Employees of Toyota Motor Corp work on the assembly line at the company's Motomachi plant in Toyota, Aichi Prefecture. Photo: REUTERS file
business

Japan's efforts to raise wages wane as firms embrace merit-based pay

24 Comments
By Tetsushi Kajimoto and Izumi Nakagawa

More Japanese companies are shifting to merit-based pay as competition for workers heats up, but the change risks holding back the sort of blanket wage hikes the prime minister says are needed to inflate the economy.

Ahead of annual labor talks set for March 11, the momentum to agree broad wage rises is waning as the focus shifts to merit-based pay scales. Bellwether auto giant Toyota Motor Corp's labor union is no longer seeking blanket pay rises, likely prompting others to follow suit.

It could give Japanese firms the excuse not to boost overall labor benefits, with many wary of fixed costs as profits are seen squeezed by Sino-U.S. trade tensions, the new coronavirus outbreak and global slowdown.

For workers, the shift would boost salaries of younger workers and potentially widen the country's wage gap.

Prime Minister Shinzo Abe's government has been pushing for a more flexible labor market that would boost wages and revive consumption, but ironically, firms have also been asked to keep offering blanket pay rises.

"The momentum toward base pay hikes is waning, while the October sales tax hike has added a burden on households. Declines in company profits are also casting a chill over the wage-hike mood," said Masaki Kuwahara, senior economist at Nomura Securities.

Sluggish wage recovery bodes ill for private consumption and the central bank's aim of hitting its elusive 2% inflation goal.

"Japanese firms no longer see the point of doing what everyone else does to raise wages in unison," said Hisashi Yamada, senior economist at Japan Research Institute. "As Abe's campaign on wage hikes runs its course, wages will struggle to rise ahead."

Some 57.8% of Japanese firms have adopted merit-based pay as of 2018, up from 17.7% seen in 1999, data from Japan Productivity Center, a non-governmental organization, show.

MERIT-BASED PAY

Electronics maker Fujitsu Ltd is one of the leading companies that have adopted merit-based pay.

It is offering annual salary of up to around 30 million yen for skilled workers such as high-tech engineers while keeping average annual per capita pay at around 8 million yen for its 32,000 employees.

"I understand the government's intention of trying to boost wages to stimulate the economy. But wages and labor costs are something that individual firm should decide based on results," said Manabu Morikawa, senior director at Fujitsu's employee relations division.

"As we compete globally, we should take global labor market and pay standards into account so that wages are set in the way that should compare favorably with our rivals," Morikawa said.

Toyota's labor union is demanding an average pay rise of 10,100 yen per month this year, down from last year's call for 12,000 yen, or 600 yen less than the agreed increase in 2019.

The union has agreed to Toyota's shift towards merit-based pay, which will make distribution of corporate income vary from employee to employee depending on their performance, so as to lure talent, said Takayuki Furukawa, spokesman for the union.

"Merit-based pay will create a pay gap between able workers and those who are not, but we share the need to help the company overcome rapid change surrounding the car industry," Furukawa said.

"We used to focus on base pay and job security. But now the competition is so tough that we need to support our company to secure workers amid labour shortages," he said.

Japan has lagged industrialised economies in adopting merit pay systems and blanket pay rises based on years of service have come to symbolize the country's inability to compete in the global marketplace.

Last year, big firms raised wages by some 2% for a sixth straight year as Abe kept up the pressure on businesses to boost pay to beat deflation that has dogged Japan for two decades.

Some analysts believe efforts to boost wages though may be limited as Japan's work structure diversifies.

About 40% of workers are lower-paid part-time staff and contract workers - double the proportion seen in 1990, just before the asset bubble burst. Seven of 10 workers are also employed by small businesses, often with much lower salaries than those at big firms.

The growing rank of low-paid workers has led unionists to prioritize addressing the income gap between permanent employees and low-paid workers, instead of a broad uniform pay raise.

