Understanding the Kishida Labor Mobility and Reskilling Initiatives

Accelerating Japan’s Economic Transformation

The administration of Prime Minister Kishida Fumio plans to invest ¥1 trillion over five years to promote individual reskilling and other initiatives to smooth the way for an economic transition. There is still much work to be done, but such policies are important for facilitating the movement of labor into growth sectors, raising wages sustainably, and ultimately, for Japan to continue to enjoy economic growth. This article summarizes the labor market reforms currently being undertaken by the government, as well as the challenges standing in the way.

The Need for Labor Market Reforms and Investment in People

The anticipated role of labor market reforms in the Kishida administration’s growth strategy can be illustrated by two key phrases.

The first is the current government’s notion of a “New Form of Capitalism.” Embracing this involves pursuing two complementary goals simultaneously: “resolving social problems” and “raising corporate value.” Since the 2010s, the developed world has become more intently focused on the consequences of income inequality and global environmental challenges. In line with this, long-term investors have begun to expect companies to create value for all stakeholders to deliver long-term value for shareholders. Company executives are therefore more sensitive to the impact of their operations on the global environment and creating space for employees to innovate. As income inequality has widened in developed countries, corporate managers have also started to pay greater attention to employee conditions.

The second key phrase is the “realization of a virtuous cycle of growth and distribution.” Doing so is particularly important considering Japan’s current situation. The Japanese economy’s potential growth rate and real wage growth have remained low, while total factor productivity growth has been around 0.5% in recent years (see figure below). In other words, insufficient growth has prevented a virtuous cycle driving income distribution from taking hold. This stagnation of wages in turn has also led to a vicious cycle where we see an outflow of human resources overseas and a decline in Japan’s international competitiveness.

In essence, for a new form of capitalism to take hold in Japan’s current situation, an emphasis on “investment in people” is required. Reform of employment practices and labor markets is critical for achieving this.

Why Japanese Wages Have Stagnated

Identifying the reasons for Japan’s wage stagnation will further illustrate why labor reform is necessary. As Japan’s population began its decline from the year 2000 onward, growth expectations for Japanese companies also fell. Many companies reacted by prioritizing some combination of cost-cutting and overseas investment while reducing domestic investment, especially in intangible assets like human resources and DX, or digital transformation. Japan’s investment in intangible assets as a percentage of GDP is particularly low compared to Western countries. In turn, this low investment in people has contributed to a decline in labor quality and productivity growth.

Several structural factors may explain Japan’s low investment in people. The first is the increase in the number of nonpermanent or nonregular employees since 2000. In 2022, the number of irregular employees exceeded 21 million, and their share of the worker population (excluding executives) increased to 36.9%. Most female workers are in non-regular employment, and Japan has one of the largest wage gaps between men and women in the OECD.

Second, most Japanese companies have a seniority-based wage system rather than a merit-based system, and most companies still use the “membership-type” approach to recruitment and employment. This is opposed to “job-type” employment, where people are recruited based on their skills and work history to do a clearly defined job. As a result, Japanese companies are falling behind in the international competition for human resources, especially digital talent, due to foreign companies offering higher wages for job-type employment.

Third, labor market mobility has remained low. Corporations usually only provide company-specific training as opposed to broader skill-development opportunities. Regular employees are also protected by lifetime employment even if their wages remain low, reducing incentives to take risks elsewhere. Labor policy in Japan has traditionally focused on maintaining enterprises and the jobs they support, so government policy has paid little attention to encouraging labor mobility that would support growth enterprises or industries. Furthermore, the government has not pursued “active labor market policies,” meaning measures that would raise wages across the economy through upskilling, support for start-up SMEs, and pushing talent toward high-growth sectors.

