Japan’s Employment System on Trial

Japanese-Style Employment as the Fruit of Democratization: A Historical Reevaluation

Economy Society

Amid ongoing calls for reform of the “Japanese employment system,” the author offers a new perspective on the issue, rejecting static cultural stereotypes while highlighting the historical context of the postwar labor movement.

The Japanese employment system is facing harsh headwinds. Though formerly hailed as the source of the nation’s industrial competitiveness, it has since been blamed for the Japanese economy’s long-term stagnation. In the mid-1990s, reform was in the air, as experts and gurus called for a shift to “performance-based” pay and advancement. Those calls for systemic change continue today, albeit framed in ever-changing terminology (job-based employment, human-capital management, and so forth).

What, objectively speaking, are the similarities and differences between these latest reforms and those promoted and pursued in the 1990s? This question provides a good launching pad for a historical survey. Surely a historical perspective on the Japanese employment system would help us understand where we stand today and why. Yet it seems to me that people are so eager to forget the past that they cannot even frame such fundamental questions. Everyone spouts cutting-edge buzzwords to conjure up the future. But in the absence of a coherent historical narrative connecting the past to the present, new terms connoting much the same thing spring up one after another, as we continue to spin our wheels.

Beyond Cultural Determinism

Certainly there are common themes running through all these calls for reform. Figuring prominently among them is the criticism of seniority- or age-linked treatment of personnel. Here is a typical example:

“The treatment of personnel, including assignment, promotion, and pay raises, must be such as to maximize incentives for employees to develop and demonstrate their abilities. One of the problems with the seniority system is that such incentives are lacking.”

The quotation above is taken from a report (in Japanese) titled “Meritocratic Management—Theory and Practice,” published by the Japan Federation of Employers’ Associations (Nikkeiren, since absorbed by Keidanren). It came out in 1969, at the height of Japan’s period of rapid growth. Yet it sounds as if it could have been written yesterday.

The factual basis for this enduring criticism is difficult to pinpoint. The reason is that we tend to view the Japanese employment system as something inextricably rooted in traditional Japanese culture, instead of as one phase in a historical process.

Terms like “lifetime employment” and the “seniority system,” which have come to define Japanese employment practices, have their origins in a 1958 work titled The Japanese Factory, by James Abegglen. Significantly, the author was an anthropologist by training. He coined terms that encapsulated (rather elegantly, it must be said) certain understandings, however vague, between the organization and its individual members. It was these terms, rather than any accurate description of Japan’s evolving personnel policies, that took hold and came to define our understanding of the Japanese employment system.

In short, Japanese personnel practices have been interpreted as reflecting the persistence of an age-based social hierarchy within the unique “community” of the Japanese company. This interpretation, while not without a kernel of truth, is all too tainted by cultural determinism, and it has robbed us of a chronological historical perspective on the issue.

The Labor Movement and the Birth of the Sha-in

My recent book Nihonteki koyō shisutemu o tsukuru 1945–1995: Oraru hisutorī ni yoru sekkin (The Making of the Japanese Employment System, 1945–1995: An Oral History Approach) is an attempt to reconstruct a chronological history of Japan’s postwar employment system by analyzing some 200 interviews of 100 participants in that history.

There is a reason why I chose 1945 as the starting point for this historical account. It was in December 1945, just a few months after the end of World War II, that the Trade Union Law was enacted to legislate the labor reforms the US Occupation was then pursuing as part of its campaign to democratize Japanese institutions. Once the law was promulgated, guaranteeing workers the right to organize, bargain collectively, and strike, trade unions began forming in large numbers.

The newly formed unions pursued their campaigns in a militant and very public way, driven by workers’ pent-up dissatisfaction. One of the major goals of the movement was to abolish the “class distinction” between shoku-in, or white-collar employees, and kō-in, or blue-collar workers, that had persisted until then. The division of employees into the elite and the non-elite was seen in pay structures (with shoku-in getting monthly salaries while kō-in received daily wages) and even in the designation of separate cafeterias and entrances. Resentment over such discrimination had built up over the years, and with the birth of the labor movement, it exploded in a concerted drive to abolish the distinction.

In the West, blue-collar and white-collar unions developed separately. In Japan, they were members of the same unions, and while this eventually eroded their working-class identity, at this stage it led to the emergence of a new, inclusive class of employee, the sha-in, encompassing both shoku-in and kō-in.

The distinguished labor economist Koike Kazuo documented the phenomenon. His comparative international analyses of wage profiles found that a strong correlation between seniority, or age, and wages was by no means unique to Japan. In the West, however, it was limited to white-collar workers. In Japan, it was seen also among blue-collar workers, who earned promotions and raises as they graduated to more difficult work, following a “white collar” career trajectory.

