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Cost of Japan’s Competitiveness: Increasing Poverty

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Many foreign observers of Japan don’t get past the “lost decade/deflation” headline. They miss the fact that Japan has a robust export sector and continues to run high trade surpluses, despite the supposed difficulty of advanced economies competing with emerging markets.

But how has this outcome been achieved? As Michiyo Nakamoto tells us in a Financial Times comment “Poverty widens the cracks in Japan’s facade,” by squeezing workers. Japan in a generation went from a system of lifetime employment to high use of part-time and temporary workers, The latter have poor earnings over their working years and face poverty in their middle age. Worse, Japan has comparatively weak safety nets (one of the reasons for its high savings rate) and less reliance on extended families than some other cultures.

Now America also has a working poor, but it does not include the college educated in large numbers. In Japan, graduates during the “lost decade,” save those who attended elite universities, are at risk of not landing a permanent job and thus suffering from marginal attachment to the workforce. Could America be heading down Japan’s path?

From the Financial Times:

Not long before representatives of the world’s richest nations convened in Toyako for the glitziest event in the history of this remote Japanese fishing community, a very different scene unfolded just a few hundred kilometres south. Angry day labourers in Nishinari, Osaka, threw stones and firebombs at riot police, overturned a car and set fire to garbage, venting their frustration at their inability to find work.

The violence, which involved an estimated 200 people and went on for two days last month, was a long way from the serene facade that Japanese society normally presents to the world. But the riots were just one extreme manifestation of the social cracks that are appearing in a country that has often, if half-jokingly, been referred to as the world’s most successful socialist state.

Following more than a decade of economic stagnation, Japan is no longer the gentle place it used to be for the weaker members of its society.

In a relatively short time, the world’s second largest economy has been transformed from a cohesive, egalitarian society to one saddled with the ills of the neo-liberalist model: a growing underclass, social alienation, widening income disparities and simmering discontent. The country’s once-vaunted social and labour contracts have failed to keep up with the changes wrought by globalisation, leaving a large number of people barely managing to survive.

Although unemployment in Japan, at about 4 per cent, is by no means high, the number of so-called “working poor”, who earn less than Y2m ($18,600, €11,800, £9,400) annually – a level considered to be close to, if not at, the poverty line – has risen at an alarming rate. In 1997, 5m workers fell in that category but by last year the number had doubled to 10m, according to a government survey.

The rise in working poor stems largely from a sharp increase in non-regular workers as Japanese companies restructure their workforces to cut costs and remain globally competitive. Non-regular workers, including part-time workers, temporary workers and others, comprise more than a third of the total workforce, according to government statistics. In addition, there are at least 1.8m “freeters”, who take on whatever temporary jobs they can find and generally have no benefits. Thousands of freeters, in their 20s and 30s, sleep in internet cafés and are unable to find stable employment because they lack a permanent address.

Japan’s minimum wage, at Y687 an hour, is in danger of falling to the lowest level among Organisation for Economic Co-operation and Development countries once the US implements legislation to raise its minimum wage. Japan is still, relatively speaking, an egalitarian society, where income disparities are nowhere near as large as they are in many western societies. But the old social and labour contract – which promised income stability, assured that hard work would be rewarded, healthcare would be within everyone’s reach and people could retire knowing that their pensions would keep them off the streets – no longer applies to a considerable proportion of the Japanese public.

There is growing concern that spreading poverty is leading to an increase in suicide, crime and the divorce rate and even aggravating Japan’s falling birth rate. “Poverty is not just a situation of low wages but isolation from society, from family, friends and workplace,” says Tsuyoshi Takagi, president of the Japanese Trade Union Confederation. “Japan’s silent public is reaching the limit [of its patience],” he says.

As public frustration has grown, the finger is being pointed at past policies of deregulation, particularly of the labour market. There are calls for tighter regulation, higher taxes on the rich and a redistribution of wealth. In a bid to placate a worried public, the government has responded with plans to ban – in principle – the contracting of unskilled day labourers.

