Why even a 40% tax break won’t encourage Japanese employers to raise wages

TOKYO – Over the past two years, Masataka Yoshimura has invested money in the bespoke costume business that his family founded over a century ago. He upgraded his factory, installed automated inventory management systems, and retrained workers who were replaced by software and robots.

The Japanese prime minister, however, wants him to do another thing: give his employees a substantial raise.

The reasoning is simple. Wage growth has stagnated for decades in Japan, the wealth gap is widening, and the quickest solution is to get people like Yoshimura to pay their employees more. Higher wages, according to opinion, will boost consumer spending and stimulate the struggling Japanese economy.

But increases are a non-starter for Mr. Yoshimura. Raising wages would be “really fatal,” he said last week from his Yoshimura & Sons office in Tokyo. And he is far from being alone in his reflection. Business groups, union leaders and others have questioned the feasibility of a plan by Prime Minister Fumio Kishida to offer significant tax deductions to companies that raise wages.

The fact that companies resist wage increases even when they are basically paid to do so shows how intractable the problem is. Years of weak growth and moribund inflation rates have left companies little room to raise prices. Without a steady and moderate rise in inflation, corporate profits – and the wages of their workers – have languished, economists say.

The government has long tried to find something, anything, to stimulate the economy and raise prices. He injected money into the financial markets and made borrowing almost free. But this was in vain, as expectations of low prices took hold, demand was weakened by the aging of Japan’s population, and globalization kept prices low.

The coronavirus has only made Japan’s challenges worse. Over the past two years, the country has oscillated between contraction and expansion even as other major economies have rebounded rapidly.

As the pandemic progresses, the Japanese government has turned to even bigger stimulus measures, inundating consumers with cash donations and businesses with zero-interest loans. But inflation barely budged, even as pandemic-induced shortages and supply chain grunts caused it to leap elsewhere.

The reaction to the wage proposal is a bad sign for Kishida, who took office two months ago promising to reverse the economic damage of the past two years and get the Japanese economy back on track with to a “new capitalism”.

Mr. Kishida’s plan is a first step towards defining the still nebulous concept, which he described as a framework for creating sustainable growth and reducing economic inequalities.

For starters, the Prime Minister is calling on employers to increase wages by up to 4% in 2022. Companies that comply will be allowed to increase their overall corporate tax deductions up to 40%. The government has announced that it will increase officially regulated wages by 3% next year for nurses and workers caring for children and the elderly.

Speaking at a press conference on Tuesday, Kishida said it was “essential that the country take all measures to create an atmosphere in which companies feel they can raise wages.” The increase in wages “is not a cost,” he added. “It’s an investment in the future.

While many companies have recognized the need to increase wages, they questioned whether the measures, as announced, will have an impact on the country’s regular wage setting process.

Big business and unions negotiate increases every spring in a ritual known as “shuntou” – literally, “spring offensive.” The last time the result even approached the level recommended by Mr. Kishida was in 1997, when workers got a 2.9 percent increase.

In 2013, Prime Minister Shinzo Abe presented a similar plan, with little success. Today, the average salary remains stuck at around $ 2,800 a month, roughly the same level as two decades ago.

The phenomenon is not unique to Japan. In most advanced economies, the once close correlation between economic growth and wage increases has broken down. In the United States and the European Union, median real wages – real purchasing power – fell far behind overall economic expansion in the decade leading up to the pandemic.

There is no consensus on the cause of the phenomenon. But many economists attribute it to a “winner takes most” dynamic in countries where globalization and technological advancements have allowed companies to make more money with fewer workers.

The story is different in Japan, where economists point to an almost opposite problem: low productivity created, in part, by companies with large reserves of workers who are almost impossible to lay off.

It has been both a blessing and a curse. During the pandemic, Japan avoided the spikes in unemployment seen in countries like the United States. But it also means that many companies have limited flexibility to hire and fire under the Lifetime Employment System, potentially making them less responsive to changing economic conditions.

The weak growth of wages is in fact the result of a compromise found between labor and capital. Since the 1990s, “Japanese workers have preferred job security to wage growth,” said Naohiko Baba, chief economist in Japan at Goldman Sachs, although companies pay workers semi-annual bonuses that can fluctuate considerably with corporate profits.

To protect their bottom line, companies tend to limit their permanent workforce by resorting to temporary or part-time workers, avoiding life-time employment contracts that were common in Japan until the early 1990s, when the country’s economic bubble has burst.

Today, so-called non-regular employees make up around 37% of the country’s workforce, a permanent subclass of low-paid and essential workers, nearly 70% of whom are women.

These workers are paid less than their counterparts, and their growing numbers have driven wages down in part by weakening Japanese trade union organizations. In the 1950s, more than half of all Japanese workers were unionized. Today, only about 17 percent are.

Given the downward forces on wages, it is not clear that a government policy can increase wages, especially when a long-standing labor shortage due to the aging of Japan’s population. , failed to move wages.

The timing of Mr. Kishida’s plan is also problematic. With many businesses already struggling with the pandemic, some have had to turn to large government grants just to keep their current workforce employed.

And then there is the issue of non-profitability. For nearly a decade, the majority of Japanese companies have been unprofitable – around 65% in 2019, the lowest figure since 2010. They have been kept afloat thanks to cheap money subscribed by the Bank of Japan, but no profit does not mean corporate tax, so these companies would not be eligible for Mr. Kishida’s incentives.

As proposed, Mr. Kishida’s plan could actually concentrate more wealth among the more successful companies while providing little help to employees of smaller and less viable businesses, said Daiji Kawaguchi, professor of economics at the University of Tokyo.

“It could potentially be really regressive,” he said.

Even if the Prime Minister can persuade companies to raise wages, there is no guarantee that the money will be spent. Last year, after the government made cash payments to every inhabitant of the country, consumers put money in the bank to protect themselves against an uncertain future, pushing household savings rates to their knees. highest levels in 20 years.

For many workers, the political emphasis on raising wages is misplaced. Other workplace issues are more pressing.

“The problem that exists in the job market is more likely to be job protection, or child care, or the kinds of perks you need to manage work and family,” said said Yukiko Abe, professor of economics at Hokkaido University.

Mr. Yoshimura, the head of the men’s clothing company, agrees that the government is trying to solve the wrong problem.

He thinks wages are important, but argues the government needs to help businesses first.

“If we don’t create an environment in which we can increase incomes a bit more,” he said, “the economy will not improve”.