JAPANESE EMPLOYMENT SYSTEM IN TRANSITION: GROWING DIVERGENCE AND GLOBALIZATION

MARI YAMAUCHI

JUNE 29, 2015

DUISBURG

1

GNP: LOST 20 YEARS, THEN, ‘ABENOMICS’

2

-8

-6

-4

-2

0

2

4

6

8

10

12

14

1990 1995 2000 2005 2010

GDP YoY

France Germany Italy Japan Korea United Kingdom United States

Source: OECD

UNEMPLOYMENT RATE (ALL)

3

0

5

10

15

20

25

30

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Unemployment Rate

Australia Finland France Germany Italy Japan Korea

Netherlands Spain Sweden Switzerland United Kingdom United States OECD - Total

Source: OECD

UNEMPLOYMENT RATE (YOUTH 15-24)

4

0

10

20

30

40

50

60

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Unemployment Rate (15-24 years old)

Australia Austria France Germany

Italy Japan Korea Spain

Sweden Switzerland United Kingdom United States

Euro area (19 countries) European Union (28 countries) OECD - Total

Source: OECD

RATIO OF NON-REGULAR WORKERS

(PART TIME+FIXED TERM+DISPATCHED WORKERS)

Source: Labor Force Survey

0

1000

2000

3000

4000

5000

6000

1985 1990 1995 2000 2005 2006 2007 2008 2009 2010

37%

THREE PILLARS OF

TRADITIONAL J-EMPLOYMENT RELATIONS

6

LTE

In-House Union

Nenko(Seniority-

Ability based pay)

High Growth

HomogeneousSociety

Silent Capital

HISTORY

Developed after WWII vs. Developed during 1940’S （Noguchi ）

• Before WWII Japan was more shareholder oriented countryNo clear consensus on the beginning of the system

• Key elements of J HRM based on common practices or court precedents• A major difference from German CME (based on explicit laws & regulations)

Labor Standards Act (Article 49) only requires 30 d ays prior notice for dismissal..

Labor Contract Act (Article 16) only says

• ‘Dismissal will be void as an abuse of rights if it is not based on objectively reasonable grounds that are socially acceptable…‘

• Four conditions for dismissal based on precedentsThus, traditionally large disparity in E/R between

• large companies vs. small companies, • And recently, foreign firms, venture firms, etc. vs. large Japanese firms

J-ERs/HRM only applies to large companies

7

RECRUITMENT POLICY

New Graduate Hire

• Hiring based on potential rather than job-specific skills or abilities• University serves as an indicator of ability and learning attitude rather than for

acquired knowledge or skills • Initial job assignments are informed only after the initial training period is over.

• Skill formation takes place within ILMsSymbols of entry to the firm as ‘community’

• All new graduates enter firms on April 1st , first day of Japanese fiscal year, with same conditions per company

• Firms hold official New Recruits Hiring Ceremony

NEW RECRUITS HIRING CEREMONY (APRIL 1ST)

9

Even at Nissan Carlos Ghosn giving an address to the new recruits at the hiring ceremony

New recruits receiving recruitment notice from the CEO. No detailed job descriptions are mentioned in the notice.

COORDINATION IN THE RECRUITMENT PROCESS

Firms and universities coordinate on

• When firms can approach students, e.g. recruitment presentation• When firms can start selection processes, e.g. interviews

“Official” Agreement abolished in 1996

• Because there were some companies who did not follow the rules

Now Autonomous coordination among large firms belon ging to Keidanren (JFEO), peak employers’ association

• Venture companies (often ICT sector) and foreign companies usually opt out• Employers’ associations are also becoming divergent. • Keidanren is now seen to represent old economy, young leaders in ICT sectors

created new association, service sectors, too…

10

AUTONOMOUS RULES BY JFEO(JAPAN FEDEREATION OF ECONOMIC ORGANIZATIONS)

11

Rules for 2015 graduatesDecember 1 (3 rd year)Firms can start recruiting presentationApril 1 (4 th year)Firms can start selection process such as interviewsOctober 1 (4 th year)Firms can make recruitment offers

New rules for 2016 graduatesMarch 1 (3 rd year)Firms can start recruiting presentationAugust 1 (4 th year)Firms can start selection processesOctober 1 (4 th year)Firms can make recruitment offers (Unchanged)

・As coordination rules continue to change and coordination erodes, firms are afraid that other companies may break the rules ‘prisoners’ dilemma’

Offer Inter-

viewsPresentations

・It takes 4 years to graduate from a university・Japanese fiscal year is April 1- March 31

PresentationsSelection, e.g.