But in an era of global competition, turning back the clock on labour reforms would be a simplistic response to a complex problem. A labour contract based on lifetime employment and seniority, coupled with companies hiring straight out of college, rewards those already in the system with stable employment, pay and benefits, no matter how unproductive they may be, says Naohiro Yashiro, professor of labour economics at the International Christian University. It also penalises those who have slipped through the cracks, regardless of their potential.

Many of the working poor are those who, having failed to secure a place within the system to begin with, become destitute as they grow older and their chances of finding even part-time work decrease. Many freeters, for example, cannot find full-time work because Japanese companies are reluctant to hire anyone who has not been in stable employment. The system also discourages much-needed venture businesses, since the opportunity costs for anyone who dares opt out of it are prohibitively high, Prof Yashiro says.

Japan, no doubt, needs to rebuild its social safety net, with greater security for its ageing population and measures to improve conditions for those outside the regular workforce. But unless Japan can also find a way to promote labour mobility and allow those who have fallen out of the employment system to come back in, it may not be too far-fetched to conceive of the social unrest witnessed in Nishinari spreading to other parts of the country.

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13 comments

  1. Caleb Mardini

    The U.S. will not face the same population problem that plagues Japan and other countries. Strong immigration policies prevent us from having the same age distribution problems.

  2. Scott

    Toyota Hybrid Engineer’s Death Pinned On Overwork…”Japanese authorities have ruled that the death of a 45-year-old top engineer on Toyota’s Hybrid Camry line was caused by working too many hours…In Japan, unpaid overtime is apparently common, and Toyota “is often praised for the efficiency and flexibility of its workforce,” to quote The Economist again”…

    So it’s no wonder that Toyota is giving Detroit the beat-down…its employees do the exact opposite of the UAW folks…work tons of unpaid overtime, nights and weekends.

  3. Yves Smith

    Caleb,

    Um, with a baby bust, you’d expect robust demand for younger workers plus a need to have people work into what would normally be their retirement age to keep the ration of workers to total population in some reasonable range. Instead we are seeing young people having trouble finding work, even with low minimum wages/

    Long winded way of saying this particular problem is not one of demographics.

  4. Mikey

    This article appears inaccurate. “But the old social and labour contract – which promised income stability, assured that hard work would be rewarded, healthcare would be within everyone’s reach and people could retire knowing that their pensions would keep them off the streets – no longer applies to a considerable proportion of the Japanese public.”

    Healthcare is socialized in Japan. Further, there never were pensions in Japan. Very poorly researched.

  5. chegewara

    this newly gained labour flexibility is precisely the reason why Japanese economy is way better prepared for the global recession that will follow. same pattern is observable in Germany. if only this discontent with economic conditions lead to a positive outcome like slashing the govt expenditures…
    besides, one thing that strikes me about japan, is that despite the perception about the country as being expensive, outside of tokyo and osaka you most probably can live on Y2m per year… though commodity inflation is changing the picture everywhere nowadays.

  6. Caleb Mardini

    Yves,

    You’re correct, my statements were off given the context of the discussion. I was addressing issues related to aged distribution. Trying to say “it will be different here, than in Japan.”

    I misread one of your points. Thanks for the correction.

  7. Anonymous

    Aren’t we also a little more entrepreneurial? I’m no expert on Japan but my sense is that we probably have a broader base of small businesses that can compete effectively. Further, even many Americans working at larger companies have long ago thrown the towel in on trying to achieve lifetime employment. These trends have resulted in more of a free-agent mentality over here vs. aspirations of becoming a lifetime company man.

    Then agan, maybe the grass is always greener…

  8. Yves Smith

    Anon of 9:21 PM,

    Yes, just about all job creation in the US for some time (at least the last 5 years) has been among smaller businesses.

    Culturally, the Japanese tend not to be entrepreneurial, but my understanding is that more Japanese than before are trying to establish new businesses. I have no idea how significant that activity is in aggregate.

    However, entrepreneurship is not all it is cracked up to be. 90% of new businesses in the US fail in the first five years. The line between self employment and unemployment is less clear than most realize. Many of the people I know who are self employed would rather be on a payroll (provided the work and income were decent).

