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Japan's Changing Labor Market

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Japan’s Changing Labor Market

            History has shown the effects of long term population growth, but long term population decline is fairly new.  What happens when a nation starts shrinking and why would it?  Japan will probably be the first to find out.  Over the past few decades its fertility rate has been declining and recently dropped below replacement rate. Until now, population has played a significant part in a country’s economic growth, but Japan’s population will almost certainly continue to diminish.  This is not necessarily unnatural or disastrous; I think that it is the result of globalization.  Although the world is far from a unified economy, it is significantly more united than just thirty years ago (before the Internet).  Increasing globalization and other factors of modern society may result in difficult change for some, but change is unavoidable as well as vital.  Japan is continuing to become an educated society; a nation that provides intangible goods, such as research.  The slow transition from a national economy, which supports a more equal distribution of skilled and unskilled labor, to part of a global economy, in which Japan supplies largely highly skilled workers will be tough, but, in the long run, beneficial.

            So far I have failed to provide many tangible facts.  That will be remedied by first examining what we know about population decline and its existence in Japan.  Then, I will discuss globalization and how it may affect Japan economically.  After linking changes in Japan’s labor market to fertility, population decline will be examined from the human side; how society adjusts to changes in demands for labor.  In the last part of this paper we will move back to the theoretical, speculating about Japan’s future labor market.

            While most nations’ fertility rates are fairly close to replacement rate, the amount needed to maintain a population, “Total fertility rates in 2005 are as low as 1.3 children per woman in Italy, Spain, Germany, and Japan” (Feyrer 2008). Replacement rate is estimated to be about 2.1.  Japan, as well as some other industrialized nations, has fallen well short of this mark.  Logically, if less people are born than are needed to “replace” those that have died, than the population will decline.  A common conclusion is that a decline in population would undoubtedly lead to a decline in GDP (a measure of an economy overall).  Seeing the quantity of labor as one of the largest factors of output, a decrease in population means less output.  The assumption is that the labor force will shrink with the population and, eventually, be unable to keep up with the current rate of expansion.  This conclusion fails to consider some important factors though.  A decrease in workers does not necessarily cause a decrease in output.  Ryuzo Sato and Tamaki Morita show that labor efficiency matters.  In “Macro Dynamics and Labor-Saving Innovation: US vs Japan,” the authors conclude that a good deal of Japan’s growth over the years can be attributed to increases in the “quality” of labor.  Of course, increasing population still played a role in Japan’s growth over the last 60 years, but sheer size of a labor force is not all that matters (Sato 2009).  If there are three workers able to make four widgets (a fictitious product) an hour, they are just as productive as four workers making three an hour.  That is a somewhat oversimplified way to put it, but the idea is there. “Quality” can be increased through technology, education, health, etc to offset population decline. 

            Another problem with assuming shrinking populations reduce labor forces is that “population” and “labor force” are not synonyms. Female participation may be able to make up for losses in overall population (Clark 2010).  Japan has a fairly low female work force participation rate currently, leaving lots of room for growth.  In 1995, over 70% of women age 20-39 in the United States were working, whereas less than 60% were in Japan (Feyrer 2008).  There is also a history of discrimination against female workers in Japan.  Fackler states, “[Japan] placed 42nd among 75 nations surveyed in 2006” (p. 1) in an index measuring female participation.  Perhaps a more telling statistic is that women only hold 10.1 percent of managerial jobs (Fackler 2007).  The quantity of workers could be increased by using female workers. Then, “quality” could be increased by using female college graduates as researchers, not secretaries.  Japan has fallen behind much of the industrialized world by not using their female work force effectively.

            Japan has not fallen behind in becoming global though.  Globalization has been a hot topic for quite a while.  Some people seem to be quite upset about the whole affair; “their” jobs being given to people thousands of miles away.  Opposing outsourcing is a short sighted attempt to block a natural and beneficial evolution. Like any evolution, outsourcing brings about some commotion, in this case, population and labor adjustment.  Feenstra has written an excellent article on the subject of labor in a globalizing economy.  He supports the relatively new idea that globalization can explain a general increase in demand for skilled labor as well as a decrease in demand for skilled labor in some industrial countries. To copy Feenstra’s example, imagine a country with assembly lines (low-skilled), component construction workers (medium-skilled), and those who do research and development (highly skilled).  At first, our hypothetical country performed all three parts domestically because of geographical and political restraints.  Later, some of the labor intensive, low-skilled jobs are outsourced to nations with significantly lower wages.  This might lead to the unemployment of some factory workers but, overall, is good for society because of considerable gains in efficiency.  Now, what happens when less developed countries with lower wages can perform the medium-skilled jobs?  Feenstra concludes that companies will outsource the medium-skill jobs as well.  When they do so, the demand for skilled labor in the industrialized country decreases because so many of the medium-skill jobs are outsourced. At the same time, real wages increase due to increased efficiency and because the jobs that are outsourced are most likely the lowest paying to begin with (Feenstra 2007).  The more advanced country gets the benefit of higher real wages, but it has to fight a falling demand for labor.  The structure formed by these countries follows the current models for wages in firms.  A company has a small, highly compensated group at the top supported by a pyramid of less skilled, lower paid workers (Ashenfelter 1999).  As barriers fall, I see no reason why nations would not begin to fit into this model.  But, this cannot come true without nations that have the needed characteristics.  There has to be a nation that is highly educated.  Although they may have produced the goods in the past, these would be the workers who tend towards research and development jobs.  Secondly, the model needs a nation with low labor costs and many unskilled workers to produce goods.  This nation would likely become the site for “sweat-shops” and similar work conditions.  The key component is a third nation (or possible sub-section of the second) with a relatively low-wage, educated population; a society to perform semi-skilled jobs at lower cost. 

