Reality Check on Work-Style Reform: Filling In the Big Picture

On March 28, a government panel released a plan of action designed to promote far-reaching changes in the way people work in Japan. In the following, I explain the forces driving the government’s reform plan, assess the plan in relation to the systems in need of reform, and discuss the challenges that lie ahead.

Surprising Shift Toward Worker Protections

The body responsible for the reform plan, the Council for the Realization of Work-Style Reform, officially began deliberations in September 2016, but it had already been meeting for about a year under the name of the National Council for Promoting the Dynamic Engagement of All Citizens. The establishment of that body marked a general shift in the focus of the government’s labor policy.

Almost from its inception in late 2012, the second cabinet of Prime Minister Abe Shinzō had approached labor and employment policy in the context of economic growth strategy, the original third “arrow” of the economic revitalization plan known as Abenomics. But the launch of the National Council for Promoting the Dynamic Engagement of All Citizens, which coincided with the September 2015 announcement of three “new arrows” for economic revitalization, signaled a voter-conscious shift in priorities. The ruling coalition’s basic strategy was to take the steam out of election opposition by pursuing worker-protection policies with which the unions and left-leaning parties could not possibly take issue.

At the outset, deliberations by the council focused on support for childcare and nursing care. Then, in his January 2016 policy speech to the Diet, Prime Minister Abe announced the launch of a "work-style reform" campaign to be headed up by the same committee, appropriately rechristened the Council for the Realization of Work-Style Reform. The biggest surprise, perhaps, was the prime minister’s sudden enthusiasm for the concept of “equal pay for equal work.”

The newly renamed council began by designating nine areas for deliberation. However, faced with a six-month deadline, it opted to concentrate its efforts on the themes of “equal pay for equal work” and “reducing long working hours.” While the final plan covers a wide range of policies organized under 11 topics, the most substantive reforms by far fall under those two headings.

Capping Overtime: A Historic Top-Down Reform

The council’s most important achievement was unquestionably the decision, approved by labor and business leaders, to establish legally binding caps on overtime hours, with violators subject to penalties. Average working hours in Japan have actually fallen substantially over the past two decades, but the main reason for this statistical decline is the growing number of part-time workers in the labor force. Among full-time employees, working hours have barely changed. In the advanced industrial world, Japan remains a poster child for the problem of chronically long hours.

Although the Labor Standards Law mandates a standard workweek of 40 hours, overtime is permitted as long as the employer submits an “Article 36 agreement” signed by representatives of labor and management. A public notice issued by the Ministry of Health, Labor, and Welfare limits such overtime to 45 hours a month and 360 hours a year, but the ministry has no power to enforce those limits—which in any case are easily overridden by an agreement between management and employees. In short, the sky is effectively the limit where overtime is concerned.

By contrast, the recently released reform plan calls for legal monthly caps with penalties attached. In addition, it sets an annual maximum of 720 hours that cannot be circumvented by any labor-management agreement. It also requires employers to make efforts to observe a minimum daily rest period between the end of one workday and the beginning of the next, similar to that mandated by the European Union.

For some 25 years, experts and activists have clamored in vain for effective government intervention to reduce excessive working hours. In this context, the reforms written into the council’s plan can be considered historic. This progress was made possible by the unprecedented cooperation of business and labor organizations—Keidanren and the Japanese Trade Union Confederation, respectively—in a top-down decision-making process by a deliberative body with a sweeping mandate.

Bottom-Up Reforms Also Needed

At the same time, we need to be cognizant of the factors that have delayed reform this long by encouraging labor’s complicity in the culture of overtime. For one thing, non-managerial employees eligible for overtime pay have come to depend on the extra income. In addition, habitual overtime has provided a kind of employment cushion, allowing management to cut back hours instead of laying off workers in the event of a business slowdown. Another factor is the corporate culture that has grown up around Japan’s “membership based” employment system, in which corporations hire new graduates by the batch with the promise of long-term job stability. In such organizations, where unquestioning loyalty is considered the price of membership, employees often work later than is strictly necessary, knowing that self-sacrificing behavior is linked to favorable evaluations, promotions, and raises.

What all this means is that the proposed statutory changes, while certainly a big step forward, may not be enough to overcome deeply entrenched habits. They will need to be accompanied by steps to change the corporate culture and personnel policies that reward employees for working long hours. Another means of de-incentivizing overtime on the labor side is to make more employees exempt from overtime pay. Current law already excludes those in managerial positions from the labor regulations requiring an overtime premium, and legislation now before the Diet would extend that exemption to relatively highly paid non-managerial employees working in areas like finance, consulting, and research and development. However, the bill has stalled amid criticism that it would encourage employers to impose long hours on those employees. Once the Diet enacts legislation placing a cap on overtime, it should defuse such concerns, and the government can focus on instituting a more comprehensive white-collar exemption, minus the minimum income provision.