Interviews

Source: Nikkei Newspaper

NO. OF NEW GRADUATE HIRE (2015)

12

Toyo Keizai Online May 1, 2015

Rank Company Number of Hire1 AEON (Super Market) 2,3002 Mitsui Sumitomo Bank 1,8323 Mitsubishi Tokyo UFJ Bank 1,6204 Mizuho Holding 1,3805 Seven & I (Seven Eleven) 1,3166 JR East (Railway) 1,3027 JFE Holding 1,2508 Mitsubishi Electric 1,1509 Risona Holding (Bank) 93310 Nippon Steel 848: : :

15 Hitachi 650: Tokyo Marine Insurance 650

17 Nissan 64318 Suzuki 64019 Denso 63520 Panasonic 60020 Nomura 600

Japan Post Group just announced to hire 6,500 in 2016 Large number of graduates from same universities often join same companies with same conditions. Strong ‘sense of cohorts’

INTERNAL TRAINING

Newly recruited graduates have limited or no skills

Training within ILM

• Emphasis on OJT by senior employees, mentoring, teamwork• ‘Tacit knowledge’ strength of J-firm (Nonaka)

Internal training expands beyond a company

• Group-wide employees’ transfers/job rotation (‘Shukko’)• Smooth coordination among group companies, supply chains • Process innovation

REGULAR JOB ROTATION

�Initial Assignment determined by HROften at Genba (factories or branches, not HQ)

�Job rotation determined by HR and managers�Broad skill (polyvalent skills)�Flexible resource allocation over time�Employees do not have much ‘say’ on their positions (what, where, when…)�‘I work for Hitachi’ rather than ‘I am an engineer’

Source：Sato, Fujimura, & Yashiro （2007）

Current Role

（Job Title） （Rank） （Pay)

GM 1

Mgr. 2

Asst. Mgr. 3

Proper Linkage

Ability Range

Salary Band

Irregular linkagepromotion

PERSON (ABILITY)-BASED WAGE

・Wages determined by ability rather than job, positions, or responsibilities・An important device supporting job rotation, OJT and LTE

PROS AND CONS OF PERSON (ABILITY) BASED PAY

16

Person Based Ranks Job Based Ranks

Pros ・Smooth job assignment/rotation・Polyvalent skills/knowledge・Smooth promotion (ranks)・OJT by seniors・employees association (community)

・Clear job responsibilities・Professionalism・Control of labor costs

Cons ・Expensive ・Labor supply oriented・Weak linkage with performance・Difficulty to measure ability tends to lead to seniority (age) based evaluation rather than ability

・Difficulties in job rotation・Limited promotion・Rigidity in managing/updating job description

PROMOTION

Largely internal promotion• Limited mid-career hires particularly in senior positions• simultaneous promotion for most cohorts who joined firms in the same year• Gradual elimination by lower performers reduce candidates for executives

Slow promotion (Koike)• Various job assignment before decision is made• Evaluation by multiple bosses before decision is made

17

PROMOTION

18

GM

Mgr. Mgr.

promotion

GM

Mgr. Mgr.

elimination

J-type promotion based on ranks

PROS AND CONS OF SLOW PROMOTION

Pros

• Long term participation in competition by many employees

• Long term motivation

• Long term evaluation by multiple bosses (fair evaluation)

Cons

• Waste of resources due to limited use of potentials of highly capable youth

• Excessive competition due to long term decision (overtime work, etc.)

• Lack of leadership• Employees try to

avoid taking risks

LTE (FROM ‘LIFE’ TIME TO ‘LONG’ TERM EMPLOYMENT)

Mandatory retirement age exists (legally accepted)• For many years 55, raised to age 60 in 1986 • Further extension of employment up to age 65 being implemented (details in slide 41)

Four requirements for work force reduction• And they have to be fulfilled individually • 1) Compelling (financial) need, 2) Employers’ endeavor to avoid reduction,

3) Fair selection of targeted person(s), 4) Proper procedure for reduction

The cost for interpreting and fulfilling the requir ements is very high• Firms try to avoid work force reduction • They reduce number of new graduate hires• They call for (collective) early retirement programs in which those who are willing to resign raise their hands

Yakushoku Teinen (forced deprival of titles )• A practice to reduce the costs for aged employees• In many large companies, employees who have no prospect to become executives lose their titles, often at the

age of 55 • Then they move to subsidiaries, affiliated companies, business partner companies, etc.

