/Herald-asahi/TKY200608010134.html

    Generally, firms didn’t take too much heat when reducing their headcount over the last 10 years. After all, there were some big name bankruptcies so there was an implicit understanding that firms might have to renege on their side of the social contract. They stopped recruiting, thinned the ranks of middle management through harassment and intimidation and created new companies so employees of a division could be re-hired on lesser terms. Compare with the protection offered in some European countries, employers had an easy time of restructuring once the ball got rolling.

    Since the economy has recovered, though, there has been a recognition that the rising tide isn’t floating all boats. Some international commentators see this as a natural result of the fact that Japan seemed to have relatively painless recession by the standards of the western world i.e. since people appeared not to suffer in a downturn then perhaps they aren’t due to prosper immediately in an upturn.

    From inside Japan, though, it appears that the people who took the hardest hits are not the ones getting the early pickings. The subcontractors who suffer first usually rebound first – in ways like that, it wasn’t the case that lifetime employees always were on top at all times although they would usually enjoy better status – but that hasn’t been the mechanism thi stime.

    This is one of the reasons why there is a good deal more focus on firms’ intentions today. Companies now have to consider allocating a larger share of profits to shareholders in order to guard against takeovers or corporate activism. Capital spending will occupy a larger proportion of spending to cope with long-delayed upgrades and the need to offset long-term labour shortages. Labour has a job on its hands to increase their share of profits in the form of salaries and benefits (I would include entertainment expenditure as an important “quasi-income”). Non-contract employees want to see a sharp increase in remuneration to get back some lost ground or else to be acknowledged and rewarded as contract employees.

    Part of the way in which the employer / employee contract is likely to change is in areas like the better official attitude to maternity and, especially, paternity leave as an attempt to get the birth rate up. We’ve also seen a number of decsions in the courts awarding compensation for karoshi and sexual harassment which are a step in the right direction for better working conditions. It is a long realignment, though, especially with a creaking pension system as another variable for financial planning.

  32. marxy Says:

    Interesting points.

    Part of the way in which the employer / employee contract is likely to change is in areas like the better official attitude to maternity and, especially, paternity leave as an attempt to get the birth rate up.

    For some reason, I don’t see this happening anytime soon, no matter how logical it is. The birth rate has already dropped to ridiculous depths, and yet, nothing seems to really budge in this area.