Human Resource Management/Pay and Appraisal Systems of Japan – Part 1

November 7, 2023 [No.114-2023]

Hiroyuki KIKUYA
Prime Consultant Co., Ltd.



Serious labor shortage resulting from post-COVID-19 society and the aging population

Every March in Japan, labor and management negotiate wages for the new fiscal year. The spring wage negotiations (shunto), which have been practiced mainly at large corporations for years, set the basis for salary revision starting in April when new graduates enter companies.

For many years until recently, the Japanese economy had been in deflation. Therefore, salary revisions were mainly "annual wage increases" based on an employee's age, length of service, level of competence/achievement at work, and individual promotions. These pay scale rises, called "base increases," were quite low. Base increases are meant to allocate the resources achieved through increased productivity in accordance with price rises and the relationship between labor supply and demand.

However, due to global resource price increases triggered by the Russo-Ukraine War, the recent hike in consumer prices reached 3.2% in August 2023. This was the sharpest increase in almost 40 years—in fact until February 2022, consumer price increases had been in the zero range. On average, in 2023 unionized workers at major private companies received a 11,245-yen increase in their monthly wage, up 3.60%. This is a significant rise from 6,898 yen, up 2.20%, in the previous year. This drastic change in Japanese wages is partly due to the emergence of a labor shortage in post-COVID-19 society, where the downward pressure on wages that had built up for many years suddenly reversed.

Japan's working-age population, which peaked at 87,260,000 people in 1995, has continued to fall. It is estimated to be 74,208,000 people as of October 2022.

Although the labor shortage stemming from this drop in the population is not new at all, companies have covered the shortage of young or mid-career workers by employing more part-timers (mainly women) and retired older people.

The Japanese government has also implemented several policies to deal with labor-shortage issues, including a significant increase in the minimum wage and the promotion of "equal pay for equal work" with the aim of narrowing the wage gap between regular and non-regular employees. The government is also helping to promote the employment of women and elderly people by increasing hourly wages for part-timers and improving the wages and conditions for re-employment of retirees. Furthermore, the requirements for accepting workers from overseas have gradually been relaxed.

However, the labor participation rate of women and elderly people is already approaching the limit, and competition for recruiting new graduates is intense. This has led to many large companies drastically increasing the starting salary for four-year university graduates to 250,000–300,000 yen per month from around 210,000–220,000 yen in previous years.

Companies are also in the middle of intense competition for mid-career recruits, whether they are regular or non-regular employees. As a result, many temporary staffing agencies are having trouble with fully satisfying clients' requests or needs.

It is now evident that there is a serious labor shortage in all types of business throughout in Japan, regardless of age, gender, academic background, or nationality, and it can be said that prices and wages in Japan are now on a long-term upward trend.

To compensate for the labor shortage, many companies are now reviewing how they do business, and as a result, a wide range of jobs will undergo robotization, digitalization, and adoption of AI.

As for workers, those of prime working age will migrate to the Tokyo metropolitan area and other large cities looking for higher-paying jobs that require higher skills. Only people who prefer rural areas, as well as elderly people, will remain in regional areas. Thus, the polarization of the population will continue.