No. 15 — April 14, 2000

 

Weekly Review

MEAGER WAGE HIKES IN JAPAN DIM PROSPECTS FOR REVIVAL OF CONSUMER DEMAND
--- by Jon Choy

In springtime, the thoughts of Japanese turn not only to romance but also to the annual private-sector pay negotiations known as shunto. With the economy struggling and corporations in the midst of restructuring, labor unions grimly faced off against management this year. Reductions in the most recent summer and winter bonuses set the tone for the 2000 shunto, with most of the fireworks coming out of the discussions of nonwage issues. Since consumer spending represents roughly 60 percent of domestic demand, observers warn that the record-low raises won so far this year could hold back the economy's recovery.

Summer bonuses - According to a survey of 1,164 firms by Nihon Keizai Shimbun, Japan's leading business daily, the typical "salaryman" received an average summer bonus in 1999 of ¥720,046 ($6,550 at ¥110=$1.00), 5.8 percent smaller than the year before. This was the first drop in five years and also the steepest one recorded since Nikkei began conducting its survey in 1975. Manufacturers cut summer bonuses an average of 7.2 percent to ¥699,607 ($6,360), while workers in service industries suffered a 2.8 percent average erosion to ¥763,884 ($6,945). Hardest hit were employees of hotels and travel-related firms, who saw an average 30.2 percent reduction in their midyear bonuses. The cuts were at odds with the overall direction of the economy, which posted gains in real gross domestic product in the first six months of 1999.

Winter bonuses - When real GDP headed south in the second half of 1999, observers predicted more bad news for end-of-the-year bonuses. Although clearly in negative territory, the average decline registered in Nikkei's mid-December poll was just 3.5 percent to ¥744,402 ($6,770) for all industries (see Table 1). The manufacturing sector again led the way with a 4.5 percent reduction versus nonmanufacturing industries' more moderate cut of 1.3 percent. One sign that the downward trend in bonuses was abating were the across-the-board increases in winter bonuses over their summer counterparts. In addition, while bonuses were cut last summer in 35 of 40 surveyed industries, that number dropped to only 30 for the winter season. When the yearend 1999 extra money is compared with 1998's, however, the pattern of change is decidedly mixed.

Spring wage negotiations - Against the background of shrinking bonuses, union leaders were not optimistic going into the pay talks for 2000. In what has become an annual replay of a kabuki-like performance, management countered labor unions' arguments for wage and salary hikes with offers that represented no change or even demands for givebacks. Playing with the disadvantage of a weak hand, union negotiators focused on job guarantees, extended employment for older workers, retraining programs and job-transition assistance. While company representatives were flexible on the last two points, they stonewalled on the first two.

Nikkei's survey of the 2000 shunto outcome, published in late March, indicated a typical pay increase of just 1.9 percent (see Table 2), representing a 2 percent average gain in the manufacturing sector and a 1.8 percent rise in the services sector. In both percentage and absolute terms, the combined figure was the lowest tallied by the newspaper since it began tracking shunto results in 1977. Nikkei reported that the deals negotiated by the shipbuilding, heavy machinery and electric power industries had pulled down the average because workers there had accepted increases that affected only the discretionary part of the compensation formula with no change in base pay. This was the first time in 13 years that shipbuilding and heavy machinery firms had failed to boost base wages and salaries, a move followed by other hard-pressed firms, including steelmakers NKK Corp. and Kobe Steel, Ltd.

Even relatively well-off companies fought hard to hold the line on pay hikes. Toyota Motor Corp. and Honda Motor Co., Ltd., for example, agreed to increases of just 2.16 percent and 2.15 percent, respectively, not much above the 2.06 percent average for the automotive industry. Similarly, workers in the hot communications and software industries settled for raises of just 1.85 percent and 2.61 percent, respectively.

One key issue that went labor's way involved the mandatory retirement age. Companies have agreed to raise the ceiling slowly and in step with recently approved changes in government-administered pension plans. These will push back the benefit-eligibility age to 65 from 60 (see JEI Report No. 13B, March 31, 2000).

Labor specialists are pouring over the details of this year's shunto to determine how Japan's labor market and personnel practices are changing in response to a wide range of developments. Salient points in their examination include:

In this year's shunto negotiations, both sides agreed on two points: the labor market is changing and job-seekers face tough competition. Companies specializing in outplacement and continuing education for adults are reporting insatiable demand for their services. Computer training, in particular, is a must-have, especially for older workers.

The job market remains difficult but could improve in the near term (see previous article). According to Management and Coordination Agency data, the seasonally adjusted jobless rate reached a postwar record of 4.9 percent in February, a rise of 0.2 percentage point over the number for December 1999 and January and above the old high-water mark of 4.8 percent in June and July of last year. Corporate restructuring is playing a role, as is the usual seasonal surge of high school and college graduates.

Nikkei plumbed companies' FY 2000 and FY 2001 hiring plans in a survey published March 23, finding that opportunities would get better down the road. Corporate personnel officers expect to increase the hiring of new graduates from colleges and universities by 7.2 percent in FY 2001, a turnaround from this year's anticipated reduction (see Table 3). The prospects for people who will be finishing junior college and professional and vocational schools in the next year are even better. The companies surveyed hope to hire 15.4 percent more employees from this group in FY 2001 as opposed to 40 percent fewer in FY 2000. Only high school graduates face at least two more tough years. Companies expect to slow hiring from this group by 39.8 percent in FY 2000 and 7.7 percent in FY 2001.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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