Of course, this change did not occur overnight. Although the unions had torn down the wall between the shoku-in and the kō-in, the erstwhile kō-in had to fight hard to achieve equal treatment within the company. Had a personnel system not emerged to satisfy the collective aspirations of this group, the intense labor struggles that persisted into the 1960s would probably have continued and intensified.

Labor and management, most notably at major corporations, entered into a long series of consultations beginning in the 1960s. The purpose was to develop a new personnel system applicable to everyone in the inclusive category of sha-in. The reason the negotiations dragged on so long is that it was no easy matter to find common ground and agree on a system acceptable to management and to the unions’ diverse membership, given their often divergent interests and values.

From Job-Based to Competency-Based Pay

A key challenge was establishing an internal assessment and ranking mechanism to determine each sha-in’s position and treatment within the company. The mechanism that emerged has been misleadingly described as the “seniority system,” an oversimplification that has given rise to stereotypes and misunderstandings. Let us examine its development.

The elimination of the distinction between white-collar and blue-collar in Japanese companies created a climate of competition quite different from that found in Western companies, where new employees were sorted from the start on the basis of educational background. In the West, elite white-collar workers on the management track found themselves in a fiercely competitive environment, but the situation was quite different for blue-collar workers.

In order to lay the basis for competition among sha-in, it was necessary first to establish a shared understanding of what constitutes merit. Next, companies needed to develop a ranking system based on that shared understanding, a managerial apparatus for placing and promoting employees, and a set of clear criteria for evaluating employees and determining pay levels. The benefits of such a clear-cut system are obvious, but to build it required, first of all, a relationship of mutual trust between labor and management, and second of all, agreement between labor and management on the conditions for equal opportunity and fair assessment. All of this took time.

In the 1950s and 1960s, most Japanese corporations were moving toward the Western system of assigning pay grades to each position in the company and making the job (shokumu) the organizing principle of the workplace. Ultimately, however, it was not possible for them to build an integrated personnel policy that hinged on a concept borrowed from the West. Nonetheless, some valuable experience and data were gained in the process of observing the workplace scientifically and analyzing each job. In the 1970s and 1980s, with the help of such information, Japanese industry proceeded to develop its own personnel system combining job-based compensation with treatment linked to each employee’s progress up the ladder of shokunō, or work competency.

The Democratization of the Workplace

Research reveals that Japanese companies already had internal evaluation systems and merit pay in the days immediately after World War II. How, then, was the concept of shokunō fundamentally different from the existing concepts of ability or merit?

Instead of relying on the central office or outside consultants to formulate general criteria, each company adopted an autogenous, bottom-up process, tapping veteran employees to write up detailed descriptions of their work and list the skills and competencies required at each successive level. This formed the basis of the company’s pay scale. The involvement of central management and labor unions was limited to encouraging and supporting the emergence of this autogenous order.

The workplace order that emerged autogenously during this time was Japanese corporate society’s answer to the question of how to ensure equal opportunity and fair pay for all employees. It was the realization of postwar democracy in the workplace.

Of course, critics have argued that these democratic reforms were warped by the dynamics of the Japanese corporate “community.” And it is doubtless true that internal competition, however autogenous, was often excessive. With no initial sorting of employees, the number of competitors for managerial posts swelled, and the average rate of advancement slowed to the point where most pay raises were automatic and thus effectively tied to seniority (that is, age).

Still, not even the critics of Japan’s postwar employment system believe that Japanese firms should classify their employees as elite or non-elite from the moment they are hired. (Anyone who did think that would be embarrassed to say so publicly.) I would guess that a key reason the 1990s reforms never seemed to reach their goals is that there is widespread support for the existing system’s internal ranking mechanism, with its democratic rejection of elite and non-elite tracks, as the bedrock of Japan’s employment system.

Another reason reform has stalled is that Western personnel systems geared to either elite or non-elite employees are poorly suited to the milieu of Japanese companies, where that distinction does not exist. Many companies thought they could overcome this problem by introducing certain Western practices piecemeal, but as long as the democratic bedrock remained unchanged, such reforms failed to take root. This has been the situation for the past 30 years.

I am not in favor of radical reform on the Western model, nor do I advocate a wholesale return to the system of shokunō-based personnel management. The only way to meet the challenges facing Japanese business today is to rethink the concepts of merit, equality, and fairness and rebuild a democratic personnel system from the ground up. A creative retrospective study of the Japanese employment system is essential to this undertaking.

(Originally published in Japanese. Banner photo: Striking employees picket outside of Mitsui & Co. headquarters, Tokyo, June 24, 1965. © Jiji.)

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