Japanese Wages Continue to Lag Behind Productivity
Senior Research Advisor
Research Institute of Economy,Trade and Industry
The 'spring labor offensive' is rolling around again. Since the 1960s, Japanese wages have been determined through negotiations held every spring between management and labor representatives. These negotiations deal not only with wage levels but also issues such as wage disparities between full-time and part-time workers and long work hours. The government is forecasting 1.7 percent real growth for FY2016, which kicks off in April. However, with plunging oil prices and China's recession likely to become even more serious, the landscape has grown much bleaker since early January, and many economists are expressing increasing pessimism over economic prospects. The Japanese Trade Union Confederation (JTUC), which represents labor in the negotiations, is aiming for a base pay hike of at least two percent. Management is not necessarily opposed to paying higher wages but is less enthusiastic about base wage levels rising, the reason being that once lifted, base wages cannot be dropped again even if the economy happens to slump. The Abe administration is pressuring businesses to raise wages. This has been a consistent demand since Abe came to power, with 2016 to be the third consecutive year. Economists and businesspeople are strongly opposed to such government intervention in wage negotiations, but Abe appears oblivious to their criticism.
Marked long-term decline in Japan's unit labor cost
Both management and labor concur that wages should keep pace with productivity. Wage growth well above productivity reduces a country's international competitiveness and spurs inflation, ultimately burdening the public. Conversely, when wages fall substantially below productivity, purchasing power diminishes, undercutting the economy from the demand side. An appropriate balance needs to be maintained between wages and productivity. Figure 1 shows a comparison of productivity and wage trends among Japan and the other major powers. It uses the index of unit labor cost (ULC), the numerator of which is nominal wages and the denominator added value per capita. Where wages grow faster than productivity, the index rises, and countries face the possibility of inflation and reduced competitiveness. In the opposite case, there is considerable risk of deflation and a domestic economic slump.
Figure 1 reveals that the situation in Japan differs markedly from other developed countries. Since 2000, only Japan has evinced a consistent ULC decline. In other words, the rate at which wages are rising is not keeping pace with productivity. This is why Japan alone in the developed world has continued to struggle with long-term deflation. In other countries, the ULC is increasing gradually, so they have escaped deflation, while countries like Australia that have experienced a marked ULC rise have inflation rates higher than those of other countries. Within Europe, Germany has a low ULC climb rate, with the result that its competitiveness has grown relatively strongly and boosted Germany's trade surplus, drawing complaints from neighboring nations. This is why Germany's former reluctance to raise wages has recently been giving way to a more positive outlook on higher pay. The ULC is accordingly a useful means of analyzing the causes of inflation and deflation.
Exchange rates also support international competitiveness
When it comes to international competitiveness, exchange rates are a vital element, and Figure 2 consequently builds in exchange rate fluctuations. The yen depreciated significantly in 2006 and 2007, then again as of 2013 following the launch of Abenomics. With other countries' currencies stronger than the yen, their ULCs too are higher for those periods. The United States and Korea appear particularly hard-hit. In Japan's case, productivity has outstripped wages, which have either not risen or risen only slightly, and should the yen weaken, it will obviously be to the advantage of Japan's international competitiveness. Given Japan's ULC, the Abe administration's assessment that industry can afford to raise wages seems extremely reasonable. The continued poor performance of Japan's exports despite this situation is due to sluggish demand in China and other trading partners.
Hazy economic prospects for FY2016
Due in part to lobbying by the Abe administration, Japan's nominal wages rose 0.4 percent in FY2014, the first increase in four years. That positive growth continued in FY2015, albeit by less than one percent. According to the IMF's October 2015 World Economic Outlook, Japan's ULC for the January-March 2015 period slumped a hefty 4.5 percent. The government will therefore have little choice but to keep pushing for higher wages. The consumption tax hike from five to eight percent in April 2014 was particularly problematic in that it has boosted general prices even as real wages have sagged more than two percent. At this rate, personal consumption, which accounts for 60 percent of domestic demand, is likely to flatten, dimming the prospects of success for Abenomics. Even if the two percent increase sought by JTUC is realized in full, real income will only hold level-despite the two-percent real growth in personal consumption predicted in the government's official economic forecast on January 22. Stock prices have already factored this in, maintaining a steep downward trajectory since the beginning of the year. With the Upper House elections scheduled for July, the government seems likely to be pushing even harder for higher wages this year. Again this year, wages will be key for the Japanese economy.
(original article : Japanese)