Future Directions for Labor Market Reform

Japan has a declining working-age population and a serious labor shortage. Going forward, it needs to transition to an economy where a more diverse range of people enjoy sustainable wage increases, including young people, women, and seniors, thereby fulfilling their potential. This should occur at the same time as breakthrough innovations and innovators that add value and enhance productivity are embraced. Recognizing these issues, the cabinet adopted the “Grand Design and Action Plan for a New Form of Capitalism” in 2022 and revised it in 2023. These documents set out the structural reforms and institutional arrangements required to realize these outcomes, with a focus on investment in people, labor market reforms, and support for start-ups.

In addition to investment in people and realizing wage increases, the 2022 Action Plan also emphasized how support for start-ups, and investment in science and technology, DX, and green transformation could serve as seeds for solving social problems as well as improving the economy. A “Start-up Development Five-Year Plan” was soon formulated to realize these goals, and in June 2023 a revised Action Plan was adopted. The focus of this revised plan was labor market reforms aimed at sustainable wage growth based on three pillars: expanding job-type employment, reskilling, and facilitating labor mobility. While job-type employment has become increasingly common in major manufacturing and IT firms, the goal is to encourage companies more broadly to adopt this approach. Individual reskilling will now be directly supported by the government while employment adjustment subsidies will provide incentives for companies to strengthen reskilling. To facilitate labor mobility to growth sectors, a review of the unemployment benefit system will take place and public-private information sharing arrangements designed to support career development will be implemented.

The Three Challenges Standing in the Way

If successful, upskilling workers and improved labor mobility will facilitate Japan’s transition to the drastically different industrial structure expected to accompany green transformation in the future. In addition, so-called “corporate metabolism” should accelerate as new, more innovative enterprises enter the market while displacing established companies, and labor mobility increases as human resources gravitate toward innovative firms. Across the economy, productivity should increase, allowing wages to increase sustainability and continuously.

However, three challenges stand in the way of Japan achieving this ideal outcome.

First, and perhaps most urgently, Japan’s army of irregular workers—currently accounting for almost 40% of all employed people—must be provided with opportunities for further education and career development as they seek new job opportunities. Currently, irregular employees find it difficult to transition into more permanent positions with better conditions within their own companies. Strengthening education for midcareer upskilling, support for job matching, and improving the livelihood security of irregular workers who are usually not eligible for employment insurance will give them confidence and help them make the leap to growing sectors even if they lose their present jobs. By reducing future uncertainties, these policies should provide greater assurance to young workers and also help combat the declining birthrate.

Second, improved job matching and education for upskilling need to be pursued throughout the economy. Technological innovation remains fast-paced, putting pressure on white-collar personnel to improve their productivity through the acquisition of digital skills, including the use of generative AI. While some white-collar workers will be made redundant due to the adoption of digital and AI technology, the shortage of workers in many “blue collar” professional and technical occupations—such as public transport operators—will only grow, driving an increase in wages in those occupations. Precise reskilling will be key to addressing these sector-specific mismatches, making it important for commercial enterprises to clarify the skills of the personnel they require. If they do so, it will be easier to develop public-private partnerships and systems that direct people to the training that will enhance their skills in the areas required by Japanese employers.

Third, corporate employment practices need to change. The link between work and education is still weak in Japan. Although the job market is currently active, many companies still recruit new graduates en masse and continue to use a seniority system. As these practices persist, it is not uncommon for the skills acquired during school years or in ongoing training to go unutilized in the workplace. Furthermore, due to the long-lasting lifetime employment system, particularly Japanese people in midlife seem to have adopted a strong cultural orientation toward career stability and are less concerned about doing things that would enhance their career autonomy.

Labor Shortages as a Transformation Opportunity

Labor shortages are all but certain to further intensify in Japan’s future, and this is already driving changes in the labor market. To realize a virtuous cycle of growth and distribution and sustained wage increases, the government must adopt proactive and fine-tuned labor market policies while company managers review and reform their personnel systems. The current labor crisis is driving a shift in business management practices and should be embraced as a societywide opportunity for transforming the Japanese economy.

(Originally published in Japanese. Banner photo © Pixta.)