            Japan and China fit this model.  Japan has a reputation for placing emphasis on education, both culturally and in spending.  For that matter, one of the most common stereotypes about Japan is that it is a technologically savvy nation that is always on the cutting edge.  Although that is overgeneralization, it is true that Japan does do a lot of research and development; they have one of the most advanced data networks in the world.  But it is not cheap to live in Japan, thus, wages are higher than places like China.  It is very easy to explain why raw manufacturing would move to China.  Japanese do the research and contract the production to Chinese factories that can pay their workers a fraction of Japan’s minimum wage. We now have the highly-skilled and low-skilled groups for the model, but China is not limited to unskilled laborers.  Over the last decade or so they have begun to give many citizens college educations.  The government educates far more than they need internally (for domestic firms).  “Smart, Young, and Broke” by Melinda Liu and Marije Vlaskamp discusses the development of a poor group of white collar workers in China; willing workers with a good education that are living in slums.  That is what creates the potential for Feenstra’s model.  Due to moderately-educated workers willing to accept low wages, it is efficient for Japanese firms to export some of the white collar jobs to China.  The New York Times and China Economic Net have both released articles detailing Japan’s exportation of jobs such as programming to China, which is evidence of globalization and changing labor markets.  The demand for medium-skill, white collar jobs should be dropping in Japan and slowly rising in China.  That is how the market adjusts to fit its new, more global form and Japan will feel the effect of that, a drop in demand for labor.

           In the long run, competitive markets will always try to move to the most efficient price and quantity they can.  Like markets, people adjust to their surroundings.  Japan’s fertility rate is dropping because demand for labor has dropped; there are too many of the current laborers.  If the product (workers) remains exactly the same, the quantity will just decrease until equilibrium is reached.  But we are talking about people, not assembly-line toys.  They are in a constant state of flux; they can influence how efficient and valuable they are.  By removing inefficiencies, namely outdated gender roles, the Japanese can increase demand for their labor and, subsequently, fertility rates.

            There is no shortage of speculation as to the social causes of declines in fertility for industrialized countries like Japan.  In 2007, Feyrer and others published a paper that examined a number of these possible causes.  What makes their study particularly useful is the order in which they examined causes: general to specific.  First, it had to be determined how some industrialized countries could have relatively stable fertility rates while others had fallen well below replacement rate.   Fertility rates worldwide have decreased, but only a handful of countries are facing population decline; Japan is one of those.  The explanation for this is that Japan (and the other countries with low fertility rates) may have advanced as fast as other countries technologically, but their social reforms are lagging behind (Feyrer 2008, Kosai 1998).  These countries may have less government subsidies for families, less working women, and/or low amounts of child care done by fathers.  These social delays are wasteful.  If Japan can make their labor force more effective by changing their culture, they will be able to raise the aforementioned “quality” of their workers, perhaps raising demand. 

            Most industrial countries have some sort of subsidy for children, so Feyrer analyzed the effect of doubling the amount spent on these supports. Government spending on “Cash subsidies, federally provided services and tax subsidies…appear to be associated with higher fertility” (Feyrer 2008, p. 14).  By separating these factors they find day care to be one of the most effective ways for a government to increase fertility.  Similarly to any government subsidy, federal spending on families cause suppliers (couples) to “produce” more children because the benefits remain the same, but the cost is lower.  But, it does seem odd that a couple’s decision to have children could be swayed by subsidies that are relatively small compared to the total time and monetary cost of having a child.  Feyrer cites Fernandez and Fogli (2005) who explain that fertility could be very elastic.  This means that a small decrease in the price of having a child has a relatively large effect on the amount of children a couple desires. This is a reasonable, if not vague explanation.  Fernandez and Fogli, like Feyrer, conclude, because of so many unknown factors in deciding to have a child, “Culture… is too important an area for economists to ignore” (Fernandez 2005, p.30); a vague but honest answer.  

