The Japanese Government Bond (JGB) market has been stable in Japan since the earthquake, but the factors holding down JGB yields could diminish over time. To limit these risks, fiscal policy should aim to reduce public debt quickly and lengthen maturity of JGBs. The Bank of Japan’s (BoJ) easing measures have had a significant and broad-based impact on financial markets. Policies to support employment and protect incomes have been effective, but have to be phased out and complemented with training and job search assistance programs to facilitate a smooth reallocation of labor.

Abstract

The Japanese Government Bond (JGB) market has been stable in Japan since the earthquake, but the factors holding down JGB yields could diminish over time. To limit these risks, fiscal policy should aim to reduce public debt quickly and lengthen maturity of JGBs. The Bank of Japan’s (BoJ) easing measures have had a significant and broad-based impact on financial markets. Policies to support employment and protect incomes have been effective, but have to be phased out and complemented with training and job search assistance programs to facilitate a smooth reallocation of labor.

IV. Labor Policies to Boost Employment after the Earthquake1

A. Introduction

1. The Great East Japan earthquake has had a significant impact on labor markets in the region. Early statistics suggest that the shock is substantially larger than the Great Hanshin earthquake in 1995, with the number of applications for employment insurance rising sharply in the first few months. The Ministry of Health, Labor and Welfare (MHLW) estimates that nearly 841 thousand workers (1 to 2 percent of the national workforce) and 88 thousand establishments (mostly SMEs) were located in the directly affected region.

A04ufig01

Unemployment Insurance Recipients

(Index Occurence month = 100)

Citation: IMF Staff Country Reports 2011, 182; 10.5089/9781462329458.002.A004

Source: MHLW.

2. But the disaster also had a nationwide impact. Shortages of key inputs, including electricity, and the ongoing nuclear accident affected businesses and workers across industries and outside the northeastern regions. This resulted in a sharp rise in applications for the employment assistance subsidy across the country (which more than doubled to approximately 2.25 percent of the national labor force through April) and a sharp rise in national bankruptcies related to the earthquake. While the unemployment rate has recently been stable, delays in hiring and business restructuring could dampen labor markets going forward.

A04ufig02

Bankruptcy Related to Kobe and East Japan Earthquake

Citation: IMF Staff Country Reports 2011, 182; 10.5089/9781462329458.002.A004

Source: Teikoku Databank, Ltd.

3. The new labor market challenges add to the broader need for Japan to raise its growth potential. Since the 1990s, trend growth has been weakening due to a shrinking labor force, which is estimated to deduct approximately ½ percentage points from annual potential GDP growth this decade (Shirakawa 2010). At the same time, the Japanese economy will need to generate sufficient growth momentum to finance fiscal reforms, to meet the demands of an aging population, and to take full advantage of growth opportunities in a rapidly changing regional economic landscape. The earthquake has not only made a commitment to such enabling reforms more urgent—as businesses and households assess their options for reconstruction and relocation—but also provides an opportunity to accelerate reforms. An important element of the government’s new growth strategy should be policies to increase employment opportunities for women, the young, and the old.

4. This note discusses how labor policies can support employment in the aftermath of the earthquake and boost growth over the medium term. The first part of this note discusses near-term challenges to support employment and protect incomes, while the second part of the note discusses medium- to long-term policies that can help restore the economy’s growth potential by boosting overall employment.

B. Supporting Near-Term Employment

5. The authorities have been quick to provide temporary assistance to firms and workers in the affected region while supporting employment nationwide. Using pre-existing support systems, the government provided employment adjustment subsidies to firms to help maintain employment levels and relaxed eligibility criteria for unemployment insurance.

Employment Support

6. The Employment Adjustment Subsidy program has shown to be an effective tool to help maintain employment during periods of crisis. This short-term work scheme was first developed during the oil shocks in the 1970s, and during the recent financial crisis, covered at its peak nearly 3.8 percent of the labor force, the largest share amongst industrialized countries. The main recipients were firms in the manufacturing sector and SMEs, with both categories accounting for approximately eighty percent of the subsidy in FY2008-09. The size of the program also far exceeded its utilization in the past.