20

UNION (IN-HOUSE UNION)

Union positions are also a part of job rotation

• Traditionally a position offered for those highly likely be promoted to senior positions??• Recently not so popular positions??• JAW and JEIU, peak organizations of unions of auto and electric sectors, but core members

are from major member companies who are assigned the positions for a few years stint. ‘Shunto’ (Spring offensive), wage negotiation

• Takes place at the same time (spring) but outcomes are different per company• No extension of agreement beyond individual companies or groups• Large wage differences among companies, particularly by size of companies

Unions focus on regular employees

• Large wage disparity between regular workers and non-regular workersUnions cover broad topics

• Wage, WLB, etc.

21

WAGE BY SIZE OF COMPANIES

22

Large companies

Medium sized companies

Small companies

Male Large companies(1000 or more employees)

Medium sized companies(100 ～ 999 employees)

Small companies(10～99 employees)

age

JPY Thousand

Source: Basic Survey on Wage Structure

WAGE DIFFERENTIALS (FULL TIME VS. PART TIME)

23

Source: JILPT (2015)

Japan: Basic Survey on Wage StructureUS: BLS Labor Force Statistics from the Current Population

Survey, median weekly wage (full vs part time)EU: EuroStat Database “Structure of Earning Survey 2010”UK: Sample Survey

Large wage gap between full time and part time in J apan(hourly wage)

J-EMPLOYMENT RELATIONS: OUTCOME

Good system under stable and ‘closed’ economy

• Unique firm specific skills through long term development of broad skills• Innovation through sharing of tacit knowledge• Long term motivation of core employees • Team work• ‘Community’

24

J-EMPLOYMENT RELATIONS: WEAKNESS

Vulnerable under global resource acquisition compet ition (coordination does not work)

• Rigidity in wages, promotion, etc. • Poaching of capable staffs by foreign companies (banking, electric (LCD))

Vulnerable under weak economy

• Reduction of employees is very difficult• Increase of non-regular workers

Vulnerable under rapid innovation cycle

• Low labor liquidity makes it difficult for employees to keep up with latest skillsLack of diversity

• J-ILM promote Japanese men who are willing to work under same conditions• Failed to attract female, foreigners, and recently young ambitious Japanese males

25

Changes in circumstances

Global CompetitionNew Technology

Variable clients’ needs

Aging populationSlow Growth

Heterogeneous pressures

Homogeneous pressure

26

AGEING SOCIETY

Source: Ministry of Finance

Ratio of 24-65yrs old vs. 65yrs or above

BIRTH RATES IN MAJOR COUNTRIES

Source: Cabinet Office

JPN

US

UK

ITR

GER

FRASWE

GOVERNMENT DEBT VS. GNP

29

0

20

40

60

80

100

120

140

160

180

200

Australia Finland France Germany Greece Italy Japan Korea Spain Sweden UnitedKingdom

United States

Debt vs. GNP Ratio (2009)

Source: OECD

Source: Cabinet Office

“Women are the biggest potential

for Japanese economy”

IMF

Christine Lagarde,MD, IMF

‘Japanese economy will flourish if more women work’

IMF/WB Annual Meeting at Tokyo (2013)

‘WOMANOMICS’

Not just increase working population but help boosting economy in many ways…

ABE DISCUSSING MEASURES TO PROMOTE WOMEN

Source: Cabinet Office

EMPLOYMENT RATE (ALL VS. FEMALE)

32

0

10

20

30

40

50

60

70

80

Australia Finland France Germany Italy Japan Korea Netherlands Spain Sweden UnitedKingdom

UnitedStates

G7 OECD -Total

Employment Rate (All vs. Female)

All Female

However, employment rate of women is not so low.

Source: OECD

WAGE CURVE (MALE VS. FEMALE)

Basic Survey on Wage Structure (MHLW)

MALE

FEMALE

Age

JPY Thousand Monthly wage

NON-REGULAR EMPLOYMENT (FEMALE)

34

Male

Regular Iregular

21%

Female

Regular Iregular

57%

All

Regular Iregular

Source: Labor Force SurveyMost women take part time jobs after having childre n

M-SHAPE CURVEINTERNATIONAL COMPARISON

Source: Cabinet Office

35

JapanGermanyKoreaSwedenUS

Age

Source : Cabinet Office

Low Ratio of Female Managers

KOR JPN Mal GER NOR SIG UK SWE ARA FRA US PHL

‘ABENOMICS’ STUDIES POLICIES IN OTHER COUNTRIES

(QUOTA ON FEMALE EXECUTIVES)

CountriesQuota

Norway, Iceland, Spain, France

Italy, Belgium

Holland

However, no quota has been agreed in Japan (Strong oppositions from business).Thus, despite symbolic or sporadic assignments of women at senior levels, slow progress is expected?

