Lack of reforms drags Japanese labour productivity

Wage growth remains stubbornly weak at the macro level.

While unemployment fell to its lowest in two decades, wage growth remains weak at around 0.5% YoY in Japan, according to a report by Natixis.

Wages are only in fifth spot in the priorities of Japanese companies for profit distribution as new hiring, M&A activity, debt, research and development (R&D) takes over wage hikes, Natixis added using data from first quarter.

Instead of hiking wages, large companies expanded dividend payment as they face pressure from shareholders to improve return of equities (RoE) whilst small and medium enterprises (SMEs) are unable to raise wages as labor productivity has stagnated.

Companies have increasingly turned to increasing the number of part-time and contract workers in its bid for profitability. However, wages to non-permanent staffs have been set more than 30% below of permanent protectors in addition to limited legal protection and training opportunities.

“Although companies were better able to control labor costs at a micro level, wages have stagnated at a macro level leading to a prolonged deflation, which ironically made it more challenging to increase wages,” the report added.

The report recommended deregulation as a way to increase wages especially among SMEs which account for 70% of total employment.

“Reforms in the labor market, which essentially reduces protections that permanent employees enjoy under life-time employment system, could encourage the labor force to move from a low productive sector to a high one, increasing the potential growth rate and thereby, wages in the medium term.”