A04ufig03

Recipients of Job Subsidies through the Crisis

(In percent of Labor Force)

Citation: IMF Staff Country Reports 2011, 182; 10.5089/9781462329458.002.A004

Source: WEO.

7. To meet potential demand for employment support in the disaster region, the government has eased eligibility criteria. The eligibility criterion on sales was changed from a quarterly to a monthly assessment, such that firms could immediately qualify; subsidies were extended for an additional 300 days regardless of previous usage; and coverage was extended to firms outside of the region that were affected by either shortages in electricity or in critical part supplies. As the subsidy is time bound, it will be phased out as the economy recovers. Through April, uptake has been significant with the share of the labor force covered rising from 1 to 5 percent in the Tohoku region, and from 1 to 2.25 percent nationwide. During Kobe, peak coverage in the Hyogo prefecture was approximately 3 percent.

8. Reintegrating the unemployed may require further measures that aid with job transition. Because of existing labor market rigidities and a focus on lifetime employment contracts in Japan, changing career paths is more difficult than elsewhere, with Japan having a relatively high share of long-term unemployed in total unemployment (Figure IV.1). Older and low-skilled workers are likely to have greater difficulties in finding new employment as experienced after the Kobe earthquake. During the recovery, the job-to-application ratio improved steadily for workers under the age of 45 from 0.65 to 0.97 over a span of two years, but remained broadly unchanged between 0.21 and 0.27 for workers over the age of 45. To help workers reintegrate, the government could consider:

Figure IV.1.
Figure IV.1.

Barriers to Labor Force Reentry

Citation: IMF Staff Country Reports 2011, 182; 10.5089/9781462329458.002.A004

  • Job search and relocation assistance: Local Hello Work offices are now actively advertizing jobs outside of the region and are providing monetary assistance for relocation. The experience from Kobe also suggests that job fairs can be particularly effective. The government could also consider providing residents with direct cash grants that could be used for relocation, with Glaeser (2005) recommending a similar program for the victims of Hurricane Katrina in the United States.

  • Employment subsidies. Employers could be given incentives to hire and train low-wage workers. Phelps (2010) has recently argued for a program of tax credits for companies employing low-wage workers in the United States and a work opportunity tax credit was used following Katrina. In Kobe, the government implemented an employment subsidy specifically for the hiring of workers between the ages of 45 and 55.

  • Job training. The government could provide targeted training in new growth sectors, such as medical and child care services.

Unemployment Insurance

9. The unemployment insurance system in Japan is broadly similar to that in other OECD countries (Table IV.1). The system allows for coverage of workers that have worked for at least the last month at a job that requires a minimum of 20 hours a week. The period of unemployment insurance is between 3 to 12 months with the actual period determined by the length of employment and the age of the worker. In this crisis, the government has further relaxed eligibility requirements by expanding coverage to workers that were not fired but were left temporarily unemployed by the circumstances, and expanded the standard payment period by four months.

Table IV.1:

Unemployment Insurance Schemes

article image
Source: The Japan Institute for Labor Policy and Training

10. The growing numbers of non-regular workers, however, remain at risk of not being properly registered under social security due to non-compliance of firms with social security payment obligations. To assess eligibility for unemployment insurance, officials rely on official business records of their wage bill. To ensure that these records are accurate, the authorities need to be able to compare the wage bill an employer declares when calculating corporate or entrepreneurial taxable income with the wage bill on which social insurance contributions have been paid (OECD 2011). The administration has reportedly been tolerant of companies that evade payments for social insurance premiums, with few criminal indictments against firms evading payments, which may have encouraged lax compliance (Duell, Grubb, and Singh, 2010). Unifying the collection of taxes and social insurance contributions would be one way of improving compliance (OECD 2011).

A04ufig04

Trend in Non-regular Workers

(In percent)

Citation: IMF Staff Country Reports 2011, 182; 10.5089/9781462329458.002.A004

Source: MIAC Labor Force Survey.1/ Not include Iwate, Miyagi, and Fukushima in 2010.