・Definition of executives differs per country Source: Nikkei News Paper 2014

Germany just passed the law in 2015 to increase women executive to 30%

Source: Nikkei Newspaper

WAGE: DECLINE OF NENKO

Decline of seniority or ability based pay ( nenko )

• Job-based or role-based wage for senior employees• Flattening wage curve

Introduction of PRP

• ‘New J-HRM’ ‘Hybrid’ (LTE + PRP)Specialization of career path

• Investment banking, capital markets ‘courses’ in banking• Annual Individual Pay for employees with specialized skills, senior members

Overall changes at large companies have been gradua l and partial, but new sectors (foreign co, start-up co) adopt more explicitly dif ferent practices

Difference by sector has also become more salient

38

FLATTENING OF WAGE CURVE

Particularly among university graduates in large co . in service sectors

39Source: ESRI（2010)

University graduates, large firms University graduates, small, medium firms

CHANGING PAY SYSTEM

Decline in wage differential by age （male・mfg. ）

Source: Imano & Sato (2009), Basic Survey on Wage Structure （MHLW）

YearMonthly Wage (1000 Yen)

(2) / (1)Age 20-24 Age 50-54

EXTENSION OF EMPLOYMENT

New law passed under JDP administration in 2012

Employment up to age 65 by 2025

• The law does not require further extension of retirement age, however, • Firms must provide employment opportunities with those who want to continue to work after 60• Gradual increase of the age from 61 in 2013 to 65 in 2025 in line with gradual increase of

pensionable age.

41

Nikkei Newspaper 2012/8/28

April 1, 2013 2016 2019 2022 2025

Employ All Who Request continuous employment

FIRMS’ REACTION

・Most firms plan to substantially reduce wages after the age 60 despite extension of employment opportunities・Or further individualization of wages

Firms coping with the extension of employment

Source: Nikkei Newspaper

REINTERPRETATION OF EXISTING PRACTICE

‘Reinterpretation’ of the four requirements for wor kforce reduction

• Used to require fulfillment of all the individual requirements respectively• Gradual shift of interpretation • Current common interpretation is ‘firms do not need to fulfill every four requirements

individually as far as overall reasons are legitimate…..’ 30.3% companies (1,000 employees or more) conducted dismissals over the last 5 years

(JILPT, 2013)

Social norm has shifted

• From ‘Firms should protect employment’ to ‘Labor reform is important’Introduction of financial compensation for discharg e of employees is finally being

discussed openly

• Provide ‘written’ legal basis for ‘practices’

43

： グローバルベースでベンチマークポジションを選定し、職務評価を実施

Japan

Band7

Band6

Band5

Band4

・・・

XX～XX

XX～XX

XX～XX

・・・

Job size pt.

＝

＝

＝

＝

North America

Grade16

・・・

Job size pt.

＝＝＝

Grade15

Grade14

Grade13

Grade12

Grade11

Grade10

Grade9

・・・

XX～XX

XX～XX

XX～XX

XX～XX＝

EUROPE

Band1/A

Band2/B

Band3/C

Band4/D

・・・

XX～XX

XX～XX

XX～XX

・・・

Job size pt.

＝

＝

＝

＝

・・・

ITOCHU Global Classification （ＩＧＣ）

グローバルバンド

Sr. Executive

Executive(Sr. Manager)

Sr. ProfessionalManager to

(Assistant Mgr)

Proffesional

JAPAN US EUROPE CHINA ASIA

各地域のBand/Grade制度は維持・継続したうえで、ＩＣＧ（読み替えチャート） を策定

・・・

・・・

Source: Rosei-Jiho

GLOBAL GRADING

J-MNCs long had separate grades between HQ and overseas operations

They are now combining or benchmarking grades or ranks among all locations

Question: Which basis for grades/ranks (ability or job) are they going to adopt?

RATIO OF FOREIGN SALES (JPN, US, EU)

TOYOTA GM Daimler

UNIQLOInditex(ZARA) H&M

MIZUHO Bank Citicorp Deutsche Bank

For US companies North American Countries (US, Canada, Mexico) are included in Domestic Sales. For European countries, EU countries are included in foreign sales

USJapan Europe

Overseas sales has been limited in many J-MNCs except for automobile

Domestic

Overseas

Domestic

Overseas

Domestic

Overseas

Domestic

Overseas

Domestic

Overseas

Domestic

Overseas

Domestic

Overseas

Domestic

Overseas

Domestic

Overseas

Source: financial statements of each company

INTERNATIONAL COMPETITIVENESS PER INDUSTRYAUTOMOBILE VS. PHARMACEUTICAL

Auto-sector benefited most from J-HRMTakeda Pharmaceutical (No 1 pharmaceutical co. in Japan) is only 16th in the worldTakeda just implemented radical HRM changes, inviting non-Japanese (French) CEO

