Everybody
agrees: wages need to grow if Japan is to make a definite escape from
deflation. Full- time wages have
increased by a mere 0.3 percent since 1995! For example, despite its record
profits, Toyota increased its base salary only by 1.1 percent last year. The
average of 219 Keidanren firms managed just 0.44 percent. Clearly, an increase
in base wages, colloquially referred to as “base up”, is long overdue.
For quite some
time now, Japanese authorities have attempted to reinvigorate growth and
generate more inflation. This is important because debt can become quite
burdensome when prices and incomes fail to grow. This is exactly what has been
happening in Japan during the couple of decades of deflation. Nominal GDP fell
throughout most of the period while public debt rose to nearly two and a half
times the country’s GDP, the highest debt in the world.
The dual labor market limits wage growth
Our analytical work shows that lack of wage growth may have some structural causes that
in turn contributed to secular deflation. First, most workers are employed
under life-time contracts and hardly move jobs between companies. In exchange
for life time employment, employees accept to temper wage demands, which means
that tight labor markets do not translate into higher wages. In addition, a
large share of workers (37 percent) are employed under non-regular contracts, a
much higher share than in comparable economies. Companies scrambled to
restore competitiveness after the sharp appreciation of the yen in the 1980s by
moving production offshore and hiring nearly exclusively under much lower paid
non-regular wage contracts. And at the same time, unionization declined and
wage bargaining power of labor unions all but disappeared.
The tighter job market does not do it
Abenomics—a
combination of monetary easing, flexible fiscal policy, and structural
reforms—was designed to boost both real growth and inflation. In 2013, the
monetary arrow was launched in force, depreciating the yen and boosting
corporate profits in the process. The ensuing record corporate profits were
expected to be passed through to increased prices for subcontractors,
dividends, and higher wages for all workers.
It has helped in
stirring nominal GDP. Over the past two years, nominal GDP has risen by
3.7 percent. Tax revenues especially from corporate profits have also
increased. And the labor market has continued to tighten and participation
reached a historic high. By end 2015, only 3.3 percent of people looking for
jobs were unemployed. Some sectors are facing, acute labor shortages.
Yet the current
wage negotiations are hardly aggressive at all. For instance, Toyota’s
union is asking for only half as much as in 2015. Overall wage demands are
likely to lead to an increase of only about 0.5 percent, well below the Bank of
Japan’s inflation target, ignoring any productivity improvements. The lagging
of real wages to labor productivity appears to continue a long standing trend
which has been affecting Japan more than other similar economies (see chart).
True, the global
and the domestic outlook remains weak. Corporations are not keen to boost wages
or prices. Yet, wage and price inflation need not lead to loss in competitiveness
or profitability. For instance, if inflation was at two percent and
productivity grew by one percent, then increases in wages and social security
benefits by 3 percent would leave everyone equally well off. And
collectively the economy would benefit from lower real interest rates and more
effective monetary policy.
Wage increases could be the missing arrow
Abenomics
rightly aimed to end Japan’s entrenched deflationary mentality. The monetary
arrow was meant to raise inflation expectations to 2 percent, and thus provide
a mechanism to coordinate wage and price inflation. However, this has proven to
be a hard struggle because companies and workers alike seem to look backward
rather than forward in setting their expectations. As a result, they fail to do
their part to solve the coordination problem that would leave all better off.
More recently,
Prime Minister Abe has shown leadership by increasing minimum wages. But this
affects directly only about one tenth of the work force. The impact is limited
at best. We are not sure that relying on moral suasion for the rest will
deliver results.
Rather, a fourth
arrow needs to be loaded:
- The government could
replicate the success of the corporate governance reform by introducing a
“comply or explain” mechanism for profitable companies to ensure that they
raise wages by at least 2 percent plus productivity growth.
- The authorities could
strengthen existing tax incentives to raise wages.
- Policymakers could even
go a step further by introducing tax penalties for companies not passing
on excessive profit growth.
- Another option is to set
the example by raising public sector wages in a forward looking manner.
At the same
time, these steps would be reinforced by the existing arrows. In particular,
Prime Minister Abe’s third arrow needs to cut much deeper through labor market
duality by ensuring that new hiring takes place on contracts that strike a
middle ground between the currently prevailing life-time and non-regular
contracts. This would restore some healthy wage bargaining power to
workers.
Along the way,
“base-up” should again become a household word.
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