Reviving Labor Markets in the Tohoku Region

11. Tohoku has fewer economic opportunities than elsewhere in Japan. With Japan being one of the most geographically concentrated countries in terms of both population and GDP, a few city centers—Tokyo, Nagoya, and Osaka—account for nearly one-third of output. The regional economies, in contrast, are on average older, more agrarian, and less educated, with average incomes about one-quarter less than those in the major cities (Table IV.2).

Table IV.2.

Selected Economic Indicators for the Tohoku Region

article image

12. A swift recovery of labor markets in the local economy is thus uncertain. Historical evidence and the experience of Kobe suggest that under certain circumstances a rapid recovery is possible; but, economic characteristics in Tohoku resemble those in New Orleans, which had a less successful recovery following Hurricane Katrina (Box IV.1). The possibility of outward migration by skilled and young workers could complicate the region’s revitalization.

What are the Prospects for a Recovery in the Tohoku Region?

Historical evidence suggests that cities tend to rebound rapidly from disasters (Vigdor 2008, Davis and Weinstein 2002). In the case of the Great Hanshin earthquake in 1995, the city of Kobe recovered quickly with most of its industrial sector remaining intact1, including the “chemical shoes” industry. This low value added industry—with heavy competition from China—was destroyed by fires following the quake, but contrary to expectations at the time recovered within a few years. The resilience of cities in part relates to the benefits of agglomeration derived from a large pool of diverse skilled labor, while the destruction of physical capital can be of secondary importance given that it can be replaced quickly.

The U.S. experience with Hurricane Katrina in 2005 provides a useful benchmark to help draw policy lessons for Tohoku’s current challenges. Similar to the Tohoku region, New Orleans had been in a slow period of decline prior to the disaster with its population as a share of U.S. population peaking in the 1800s. Moreover, the hurricane displaced nearly 650,000 people, with some estimates suggesting that all 400,000 of the downtown residents were evacuated. Thus, like Tohoku, New Orleans faced similar questions about its post-disaster future. Two years after the disaster, an estimated one-third to one-half of the evacuees had not returned to the city. There was also a significant change in the demographics of the city, with the composition of residents becoming slightly more economically disadvantaged. Statistics also reveal that most industries had experienced a fall in employment, with services (for local residents), manufacturing, and transportation experiencing the largest declines.

Economic differences between Tohoku and the major city centers suggest that Tohoku may not rebound to its pre-quake population level, with higher skilled younger workers possibly choosing to relocate. Since the late 1950s (Figure IV.3), the population in Tohoku (as a share of Japan’s total population) declined fastest in Japan’s boom years when income differences were the widest. This trend continued into this decade and is reflected in the rise in Japan’s Gini coefficient which captures the growing regional economic differences between urban centers and rural regions. Recent emigration from Tohoku has in large part taken place amongst younger cohorts, with many students seeking better opportunities in the city centers.

A04ufig05

Gini Coefficients of Income Inequality: 5 OECD Countries

Citation: IMF Staff Country Reports 2011, 182; 10.5089/9781462329458.002.A004

Source: OECD Factbook 2010.
1 The damage during the Great Hanshin quake is estimated at ¥9.6 trillion relative to ¥16.9 trillion for the Great East Japan quake. For a discussion of the economic impact on the city of Kobe, see Horwich (2000).

C. Boosting Overall Employment

13. Japan is growing older faster than anywhere else in the world. After experiencing a demographic dividend of a rapidly growing labor force and falling birth rate in the 1960s to 1980s, Japan is now facing the consequences of a rapidly aging society and a sharp decline in the size of its labor force. The working-age population, aged 15-64, will fall from its peak of 87 million in 1995 to about 52 million in 2050. This is approximately the same size as the workforce at the end of the Second World War (Economist 2010). Unless output per worker rises at a faster rate to offset the decline in the number of workers, Japan’s GDP is likely to fall behind comparator countries. Yet there is much Japan can still do to help mitigate the decline in the size of its workforce apart from encouraging immigration, particularly by tapping underutilized sources of labor, such as women, the young, and the old.

A04ufig06

Working-age Population Change, 1950-2050

(Index, 1950=100)

Citation: IMF Staff Country Reports 2011, 182; 10.5089/9781462329458.002.A004

Source: U.N.