    Small businesses are likely to have a rough time this downturn. They are very dependent on credit cards for financing, and the bigger small businesses tend to rely on local banks. I have heard stories of banks yanking credit lines to solid businesses that have always paid on time.

  9. Anonymous

    “…However, entrepreneurship is not all it is cracked up to be. 90% of new businesses in the US fail in the first five years. The line between self employment and unemployment is less clear than most realize…”

    Yves, as someone who’s been servicing small business for more than 25 years, I couldn’t agree more. So things are more stressful at the individual level.

    And wouldn’t this create an economy that is more fluid and efficient? IMHO, there’s more ground level migration of talents and skills towards those areas where they are most needed, since there are more opportunities(because of the ubiquity of small biz), and just as much moving away from areas that are over-supplied or are slowing down.

  10. Richard Kline

    So Yves, your comments re: the dependence of small business on credit cards and local banks for immediate cashflow financing point up an interesting issue in the present economic dislocation. In the 91 and 78-82 bad patches, it was quite common for the banks to pull financing on small businesses that were fully solvent to my recollection; places like commercial bakeries, dairies, janitorial contractors, and etc. who needed ongoing credit lines to buy inventory and run their payroll. The banks were hurting on capital, and weren’t shy about cutting off sound but smaller accounts to keep the money for themselves and their major clients who were harder to acquire and paid in more, even if those larger clients were in much more financial difficulty. Capital rationing, in a phrase.

    What is interesting about the present problem is that the credit squeeze has, by contrast, been concentrated at the very top of the financial food chain due to severe (and justified) counterparty risk concerns. To me, this is one reason, and perhaps the major reason, why the present economic slow down has been surprisingly slow to phase in: small businesses who generate most hiring are still largely intact and haven’t yet been cut off by the banks. I have been waiting and watching for the last year for reports of credit rationing to small but game operators, but there hasn’t been much mention of this.

    The losses at the top of the financial system spell severe recession. If we see the small and medium sized outfits who still have solid business contracts getting axed, we’ll know that we are months away from _depression_. That may not happen. But this is why I would be far happier if the Fed was working to keep the financial system as a whole going rather than coddling cancerous zombie plutocrats. We need the local banks to keep on funding small and medium sized businesses, who don’t do IPOs or sell bonds. And those local banks are going to have large commercial re losses, and will need close attention and support from the Fed and other regulators to make it through all this—but they are far down the list and off Bernanke’s screen. Too bad, for all of us. We can all live, and well, without Lehman’s and half the hedgies. Our lives will be far more straitened if local banks won’t fund basic business.

  11. JSW

    @Mikey:

    Japans pension system has been in effect since 1961. Its called nenkin. The japanese wikipedia link is here: http://ja.wikipedia.org/wiki/%E5%B9%B4%E9%87%91

    Private companies here have maintained pension funds since roughly 1903.

    go do some research.

    While there are problems with the ‘seishain’ (full employee) system, things are slowly changing, and there are even recruiting agencies who focus on getting freeters and inexperienced workers into full-time salaried positions, you can see their ads on every train in downtown tokyo.

    I think an underlying aspect of this that goes under-reported is the gender aspect. Since the 1950′s america has fueled its economic expansion by bringing women into the workplace, while Japan has steadfastly resisted this. Part of the reason the full time employee system had to be cut back so hard is because the system is designed to provide for your wife and children. When you get married, your pay and benefits increase dramatically, when you have children they increase again. Eliminating these benefits would

    Partly, the problem of removing these problems and working to minimize the gender gap is that this would not only be counter to custom but also to the government and industries attempts to raise the birth rate (companies give you reward money that gets progressively bigger for each succesive child for example).

  12. fajensen

    @ Caleb Mardini

    Granted, the US will not have an age distribution problem – yet – it will instead have a civil war problem once the economy has contracted sufficiently below the point of being able to support the growing load of a mostly unproductive immigrant population! No country can survive mass immigration – the US is merely an anomaly which will correct in time.

    The Balkans will be your future.

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