Tokyo, 102-0093 Japan
October 31, 2008
Japan Research Institute of Labour MovementĀ@(Rodo-soken)
Tomio Makino, Co-President
Takayuki Kiji, Researcher
Hiroshi Fujita, Statistics Department
The US-originated "financial crisis" has begun to have a grave impact on Japanese economy. Toyota Motor Corp., "the world's top automobile manufacturer," which expects surplus of more than one trillion yen, plans to dismiss several thousand of dispatched and fixed-term workers for the reason of slump in its exports to America. As shown by this, a "storm of restructuring" is now going to rage throughout Japan again.
Japan's big companies, meanwhile, have carried out a thorough restructuring and cost reductions at the expense of workers and small-and medium-sized enterprises, and have increased their ordinary profits by 1.9 times while cutting down wages for workers and amassing internal reserves to increase 1.8 times compared to a decade ago.
However, if such a situation continues, Japan's economy will get caught up in a "vicious spiral": decreases in employment, reductions in wages, decreases in domestic demand and more dependence on external demand, contraction of domestic production and decreases in employment, which shows no prospects for both Japan's economy and its workers.
In order to overcome this situation, the structure of Japan's economy has to be changed from one based on its dependence on external demand and exports to one that seeks domestic demand expansion and quality of life. The key to this is improvement of living of the working-class households, the overwhelming majority of the population.
Our proposal for creating employment by shifting non-regular employment to regular employment and through strict observance of working rules and regulations will be the first step, giving the prospect of placing Japan's economy in a "positive cycle" of increases in wages/income, expansion of domestic demand, increases of domestic production and increases in employment.
2. Content of the Trial Calculation
What effect will Japan's economy gain from stabilized employment as proposed through a shift from non-regular employment to regular employment and from new employment created by the observance of working rules and regulations? Japan Research Institute of Labour Movement used the "2005 Input-Output Tables (preliminary report)" published in August by the Ministry of Internal Affairs and Communications, to make a detailed trial calculation.
When the demand for a certain product grows, the manufacturer of the product expands its production, and it leads to purchase of the raw materials and services necessary for the production, thus inducing production of related industries subsequently.
For example, assume that the demand for automobiles increases. First, the automobile industry expands its production. Then in the subsequent stage (of demand chain) production in related industries is induced one after another in such a way: production of automobiles, followed by the production of tires, production of synthetic rubber, production of ethylene, and import of crude oil. An analysis the input-output table allows us to measure how much and of which domestic industry a growth of a certain demand (i.e., consumer demand as the result of income increases in this case) would expand the production.
3. Results of Trial Calculation
(1) The proposed employment stability gained by shifting non-regular employment to regular employment and creation of new employment by observance of working rules and regulations will annually raise wages by 21,292.2 billion yen and increase consumer demand (household expenditure) by 14,896.3 billion yen. This will induce an increase of 24,258 billion yen in domestic production of industries, pushing up GDP by 2.52%. Compared to Japan's actual GDP growth rates of 2.0% in FY2004, 2.4% in FY2005, 2.5% in FY2006 and 1.6% in FY2007 (flash estimates), the employment stability and the creation of employment by observance of working rules and regulations will bring about a great magnitude of economic effects.
(2) Economic ripple effects generated by stabilized employment and newly created employment, in general, will bring about a further expansion of production in such areas as agriculture, food industry, commerce, education and research, corporate services, and the like, which are mostly comprising small-and medium-sized enterprises. It is, therefore, expected to give a stimulate-growth effect on small-and medium businesses, which are now facing the explosion of bankruptcy caused by recession.
(3) Also, income increases of working-class households and corporate earnings increases by expansion of production will boost tax revenue. According to the trial calculation, tax revenue will grow by a total of 2.27 trillion yen: 1.3 trillion yen in national tax and 0.97 trillion yen in local tax. This resource will fund a drastic expansion of employment assistance subsidies to small-and medium-sized enterprises, allow a suspension of the currently-ongoing reduction of 220 billion yen in social security expenses and enable measures for solving the shortage of medical doctors and other issues.
(4) The money necessary to realize the above proposal (i.e., increases in wages to be paid by companies) is no more than just 5.28% of the current total internal reserves amassed by companies. In the past decade Japanese companies' ordinary profits have expanded by 1.9 times, but the total wages they paid to workers have decreased by more than 19 trillion yen, and their internal reserve has increased by 180 trillion yen (1.8 times).
4. Methods of Trial Calculation
(1) Estimate calculation focusing on three cases
We made estimates of economic effects of our proposal on the three limited instances as below.
