Changes in the Pattern of Consumer Spending as
Personnel Expenses are Converted to "Variable Costs"
The Likelihood of an Expansion in Consumer Spending
Given Income and Employment Conditions
April 28, 2004
Unemployment in Japan has followed an upward trend since the collapse of the bubble economy, but, since the second half of 2003, has begun to show signs of falling. This is due to a fall in the labor share, for which there are two reasons: (i) Thanks to the rationalization of production and distribution processes and a recovery in sales largely due to export growth, the amount of value added has begun to rise. (ii) Raising the proportion of non-regular employees and introducing performance-based wage systems has allowed companies to cut their personnel costs.
With economic recovery set to continue, it is likely that employment conditions will continue to improve as the labor share falls. However, the following factors suggest that unemployment is unlikely to fall below a level of 4.0-4.5%: (i) With companies demanding increasingly skilled and specialized labor, the so-called "mismatch" unemployment rate stands at more than 4%. (ii) Due to the growing pressure to enhance productivity in order to survive in a climate of intensifying international competition and the growing tendency to avoid risk when conditions are still in many ways uncertain, the corporate stance on increasing employment remains cautious. (iii) New service industries are unlikely to absorb a significant volume of surplus labor in the short term.
The measures that the corporate sector has adopted in order to cut personnel expenses with a view to reducing the labor share - (i) raising the proportion of non-regular employees and (ii) introducing performance-based wage systems - have transformed personnel expenses into "variable expenses". Employing a greater proportion of non-regular employees, whose dismissal is less strictly regulated, has helped to increase the speed at which companies are able to adjust employment to reflect economic fluctuation. The introduction of performance-based wage systems has allowed companies to cut basic salaries while rewarding strong performance with bonuses.
This year's bonuses are expected to see reasonable growth, which should boost consumer spending. However, the increase is unlikely to be as high as the scale of the bonuses awarded to the employees of big corporations may suggest. Moreover, as compared with an increase in "stable income" such as basic salary, the boost to consumer spending provided by an increase in "occasional income" tends to be "localized" and "temporary".
In this light, it is likely that higher bonuses this summer will lead to growth in the sales of digital consumer electronics and, as the deflator has also seen a substantial fall, that real consumer spending this summer will be strong. However, this will be the result of a localized increase in consumption in conjunction with a rise in occasional income, and consumer spending may yet fall in the event of some kind of external shock. For this reason, it is all the more important that the government exercise caution with regard to discontinuing quantitative monetary easing and increasing personal taxation. In the end, stable and sustained improvement of income and employment conditions is an essential requirement for a stable and general recovery in consumption. In view of the fact that employment and incomes are lagging indicators of the economic trend, the first and foremost requirement is to ensure continued economic recovery. In this sense, the government must strive to promote a further regeneration of Japanese industry through support for the accumulation of intellectual capital, deregulation and policies that promote competition.
For more information on the content of this report, please contact
Economics Research Center, Economics Department