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News Release

Reforming Employment Systems to
Meet the Needs of an Era of Population Decline
- Japan may face a "human resource" shortage of 5 million persons by 2015 -

September 30, 2005


Since the beginning of 2005, the trends surrounding employment in Japan that had persisted since the collapse of the bubble economy have started to change. The "era of surplus labor" has ended and there are now moves to re-evaluate "Japanese-style employment practices". However, it would be premature to conclude that the employment practices that prevailed in Japan before the collapse of the bubble economy are likely to be "restored".
The trend of "population decline" is beginning to gather momentum and the employment systems established during the postwar years, which were based on the assumption of steady economic growth, remain dysfunctional. This report examines new issues surrounding employment that have arisen in the "era of population decline" that is dawning in the aftermath of the "era of surplus labor" and makes proposals relating to new employment systems to meet the needs of this new era.

A survey of the employment situation today, in the aftermath of an era of surplus labor, reveals that although, in macro terms, the problem of excess employment is at a stage where it could be described as "gradually being resolved" there is already a growing shortage of human resources in certain areas and that, with excess employment persisting in other areas, Japan is facing a growing "employment mismatch".
One of the most important reasons for this mismatch is that the performance of conventional systems for the development of human resources has declined. Besides the "quantitative problem" of the fall in the amount of money and time invested in fostering human resources, the "qualitative problem" of the growing discrepancy between the content of investment in human resources and the needs of the age and the consequent decline in the efficiency of investment in education cannot be overlooked. One particularly grave problem in relation to the latter is the lack of efficient systems for the development of the "professional skills" and "management skills" that are the key to the competitive strength of companies in the future.

The primary impact of population decline on the labor market is to encourage a "diversification of labor". Population decline means a quantitative fall in the supply of labor, but because employment systems in Japan have traditionally been based on the assumption of a lifestyle in which the husband is the breadwinner and stops working on reaching retirement age, there is still considerable scope for the employment of women and elderly persons. Consequently, Japan needs to make up for the fall in the volume of "typical labor" (i.e. men who have not reached retirement age) by harnessing the labor of women and the elderly. The opening up of the labor market (in a planned manner and subject to a degree of control) to foreign workers, who, as a rule, have until now been excluded, has also become a matter of urgency.

Another, more important effect of population decline on the labor market is that it encourages a "qualitative change in the demand for labor". By speeding up the three sea changes that are currently taking place in the structure of industry and the business environment - (i) the intensification and acceleration of domestic competition, (ii) the globalization of business management and (iii) the growing power of shareholders - population decline encourages rigorous application of market principles (the theory of capital) to economic activity. This tends to encourage individual companies to compete more fiercely with one another, to boost the rate at which companies create and withdraw from businesses, and to demand the pursuit of higher profitability. This requires a qualitative change in the nature of employment, towards "greater sophistication, flexibility and fluidity".

Although population decline tends to strengthen the "theory of capital", it does not necessarily mean that the structure of employment in Japan will come to resemble that seen in the United States. When compared with those of other developed nations, the defining characteristic of the structure of Japanese industry is the strength of its monozukuri [making-of-things] base, and the direction that the structure of employment in Japan is likely to take in the future should probably be described as "the creation of a '2.5-ary industry' through the fusion of secondary and tertiary industry", rather than "a shift from secondary industry to tertiary industry". This means that "greater sophistication, flexibility and fluidity of demand for labor" in Japan will continue to generate a degree of demand, not only for the management and professional human resources that companies need if they are to survive against global competition, but also for high quality skilled workers and basic clerical workers.

If Japan fails to build new systems for the development of human resources that are capable of coping with change in the demand for labor, it is likely that, by 2015, the shortfall in the human resources (skills) required to achieve growth of 1-2% will be of the order of 5.2 million workers (around 4.86 million specialist and technical workers and 340,000 production workers). In other words, if Japan fails to foster these essential human resources, then the real economic growth rate of 1-2% for which the corporate sector hopes, will be impossible to achieve. In fact, it is likely that consistency will be restored by a fall in the real economic growth rate. This will result in a fall in the rate of growth of labor productivity and real per capita income will inevitably slump. If the supply of labor has been increased by the employment of women, elderly persons and foreign workers, the mismatch will be aggravated, resulting, ironically, in high unemployment in a climate of population decline

Consequently, increasing labor productivity and the standard of living against a backdrop of population decline will necessitate a plentiful supply of human resources capable of adapting to the diversification of labor and the greater sophistication, flexibility and fluidity of demand for labor that the dawn of a new era of population decline requires. It is essential that there be a shift away from conventional "individual-based employment systems emphasizing regular employees" towards "job-based, pluralistic employment systems", and, if "job-based, pluralistic employment systems" are to function properly, it is vital that social infrastructure for the development of human resources outside companies be created.

For more information on the content of this report, please contact: Hisashi Yamada the Japan Research Institute, Limited.

Tel: 03-3288-4245

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