<a> Stabilization of employment that can be achieved by shifting a part of non-regular employment to regular employment
<b> Creation of employment that can be brought about by eradicating unpaid overtime work as apparently illegal practices
<c> Creation of employment by full implementation of the five-day workweek and paid vacations, which are common in Europe and other countries.
(2) Expansion of employment
On the question of a shift of non-regular employment to regular employment in the above case <a>, we divided non-regular workers into two groups of temporary agency workers and fixed-term contract workers, and then determined the numbers of workers to be shifted from respective groups. As will be explained later, this step was taken giving consideration to the fact that relatively a large number of temporary agency workers are young people.
Of temporary agency workers, we estimated the number of people to be shifted from non-regular employment to regular employment at 534,000. This is based on Health, Labour and Welfare Ministry's "Questionnaire survey on labor supply-demand system." According to the survey, to the question asking "the reason why temporary workers choose such an employment form," 33.2% of temporary agency workers replied that they chose that type of work, "because they were unable to find a regular job, though they wanted to work as regular workers." Based on this, we obtained the number of 534,000, which represents 33.2% of 1,607,000 temporary agency workers defined by the "Fundamental survey on employment structure."
For fixed-term contract workers, we estimated 3,100,000 people as targets for a shift from non-regular employment to regular employment. This is based on the Health, Labour and Welfare Ministry's "Report of workshop concerning improvements of employment management of fixed-term contract workers" (July 2008). According to this report, "fixed-term contract workers whose length of the standard work-week is the same as that of regular workers amount to 3,100,000." We thought it quite natural to shift those fixed-term contract workers to regular workers.
On the question of creation of employment by eradicating unpaid overtime work in the case <b>, as shown in Appendix 1, we based our calculation on the difference in data between the "Labor monthly statistics" which is a survey on business establishments, and the "Labour force survey" by the Ministry of Internal Affairs and Communications, which is a household-level survey on individuals.
According to the "Labor monthly statistics," the total hours worked per year by general workers is 2,032.8 hours, while the annual worked hours from the "Labor force survey" is 2,153.5 hours. Based on the assumption that the difference between them is "unpaid overtime work" hours, we obtained total unpaid overtime work hours, and divided them by the total hours worked per year by general workers to obtain the number of possible increase in employment. In doing so, we calculated total unpaid overtime work hours per year based on 20,003,000 workers working for business establishments with 30 employees or more. Likewise, we calculated increases in employment based on the total hours worked per year by general workers working for business establishments with 30 employees or more. These trial calculations have generated quite an underestimated value, but still, leads to the creation of 1,188,000 jobs.
On the case <c>, the creation of employment by full implementation of the five-day work week and paid vacations, as shown in Appendix 2 "Trial calculation for creating employment through shorter working hours," we used Health, Labour and Welfare Ministry's "Comprehensive survey on working conditions", Ministry of Internal Affairs and Communications' "Labor force survey" and Health, Labour and Welfare Ministry's "Labor monthly statistics", and worked out 1,535,000 people. How we obtained the estimate is shown in the notes for the table.
(3) Ripple effects on domestic production
On the ripple effects on domestic production, we measured the magnitude of effects in each of the three cases.
In the case of <a>, we made estimates, based on marginal propensity to consume, of expected increases in consumer demand; increases of consumption of individual expense items, which are expected to boost by an increased total amount of domestic wage as the result of a shift from non-regular employment to regular employment. Then we made a trial calculation of its economic effects by the input-output analysis.
First, as for increases in wages, we calculated wages of "regular employees in total (annual wages: 4,860,000 yen)" and "other than regular employees in total (annual wages: 2,470,000 yen)", from Health, Labour and Welfare Ministry's "Basic Survey on Wage Structure," then determined the gap between them as the possible amount for wage increase. In doing so, as for temporary agency workers, we gave consideration to the fact that relatively a large number of temporary agency workers are young people, and we used accordingly the wages for the age-group of 25-29 year-old of the same statistics, as "regular employees in total (annual wages: 3,510,000 yen)" and "other than regular employees in total (annual wages: 2,380,000 yen)". Then, we multiplied each amount of the wage increases by the number of workers to be shifted from non-regular employment to regular employment to obtain the total amount of wage increases.
We then applied average wages of before and after the shift of employment to each of the yearly income decile groups of the "family budget survey" by the Ministry of Internal Affairs and Communications, to calculate marginal propensity to consume based on their respective consumption patterns, and estimated how much and to which items the increased amount of wages will be spent.
Lastly, we calculated, by using the input-output table of 2005, what effects those increases in consumption expenditure will have on Japan's economy.
As the result, we found that the shift from non-regular employment to regular employment will boost gross domestic product by 9.2 trillion yen and induce GDP by 4.1 trillion yen.