Company Name Country Sales Company Name Country No.of Production1 Novartis AG SW 50,576 1 Toyota JPN 8.5572 Pfizer US 44,380 2 GM US 8.4763 Sanofi FRA 38,181 3 VolksWagen Germany 7.3414 Merck US 36,350 4 Hyundai Kore 5.7645 Roche SW 36,146 5 Ford US 4.9886 GlaxoSmithkline UK 32,544 6 Nissan JPN 3.9827 Johnson & Johnson US 30,784 7 Honda JPN 3.6438 Astrazeneca UK 30,267 8 PSA Peugeot Citroen France 3.6059 Teva Pharma. Ind. Israel 24,258 9 Suzuki JPN 2.892

10 Eli Lilly US 23,045 10 Renault France 2.716

Unit: USD Million Unit: MillionNumber of cars

Key HR Practices Sector Ownership

Regular Job Rotation ++ AE > FI, AE > MP ++ J > F

Initial Assignment to factories or branches + AE > MP, AE > ICT +++ J > F

Determining specialized field after entry ++ AE > MP, AE > ICT +++ J > F

Individual Annual Pay ++ AE < ICT + J < F

Basis for Ranks (Ability vs. Job) ++ AE > ICT +++ J > F

Individual Forced Resignation (dismissal) +++ AE < MP (a)

Highest Positions of Women ++ AE < MP, AE < ICT, AE < FI +++ J<F

47

(a) Not statistically significant when controlled by years of operation in Japan, number of employees.AE= Auto and Electric, FI= Finance, MP=Medical and PharmaceuticalJ= Japanese Co, F= Foreign Co in Japan

DIVERGENCE AMONG ALL SECTORSRELATIVE COMPETITIVE STRENGTH OR WEAKNESS

Some sectors may be more (or less) motivated to maintain J-HRM (questionnaire survey)

Yamauchi (2013)

Conclusion (1): Sectors that are the beneficiaries of J-HRM, e.g. automobile & electric, have more tendency to practice or maintain HR policies that have characteristics of J-HRM

DIVERGENCE AMONG FINANCIAL SECTORINSTITUTIONAL AND COMPETITIVE PRESSURES

Comparison of changes among 3 sub-sectors of financ e, bank, sec, life (interviews).

• There are sectors where relative strength (or weakness) is less important• Highly regulated sectors, sectors with limited global competitions

Securities Cos have experienced most significant ch anges in HRM, why?

• Clients are listed corporations, institutional investors, wealthy individuals, who are easily approached by foreign firms (clients of life insurance companies are ordinary individuals)

• Local networks are limited (branches exist only in large cities)• Securities products are most internationally transferrable, etc.• New products development had been led by aggressive foreign players • Financial deregulation most proceeded in securities companies (no longer require license)

Life insurance companies experienced least changes

48Yamauchi (2013)

Conclusion (2): In sectors where global competitions are limited, relative strength (or weakness) does not surface, thus, firms are less motivated to change. They follow successful changes of other players, if they change

DIVERGENCE OR CONVERGENCE BY

INSTITUTIONAL AND COMPETITIVE FORCES

Institutional ForcesWeak Strong

Weak

Strong

Com

petitive Forces

Cell 1

Cell 3

Competitive Variation through Selection

Cell 2

Selection of Stable Best Practices

Cell 4

Modified from Scott & Meyer (1991) Sherer & Leblebici (2001)

Sec Bank

Life

Sec

Bank

Life

Financial industry experienced major deregulation in 90’s

Yamauchi (2013)

DIVERGENCE OF HRM?

50Yamauchi (2013)

Sectors where FS-Skills are important

(Comparative Strength)

Sectors where G-Skills are important （Comparative

Weakness）

Regulated sectors and sectors with

limited global competitions

Dom

estic Op

s.O

versea

s Op

s.

Hybrid -TypeNew Japanese Type

Traditional Japanese-Type

Hybrid-TypeGlobal ‘Best Practices’

Domestic Divergence

Intern

ation

al

Con

verg

ence

Globalize Domestic Ops

Japanize Overseas Ops

Government, UtilityLife InsurancePharmaceutical

SecuritiesAutomobileElectric? Banks?

TRAJECTORIES OF CHANGES

51Modified from (Thelen 2009)

Even more segmentalized?

THANK YOU FOR LISTENING

52