Human Resource Management/Pay and Appraisal Systems of Japan – Part 2

November 21,2023 [No.115-2023]

Hiroyuki KIKUYA
Prime Consultant Co., Ltd.



Characteristics of "membership-type" employment practiced in Japanese companies

The basic form of typical human resources management systems at Japanese companies was established between the high economic growth period (1955–1973) and the stable growth period (1974–1990) during the Showa era.

The long-term employment system, also known as the "membership-type" system, was widely established during these periods. The characteristics of this system are: recruiting new graduates, internal training and promotion, flexible personnel transfers, and mandatory retirement at age 60. Underlying this system is the seniority-based human resources system founded on the ability-based grade system, merit-based wages, and the retirement benefit system, which became common practice in large companies. The plentiful supply of an educated young workforce and the multi-layered division of labor and subcontracting structure enabled sustainable, stable management. Furthermore, the universal health insurance system offers medical coverage, and the pension system provides lifestyle protection in the post-retirement years. These generous economic and social conditions have fundamentally supported Japan's unique management system.

One of the noteworthy characteristics of "membership-type" employment is that companies do not offer "job descriptions," a concept commonly used overseas, to their regular employees. Furthermore, there is no concept of individual labor agreements, which prescribe the details of an individual's work, workplace location, and wage treatment, to be agreed on between a company and a regular employee. On the other hand, a notice of employment must be exchanged in the case of fixed-term workers such as part-timers.

Companies guarantee their regular employees' career-long employment and stable pay until they reach retirement age in exchange for demanding, unlimited work. Companies hold comprehensive authority over personnel issues, allowing personnel evaluation by superiors or the human resources department to change the content of jobs and to relocate or transfer employees. Although there is a wage system, both individual evaluation and wage treatment are almost at the discretion of management or the human resources department.

This has enabled Japanese companies to conduct flexible organizational management. They efficiently developed new products in an agile manner, expanded business overseas, and carried out extensive capital investment. As a result, Japanese companies dominated the global trade market, and accordingly the Japanese economy drastically improved its position in the world.

During the period of high economic growth when prices were rising sharply, intense labor-management negotiations took place in spring every year. As price rises moderated once Japan entered the period of stable economic growth, so did wage increases. Then, when Japan entered the bubble economy, the labor unions within companies, whose members were mostly the relevant company's employees, gradually weakened.

When the bubble economy burst in 1991 and Japan entered into its low-growth period, the most critical issues were to secure company profits and the employment of union members. As restraining labor costs became an implicit social agreement, the numbers of low-paid non-regular employees, such as part-timers and temporary employees, significantly increased, and cheap products from overseas flowed in, plunging Japan's entire economy into a deflationary spiral. Thirty years has passed since then, and today, the rate of wage increases in Japan lags behind that of other advanced countries.

So, what does the future hold?
As mentioned earlier, the labor shortage and ongoing global inflation have shifted prices and wages in Japan into a long-term upward trend. As for the working population, the general assumption is that it will fall below 60,000,000 in around 2040. If this assumption is correct, 14,000,000 workers, equivalent to the current Tokyo's population, will have vanished from the labor pool in less than 20 years.

The serious shortage of labor will have a significant impact not only on the pay scale but also on employment and human resources at Japanese companies.