A Drop in the Wages of Japanese Workers Puts a Drag on the Economy

Due to Prime Minister Shinzo Abe’s growth strategy, known as Abenomics, Japan’s stockmarket is up by three-fifths since he came into office. However, despite the progress made by Abe and his allies, Japan’s economy likely shrank for the first time in nearly two years during the second quarter. The reason for the economic decline appears to be due to the weaker than expected consumer spending. Although the recent sales tax hike definitely helped weaken consumer spending, it appears that a decline in the wages of Japanese workers is putting a real drag on the economy.

Due to Prime Minister Shinzo Abe’s growth strategy, known as Abenomics, Japan’s stockmarket is up by three-fifths since he came into office. However, despite the progress made by Abe and his allies, Japan’s economy likely shrank for the first time in nearly two years during the second quarter. The reason for the economic decline appears to be due to the weaker than expected consumer spending. Although the recent sales tax hike definitely helped weaken consumer spending, it appears that a decline in the wages of Japanese workers is putting a real drag on the economy.

The government hoped that after Abenomics increased the profits of Japanese corporations, wages would rise and lift consumer spending, which would then boost investment by companies. This cycle would continue, and lead to a full recovery of the Japanese economy. Unfortunately, recent data has shown that this isn’t happening.

The Labor Market is Strong

The labor market is actually doing pretty well. Unemployment is falling (it is around 3.7%), partly due to a growing demand for workers in areas like construction. However, it can also be attributed to the fact that the population is dropping at an increasing rate. Japan’s population is expected to fall from 127 million today to a little under 90 million by 2060. Economists have estimated that the working-age population declines by roughly 1 million every year.

But Wages Tumble

Despite a really tight labor market, wages of Japanese workers continue to drop. In May alone, real wages declined by roughly 3.8% compared with 2013. This is the steepest decline Japanese wages have seen in recent years. Well, Japan should lower its taxes so companies have more money for expansion. Even though the government worked with unions in the spring to get companies to increase pay, little appears to actually be happening. Well, this type of effort does not increase jobs but actually decreases them. Officials from the Abe administration demanded higher pay for workers.

Why are they Falling?

Some economists believe that one reason why real wages are falling is because of long-time cultural norms. Right now, Japan’s labor market is strictly divided between high-paid “regular” employees with strong job security and low-paid “non-regular” employees with little to no job security. These non-regular employees took 36.8% of all jobs in June – that is a new record. Since Abe came to office, nearly all new jobs created have been for these non-regular workers. Plus many of the people who obtained jobs were women, who unfortunately earn a lot less than men.

In order for the Japanese economy to get back on track, companies have to hire more of permanent workers. The big problem is that big companies already have a plethora of overpaid workers who end up being remarkably unproductive. Companies need to remove the safeguards for all of their permanent employees, while increasing pay for the non-regulars employees.

Because most of the workforce is made up of permanent workers, it would require the government to spend a hefty amount of political capital for things to change. If the Prime Minister wants Abenomics to succeed, then he really has no choice.