            Others have correlated female employment to drops in fertility.  The employment of women raises the opportunity cost of raising a child.  Women invariably have to take some pregnancy leave.  This puts a kink in their career; leaving for a couple months could easily force a woman to forgo opportunities to advance.  Even after pregnancy leave, they may be unable to work long hours in order to care for their children.  Child care may be available, but it can be assumed that the majority of mothers feel an obligation to spend fairly significant portions of time with their child.  Since children take time, a woman whose number one goal is to advance her career might opt out of having a child.  Who can blame them?  It is the economic way to choose the option you find most advantageous.  When women’s wages are reasonable and success is defined as financial security, children do not seem to fit in very well.  This is efficient to a certain extent, but even if demand for Japanese labor is dropping, it is probably not zero.  Someone must have children.  Forgive the callousness, but imagine children as a good.  When there is a surplus, quantity and price fall until an equilibrium is reached.  Women will opt out of having children until the price fits their personal demand.  The next paragraph details how increased job opportunities for women raise the price of having a child but then social factors lower the price again.

            We are left with culture being the main way to shift demand for labor and fertility rates.  Culture helps determine women’s wages (compared to men’s’).  Culture determines who takes care of the children.  As stated, Japan’s female participation in the work force is still low, but it is substantially higher than some third world countries.  Through analysis of countries at various stages of development, Feyrer concludes that female participation rate likely has a “U-shaped” relationship to fertility.  At first, it is true that the increased opportunity cost of having a child reduces the number of births.  Later, as women become equal to men in the job market, fertility rates begin to rise again.  Changes in acceptable gender roles make this “U” shape.  While female employment climbs and society’s ideas about women remain the same, the opportunity cost of having a child can only rise.  Chapple notes that in 1999 56.4% of women took leave for child care while .42% of men did and, “only 6% of men say they feel comfortable taking child care leave” (Chapple 2004). The data is a little old, but rarely do ideologies change quickly.  This means women do have the opportunity to work but, if they decide to have a child, they will likely be doing most of the child care.  The majority of the cost falls on them.  But, as culture catches up to employment, fertility begins to rise again.  This explains why the United States has higher female employment and higher fertility rates; men also do a large share of child care (Feyrer 2008).  Japan’s culture has not yet widely accepted a change in gender roles.  Women are still seen at the primary caretakers for children.  In 2007 51% of men agreed with the statement, “The external world for the husband, the domestic world for the wife” (Clark 2009, p. 223).  Men provide for their family, working long hours but providing little help at home.  Women with careers and children face huge amounts of work; providing income and caring for a child.  That can change though.  Paternity leave is a new concept; it will take time to catch on and become accepted, but can greatly reduce the cost of a having a child for a woman.  Time is needed, women did not become a part of the labor force over night and men will not take over women’s roles over a short period of time either.  Economists believe in markets’ ability to shift to equilibrium if given enough time.  I think culture can be thought of the same way, adjusting to new ideologies in time.  Right now, while demand for Japanese labor is low, men and women will work, choosing not to have children.  Labor should become more effective as men begin doing some housework and women’s talents become fully utilized.  As gender roles change, so does efficiency and the cost of having a child.  Egalitarian society offers the chance to raise efficiency, making labor more valuable and shifting some of the cost of having a child to men.  Predicting the exact effect on Japan’s fertility rate is probably impossible, but it should suffice to say that if the quality of labor increases and the price remains the same, demand will increase.  Also, if the sole producer of children, women, face lower costs, they are more likely to have children, raising fertility rates. 

            Although I focus on Japan for this paper, the effects of globalization and population decline will likely not be limited to Japan in the future.  Increases in efficiency for all nations lie ahead, but it is a somewhat rocky road.  Globalization and cultural adjustment will be similar to building a highway.  It takes a long time. Thousands of miles of road are not laid over night; it will take decades, and, when it is all done, the process starts over again.  There will be potholes to fill and cracks to mend.  Japan’s fertility rate may rise and fall numerous times; as Sato and Morito said in their paper, Japan is far from the stable state.  Adjustment is never perfectly smooth. A highway also displaces some people. Unemployment in the “home country” is an unavoidable side effect of outsourcing jobs, and something will have to be done about that.   A market never stops changing.  Right now, Japan has to adjust to a globalizing economy where women can perform most jobs at no disadvantage to men.  Companies should not stop outsourcing labor in order to “save” their nations economy.  They should continue to outsource labor and let their nation adjust as necessary.  Over the coming years, female work force participation should continue to rise.  Perhaps over a longer period of time, the amount of child care done by males will also rise.  These changes should be embraced and applied as fast as possible.  Japan’s future is still bright; I hope to leave you with that thought. However, anyone from anywhere must realize that as the world around them changes, they must also, in thought as well as action.


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Disclosure: I am long EWJ.