Concerning the question of eradicating unpaid overtime work as proposed in the case <b>, we made a trial calculation on the assumption that 1,188,000 new regular workers expected to be created will get the same average annual wage of the existing regular workers, which is 4,860,000 yen. The total amount of wage increases is 5.8 trillion yen, and by multiplying it by 75%, which represents an average consumer propensity, we obtain 4.3 trillion yen as increased consumption expenditure.
As the result of calculation of production ripple effects on Japan's economy brought about by this increased consumption expenditure, using "production inducement coefficients by final demand items" and "added-value inducement coefficients by final demand items" of the input-output table of 2005, we found that domestic production will increase by 6.6 trillion yen and GDP (added-value) will increase by 3.8 trillion yen respectively.
As the result of a similar calculation of the case <c>, which involves full implementation of the five-day workweek and paid vacations, we found that domestic production will increase by 8.5 trillion yen and GDP (added-value) will increase by 4.9 trillion yen respectively.
5. Some Points at Issue
Āú On the argument over "solvency" of enterprises
The proposal for "shifting non-regular employment to regular employment and creating employment through strict observance of working rules" is designed to be a first step to transform Japan's economy to a domestic-demand-led and life-fulfilling economy. Naturally, though, we expect counterarguments from Japan Federation of Economic Organizations and others based on the question of "solvency" of companies. But the fact is that Japanese companies over the past decade have continued to reduce workers' wages to increase their ordinary profits by 1.9 times and amassed their internal reserves by 1.8 times. Spending just 5.28% of it will be enough to fund the cost in our proposal (Appendix Table 3). It is no extra spending for them at all; it is a delayed expense for improvement of workers' living, which they should have done much earlier.
Changing the direction of the Japanese economy from one of depending on external demand and exports to one of expanding domestic demand should have been made a primary more than 20 years ago. For example, "Maekawa Report," published in 1986 under the Nakasone Cabinet, pointed out that "in order to transform Japan out of its external-demand dependence to achieve a domestic-demand-led vigorous economic growth, it is necessary to focus on effective measures that expand domestic demand which would give great multiplier effects and lead to expansion of individual consumption," and emphasized the importance of "appropriately distributing the fruit of economic growth to wages" and "increasing free time through shorter working hours and promoting intensive utilization of paid holidays." It was despite the fact that the report called for the need of equilibrium of balance of payments through a shift to a market economy and economic globalization, and was not the kind in favor of workers or the people. However, while there have been a remarkable advance toward a market economy and globalization, improvements in workers' lives have seen little progress.
Moreover, large companies in recent years have expanded non-regular employment and cut down wages to strengthen their "international competitiveness," which has weakened domestic demand greatly. And furthermore, they have continued to expand their exports to the U.S. by relocating production to developing countries and have increased their economic dependence on the U.S. This is the root cause of today's economic crisis.
Unless Japan changes its direction and quit such dependence, its economy will only repeat the same negative "vicious circle" over and over again.
Āú On the argument over "international competitiveness"
Japan's manufacturing industry has an exceptional international competitiveness. It is clear from the fact that Japan's trade surplus has continuously grown over the years, but now it is reaching a dead end. Under the globalized economy, no matter how strong Japanese companies are in international competitiveness, if the world economy slows down and consumer demand declines, then goods do not sell. It is necessary to change the approach of rushing to cost reductions just to retain international competitiveness only in price. If we can change this approach into a direction toward focusing more on domestic demand, then it will become more important for companies to meet the needs of Japanese consumers who value quality above quantity, which will possibly result in Japan's enhanced international competitiveness in quality.
Also, international competitiveness largely depends on the trend of foreign exchange rates. In this respect, too, it is imperative to take drastic measures to change Japan's US-dependent economy into one driven by domestic demand. This is because exchange rates, ultimately, would come to reflect the real economy.
Āú On measures for small-and medium-sized companies
Some claim that it is impossible for small-and medium-sized companies to shift their non-regular employment to regular employment. This is a "common argument" shared by large companies and the business community, but the truth is that large companies "do not want to lose lucrative profit secured by the lower wages among small-and medium sized companies, maintained by their strong control over subcontractors."
The important thing is to eradicate various forms of "bullying of small-and medium-sized companies" by the government and large companies, and guarantee and ensure the increases in "the necessary and valid cost" arising from such measures as shifting non-regular employment to regular employment. The late Mr. Akio Morita, Sony's ex-chairman, cited the feudalistic relationship between large companies and their subcontractors as one of the vicious practices of the Japanese-style management, which "cannot be accepted in the world." Development of laws to drastically change such practices is more necessary than ever.