For decades since the mid-1950s, spring labor negotiations (shunto in Japanese) have served as a platform for wage talks in Japan. But with less than one in five Japanese employees being union members, the bargaining power of unions has been on a steady decline, making annual talks more symbolic, analysts say.

"Wage gaps among businesses and within the same company are getting wider and wider, making effects of wage talks unclear," Shintaro Nakao, president of Pasona Inc, a human resources service company, told Reuters. "As merit-based pay replaces seniority-based pay, wages for those in their 20s and 30s may increase more than the middle-aged and elderly workers, causing the wage curve to flatten."

© Thomson Reuters 2020.

©2020 GPlusMedia Inc.

24 Comments
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For workers, the shift would boost salaries of younger workers and potentially widen the country's wage gap.

How will that widen the wage gap? In existing seniority based pay-raise system, isn't it the youth which is struggling the most to make ends meet? Youth poverty is one of the biggest reason of Japan's shrinking birth rate.

13 ( +15 / -2 )

Merit-based pay, when determined solely by the paymasters, is the same as freezing wages.

13 ( +15 / -2 )

So unless a company has a sick pay policy (here in the UK we have statutory sick pay) then someone ill through no fault of their own won't be paid? It's only based on productivity? Isn't that sort of like sales people with that sort of system? It seems grossly unfair to me.

3 ( +4 / -1 )

In that case they should raise corporate tax and lower consumption tax. Corporate taxes were supposedly lowered so that companies could pay higher wages.

9 ( +11 / -2 )

Still pending the definition of "merit" in Japan when it is usually not decided based on work's quality or outcome.

11 ( +11 / -0 )

Lemme get this straight...

Wages have grown by 2 percent on average for the past six years. The labor market is extremely tight, and so companies are competing to attract employees, which means that wages are expected to continue to rise. However, the fact that companies want to compete more heavily for the most productive employees is a bad thing because....inflation...communism?

That's about all I can figure as explanations. Economically, across-the-board wage hikes make no sense unless you are seeking to inflate currency or are stubbornly wedded to an ideology. Companies risk locking themselves into expensive wage deals that eventually result in steeper layoffs and pension cuts when the economy hits trouble.

I can understand why the government desperately wants inflation--Japan's government debt is huge, and a shrinking population is not going to be able to sustain that debt. But wage inflation combined with currency inflation is not ever going to benefit workers. In the end, the government is robbing today's workers to pay for yesterday's debts.

3 ( +5 / -2 )

So the only pay raises people can actually get, wont be asked for any more.

In favor of merit based, where the company defines "merit". Yeah ok......

Bellwether auto giant Toyota Motor Corp's labor union is no longer seeking blanket pay rises, likely prompting others to follow suit.

5 ( +5 / -0 )

Prime Minister Shinzo Abe's government has been pushing for a more flexible labor market that would boost wages and revive consumption, but ironically, firms have also been asked to keep offering blanket pay rises.

Abenomics has been confused and ineffective, after promising talk in the early days that suggested reforms might be coming.

"Merit-based pay will create a pay gap between able workers and those who are not

That's how it works, otherwise the "able" workers (at least seen by someone as performing well) could skip off to greener fields elsewhere, if they are so inclined.

The growing rank of low-paid workers has led unionists to prioritize addressing the income gap between permanent employees and low-paid workers

Rather, they should demand the government reform labour laws to abolish the system of two-tiers of worker that makes this a problem in the first place.

4 ( +4 / -0 )

Workers already get a wage! Tax them more I say! Cup noodles are cheep and easy to get as are staff. More tax that's how to motivate people, lower the company tax more its ridiculousness for a profit making company's on actually pay tax. Let foreigners do the work and tax them too. Having a no responsibility government job it's obviously the best choice for my financial future. More work for you plebs less talk, get back to it, when you are 70 take a break and die. Raise tax....please.

1 ( +6 / -5 )

If the old workers are still unwilling to retire this problem will continue.

