Economic Survey of Japan 2005: Improving the functioning of the labour market

 

How can the functioning of the labour market be improved while encouraging labour force participation?

Employment flexibility is being achieved through increased hiring of non-regular workers, who have temporary contracts, boosting their share over the past decade from 19 to 29 per cent of total dependent employment. In addition to enhancing flexibility, nonregular workers are relatively inexpensive; the average hourly wage of part-time employees, who account for three-quarters of non-regular workers, is only 40 per cent that of regular workers. The increasing dualism is creating a group, concentrated among young people, with short-term employment experience and low human capital, given the important role of firm-based training in Japan. There are also important equity problems, given that the difference in productivity between regular and non-regular workers is much smaller than the wage gap. The equity concern is magnified by the lack of movement between the two segments of the workforce, trapping a significant portion of the labour force in a low-wage category from which it is difficult to escape. Stopping the trend towards increased dualism requires a comprehensive approach.  This should include reducing employment protection for regular workers, increasing the coverage of temporary workers by social security insurance and other policies, such as training programmes, to enhance the employment prospects of non-regular workers.

A significant portion of non-regular employment is concentrated among young people. Nevertheless, the unemployment rate for the 15 to 24 age group is about 10 per cent, about double the national average. Increased unemployment of young people reflects reduced hiring of new graduates as firms have cut their workforces during the past decade of sluggish growth. Reducing employment protection for regular workers could reverse this trend by preventing the adjustment of the workforce from falling disproportionately on young people. The government has taken steps to increase the capacity of the public employment service to assist young people. It is important, though, to improve job training programmes aimed at young people in order to enhance their job prospects.

With women accounting for more than two-thirds of non-regular workers, reversing the trend toward labour market dualism may help to boost female participation rates by providing more attractive job opportunities. A higher participation rate of women would help buffer the impact of the decline in the working-age population, which is projected to fall by 5 per cent in the decade 2000 to 2010. Private-sector practices, such as company allowances for spouses, the importance of tenure in setting wages and the use of age limits on potential new workers may also have a negative impact on female participation in the labour force. The government should reduce or eliminate aspects of the tax and social security system that discourage women from working full-time. In addition, relaxing licensing conditions for private-sector childcare facilities may facilitate female labour force participation.  Finally, the high participation rate of older workers should be maintained by further reforming the pension system to reduce incentives to retire between the ages of 60 and 64.

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