JRI Research Journal

JRI Research Journal;Vol.6 No.3,

Severe Labor Shortage Puts Upward Pressure on Wages in Japan
―Stagnant labor participation rate may lead to the unemployment rate falling below 2%―

Shinichi Nishioka


Labor shortages are becoming more apparent in Japan. One of the reasons for this shortage of personnel despite the lackluster economy is that labor supply has reached a plateau. The influx of foreign workers has decreased due to waterfront measures imposed after the start of the COVID pandemic. Another factor behind the stagnation of labor supply is that labor participation among women and the elderly, which had been strong before COVID, has stalled.

If economic activity continues to normalize, Japan may find itself facing a serious labor shortage. The figure for surplus personnel (people who are seeking jobs or have been offered jobs but have not yet started them) has halved over the past 20 years, meaning that the potential labor participation rate can only increase by 1-2%. This is partly because of a significant decrease in surplus female personnel, as many women entered the workforce in the 2010s. If economic activity normalizes in the future and the labor participation rate stays the same, the unemployment rate is expected to fall below 2% in 2024, resulting in the first labor shortage since the early 1970s.

Going forward, as the unemployment rate declines, pressure for higher wages may increase. In Japan, wage growth tends to increase rapidly when the unemployment rate falls below 2%. This reflects the fact that if there is a slight labor shortage, companies will refrain from raising wages as they will be wary of excessive payrolls in the future, but if they face a labor shortage to the extent that it hinders their operations, they will take aggressive steps to raise wages to secure workers.

Such moves are already occurring in some areas of the economy. In the face-to-face service sector, while demand is recovering, the labor force, which was depressed by the COVID pandemic, has not yet recovered, and personnel shortages are becoming more severe. This has led to a nearly 5% increase in wages in the sector compared to the previous year. In the future, this pressure for higher wages is expected to spread to a wide range of industries.