-4 ( +0 / -4 )

For workers, the shift would boost salaries of younger workers and potentially widen the country's wage gap.

This statement needs to point out which wage gap they are talking about. Within the same company, the most prominent wage gap will be between old and young regardless of merit. Paying young workers more based on merit would actually close that gap.

Paying elite workers more might increase some gap between them and people doing casual work, but the onus there is on people doing casual work to acquire more valuable skills. It is not Fujitsu's fault if 7-11 does not pay well.

2 ( +2 / -0 )

This is exactly what I expected when they were shifting towards this system. Now instead of annual pay hikes it would be raised based on production and hours.

0 ( +0 / -0 )

The widening gap between rich and poor is moving along at a faster clip...

0 ( +1 / -1 )

No talk of the government system reducing its expenditures.

Also, the mandatory retirement ages should be abolished so people can work as long as they wish. In my university education field, the wage difference between 20s and 60s is just a pittance, so this is not a factor, Kag-san.

2 ( +2 / -0 )

The solution for the pay-gap between low paid (contract) workers and full-time employees, is simply to get rid of full-time employees and only hire low paid contract workers...

0 ( +1 / -1 )

the change risks holding back the sort of blanket wage hikes the prime minister says are needed to inflate the economy.

Abe has been going on about these blanket salary increases for nearly a decade, but all he has done is give corporations tax cuts and given them more freedom to exploit their employees by 'urging' companies to increase salaries. He is the damn prime minister for flip's sake! He has the authority to demand salary increases, but does nothing about it. He's just a two-faced wimp!

2 ( +4 / -2 )

A bellweather company sucking up workers from all over the country

is it out of tunes these days

as an automotive co in the far east

-1 ( +0 / -1 )

Will the incumbent and incompetent oyajis willing to adjust their pay to their merit ?

3 ( +3 / -0 )

The solution for the pay-gap between low paid (contract) workers and full-time employees, is simply to get rid of full-time employees and only hire low paid contract workers...

There is that pay gap too, which I forgot in my post, but that one is 100% about people not being paid for merit. Having two pay scales (seiki and hi-seiki) for the same work is the complete opposite to merit-based pay.

2 ( +2 / -0 )

JAPAN is always late. The rest of the world had been like this way since I know. I am 61 years old.

1 ( +2 / -1 )

For 70+ years the hard-working citizens of Japan have devoted their lives to companies in an effort to rebuild the nation. After all this time, who has benefited? The companies and the politicians. Despite record profits, much of which is invested overseas, salaries remain stagnant, and the living standard has been declining for the last 40 years.

What a truly sad state of affairs. In any other country, people would be protesting in the streets.

It's time for a radical change, and this starts at the top of the government.

2 ( +2 / -0 )

The radical change needs to begin with Western governments making market access conditional upon Japanese firms extending to their workers in Japan the same rights and conditions which workers in their overseas subsidiaries take for granted. Failure to make this a condition of doing business will result in ceding more and more ground as a direct result of the unfair cost advantage conferred by practices such as service zangyo, obligatory sacrifice of half of annual leave, and the many other not so hidden Dickensian features. If they can afford to follow the law abroad, they should be able to afford the same conditions here.

0 ( +0 / -0 )

This sounds like a nice idea but as some commenters have mentioned the companies control the criteria for deciding who gets pay rises and who doesn't...

As a prime example of how it can go wrong, one company I work for has a fixed scale of incremental increases and each year decides the number of steps employees go up based on their categorisation into four different brackets based on performance. That's all well and good in theory but a year ago they just decided nobody would get a pay increase because of 'poor sales', even the outstanding staff members...

Our union said never ask for a share of profits because companies will do anything to make it look like there isn't enough when really they should consider staff wages a cost of doing business... If you let them keep the profit after paying staff fairly everyone is motivated

0 ( +0 / -0 )

Lads! No worries,

I'm more than sure Abe got this.

0 ( +0 / -0 )

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