Far-Reaching Implications of Equal Pay

The other major target of the work-style reform plan is the pay and benefit gap between regular employees on the one hand and those classified as temporary or part-time on the other. If the foremost labor issue for regular employees today is excessive work hours, the biggest complaint of nonregular workers is the discrepancy between their terms of employment and those of regular employees doing the same type of work for the same employer. Here, too, the council deserves high marks for taking on a difficult challenge and reaching a conclusion based on the principle of equal pay for equal work. But the obstacles to implementation are considerable, given the basic features of Japan’s employment system.

A key aspect of that system is the way wages are set and structured. In Japan, the pay scale for regular employees is ostensibly linked to skills acquired through time on the job, rather than to the particular job title and its duties, as in the West. Wages for nonregular employees, by contrast, are generally linked to the position. This means that the pay gap tends to widen as employees age. The conventional wisdom has been that such a dual system is basically incompatible with the principle of equal pay for equal work. Nonetheless, the reform plan has endeavored to uphold the principle as firmly as possible by breaking compensation down into various components and emphasizing equal treatment in those areas where it is feasible.

For example, the plan calls for equal treatment with respect to employee training, allowances, and benefits, assuming that the conditions and circumstances of work are comparable. One of the biggest burdens the plan would impose on businesses is a requirement that any bonuses tied to business performance be paid to nonregular as well as regular employees. If rigorously implemented, such rules will doubtless improve conditions for nonregular employees. But how will companies pay for them without sacrificing profits? The only real option is to reduce regular employees’ compensation and benefit packages. The government has been less than forthright when it comes to this inconvenient truth.

Most problematic, however, is the call for equal base pay. The plan assumes that it is possible to perform a factor analysis of base pay to establish the relative weight of such components as job position, skills and performance, and seniority. Armed with this analysis, employers are expected to compare employees and their work factor by factor and pay them accordingly, using the same criteria. The problem is that, while companies usually claim that the pay scale for regular employees is linked to job skills, in reality it is more strongly linked to life stage, taking into account the financial demands on a typical married male at various points in his lifecycle. This practice makes it extremely difficult to conduct the kind of objective factor analysis and one-to-one comparison that the reform plan proposes. The truth is that Japan cannot hope to achieve equal pay for equal work simply by improving the treatment of nonregular employees. If we are serious about this goal, we need to overturn the entire system by which Japanese corporations set wages for their core employees, which would amount to a workplace revolution. One wonders if our business and labor leaders are really prepared for such an upheaval.

Filling In the Big Picture

In addition to the two key areas of reform discussed above, the plan covers such topics as care for children and the infirm, treatment of young workers and women, and employment of foreigners and the elderly. Owing to time constraints, however, the council made scant progress in these areas, and the recommendations offer little that is new. That said, the council is to be commended for coming out in support of such flexible work arrangements as telecommuting and working multiple jobs and laying the groundwork for further study. One topic that should be included in future deliberations is the adoption of mechanisms for preventing excessively long work hours in the context of such arrangements, including the use of new information and communication technologies to accurately record working hours.

The government’s plan unquestionably breaks new ground on discrete labor issues that have thus far defied efforts at reform. At the same time, it lacks sufficient clarity when it comes to the bigger picture, including the interrelationships among these individual issues and a comprehensive vision for the future of Japan’s employment system. Without such a perspective, the ripple effects from individual reforms are likely to interact and create disturbances that run counter to the long-term goals we seek.

One perspective inadequately represented in the plan is that of work-style reform as a means of boosting productivity in order to power sustained economic growth. Unless accompanied by measures to increase productivity as measured by output per labor hour, cutbacks in working hours and better treatment for nonregular workers are bound to have a negative impact on business activity and the economy as a whole. Among the workplace reforms needed for increased labor productivity are flexible work arrangements leveraging ICT and a shift from membership-based to job-based employment as the default mode.

We must also look to increased labor mobility as a means of boosting productivity. Policy makers are currently studying the possibility of a rule that would permit a wrongful termination to stand as long as the employer provided financial compensation, along with a proposal for substantial government investment in programs to help workers find new jobs or reenter the labor force. These are among the upgrades that the government will need to incorporate in its next action plan if Japan is to achieve meaningful and sustainable workplace reform.