Two Reasons Why Wage Growth Has Stagnated in Japan

May 6, 2016

Wage growth in Japan has lagged well behind productivity during the past 15 years and remains sluggish despite an increasingly tight labor market.

 

Average Real Wage & Labor Productivity Growth, 1992-2014

 

Source: IMF

 

Such weak growth is a major bugbear for Japan’s economy because wages feed private consumption, which in turn accounts for 60.7% of GDP. Therefore, any uptick in economic growth will have to be rooted in a sustained increase in consumer demand, which in turn will be fed by wage growth.

 

So what lies at the core of this phenomenon? The IMF cites two main reasons for weak pay growth in recent years and they break down as follows:

 

  • Secular stagnation: Wage settlements use past inflationary numbers as a guide for pay rises. Since prices have been more or less stable over the long term and future inflation prospects look weak, employers have kept wages stable.

 

  • Growth in non-regular workers: Part-time workers and contractors without work union affiliation have accounted for the recent increases in employment. This marks a change from the unionized, long-term work engagements of the past. As such, wage bargaining power has declined.

 

Japan: Regular & Nonregular Workers (YoYChange, Thousands-LHS), Share of Non-Reg Workers (RHS)

Source: IMF

 

If Japan is to get serious about tackling the problem, policies to look out for include pushing firms to comply with recent increases in the national minimum wage and action to cut short-term hiring in favor of longer, open-ended work contracts.

 

But past performance suggests aggressive policies are unlikely since the government has failed to proactively reform the economy in the years since Abenomics was introduced in 2013.

 

And with Japan’s economic outlook worsening and reforms stuttering, the government can hardly ignore the need to address the wage issue, particularly because it holds the key to stimulating consumer demand, which is the foundation of the economy.

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