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News Release

The Urgency of Reform in Japan's Labor Market
- Japan Should Switch to a Policy of Flexicurity -

>December 9, 2009

1. The Limited Improvement in Japan's Employment Situation

2. The Approach in Other Developed Economies

(1) The EU
(2) The Present Situation in Denmark
(i) The Employment and Income Situations
(ii) Policy Characteristics

3. Issues for the Future

(1) Holding Fast to the Policy of Small Government
(2) Expanding Occupational Education and Training
(3) Reducing the Corporate Burden

Overview

The improvement in the employment situation in Japan is as yet limited. The fall in the number of freeters [young people not in full-time employment] is partly due to population decline as a result of a falling birthrate. The unemployment ratio is well above the level recorded in the first half of the 1990s. The number of people in the higher annual income bands continues to fall, while the number of people in the lower bands continues to rise. These trends are the result of a structural change, namely, the intensification of global competition in conjunction with the spectacular growth of the developing economies. If this is the case, should one assume that growth in non-regular employment and in the number of people on lower incomes will continue to be difficult to avoid in the medium term?
Meanwhile, in April this year, the government proposed reforms of the labor market as part of its growth strategy. The idea is to raise the employment ratio by promoting a diversity of working formats, and thereby enhance Japan's growth potential. But is this practical in a climate of ongoing structural change? This report, therefore, examines the other developed economies, which have set about reforming their labor markets ahead of Japan, and seeks to identify lessons that Japan may draw from their approaches.

In recent years, the EU has seen growing interest in the concept of "flexicurity" (a portmanteau word formed from "flexibility" and "security"). Flexicurity aims to achieve a balance between the two policy issues that tend to be antagonistic: flexibility of the labor market and security of employment. In other words, it is a policy that aims to promote strong growth by encouraging innovation and greater sophistication in the economy through the fostering of skilled human resources and a shift of employment to growth industries through the encouragement of greater fluidity in the labor market. Denmark's success has lent momentum to the shift away from an employability policy.

Since the labor policy reforms of 1994, the employment situation in Demark has gradually improved. Of the developed economies, Denmark has the second lowest unemployment ratio, after Norway, and the highest employment ratio. Income levels in Denmark are also rising. A breakdown by level of income reveals that, in contrast to the situation in Japan, the number of people with low incomes in Denmark is falling, while the number of people with high incomes is rising. Denmark has one of the most fluid labor markets in the world, with one of the highest rates of changes of occupation and shortest average years of continuous service. On the human resources development front, Denmark has a great number of occupational education and training programs for adults. A comparison of rates of participation in such programs to population reveals that Denmark, alongside Sweden and the United States, has one of the highest participation rates. In recent years, the number of people choosing to participate in occupational education and training programs, especially programs relating to specialist occupations, has risen.

In the light of the approaches taken in other countries, it is likely that, as long as the current scheme operating in Japan's labor market is maintained, the Abe administration's goal of strengthening Japan's growth potential by increasing the employment ratio, and its ageshio strategy [ageshio: "rising tide"; a strategy that seeks to resolve economic problems through a high rate of economic growth] are at considerable risk of failure. It is a matter of urgency that Japan should switch to a policy of flexicurity by means of a radical reform of its labor market. However, to import a simple Danish-style scheme without modification would be to run a high risk of failure. The 3 following points will be particularly important to the success of the reforms:
(i) Holding fast to the policy of small government
The government of Denmark spends more than any other government on measures to support employment and education. However, the United States has succeeded in improving its employment and income situation although it spends very little on measures to support employment and education. The American approach is therefore a valid option.
(ii) Expanding occupational education and training
The level of occupational education and training programs provided for adults is very low in Japan as compared with other countries. Although organizations in some industries are adept at training human resources in-house, this is not enough to maintain and improve competitiveness.
(iii) Reducing the corporate burden
Japan, alongside France and Italy, has one of the least fluid labor markets in the world. In addition to a review of dismissal systems, Japan should reconsider the tendency to leave the development of worker skills to the corporate sector.

For more information on the content of this report, please contact Hidehiko Fujii, the Japan Research Institute, Limited.

Tel: 03-3288-4615
E-mail:fujii.hidehiko@jri.co.jp

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