Youth Employment: A New Labor Contract for New Graduates2

14. The most important individual labor market decision in Japan is typically made following graduation from post-secondary school, with considerable focus on the attainment of jobs with an implicit lifetime employment guarantee. As a result, most employees do not expect to reenter the labor market during their prime working years. It is decisions made at this juncture that often lead to the many inequities that exist in the current employment system, including both the high level of non-regular workers amongst the young, and the minimal number of career female employees.

15. For example, the structural decline in the number of available lifetime employment contracts has led to a growing share of young workers in non-regular positions. Following the collapse of Japan’s asset price bubble, firms began to hire a more flexible labor force that could adjust to changes in demand and rising uncertainty about the future (Asano, Ito, and Kawaguchi 2011). They achieved this through worker attrition by hiring fewer new graduates and offering voluntary retirement packages to their oldest employees. As a result, non-regular employment is now heavily concentrated in the generation of workers that first entered the labor market after the bursting of the bubble and in the oldest cohort.

A04ufig07

Share of Male Non-regular Workers by Age Group, 2010

(In percent)

Citation: IMF Staff Country Reports 2011, 182; 10.5089/9781462329458.002.A004

Source: MIC.

16. Reforming this market is key to creating a more flexible and equal labor market overall. Introducing a new, more flexible labor contract could increase incentives for hiring regular workers and allow a greater number of young and female workers to enter mainstream career paths with established firms. One possible option is to modify regular work contracts to include phased-in employment protection. Such a new regular work contract would gradually increase the dismissal costs to employers over the course of a worker’s tenure. This would help reduce hiring risks given unknown skills of new workers (or more importantly, the length of their tenure), while maintaining employment protection for tenured employees.

Female Employment: Support for Working Mothers

17. Female labor participation (FLP) rates are low compared to other advanced economies, with the difference between male and female participation rates nearly 25 percent. At the same time, young women in Japan are more educated than both their OECD peers and their male counterparts, with women in their 20s having on average 14.3 years of schooling. Thus, getting more women into the workforce would not only increase the size of the labor force but also possibly increase its skill intensity. We estimate that if Japan was to raise its FLP ratio to the level of the G-7 average, per capita GDP would be approximately 5 percent higher, raising potential GDP growth by as much as a quarter of a percentage point during the twenty year transition period.3

A04ufig08

Difference in Prime-age Male and Female Labor Participation Rate, 2009

(In percent)

Citation: IMF Staff Country Reports 2011, 182; 10.5089/9781462329458.002.A004

Source: OECD, and Fund staff calculations.

18. One obstacle to higher FLP rates is the high drop-out rate of women from the labor force following child birth (Figure IV.2). FLP rates for women in their early twenties are similar to comparator countries but then fall off sharply. This reflects both weak support systems for working mothers and the reluctance of firms to hire career female employees at the start of their careers.4 When women reenter the labor market, they often choose lower-paying non-regular positions5, and as a result, Japan stands out in cross-country comparisons of the share of female managers.

Figure IV.2.
Figure IV.2.

Challenges for Female Labor Participation

Citation: IMF Staff Country Reports 2011, 182; 10.5089/9781462329458.002.A004

Figure IV.3.
Figure IV.3.

Rural-to-Urban Migration

Citation: IMF Staff Country Reports 2011, 182; 10.5089/9781462329458.002.A004

19. Providing support for working mothers may help reduce this disparity in female labor participation and assist more female employees to become future managers. Previous studies have found that FLP is positively associated with a more neutral tax treatment of second earners, childcare subsidies, and paid maternity leave (Jaumotte 2003); and according to OECD statistics, Japan provides much fewer of these benefits. Public expenditure on childcare and early educational services is in the bottom one-quarter of the distribution, and informal reports within Japan suggest that demand largely outstrips supply, with potential unmet demand as high as one-third of current childcare capacity.

A04ufig09

Public Expenditure on Child Support, 2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 182; 10.5089/9781462329458.002.A004

Source: OECD.

Elderly Employment: Raising the Retirement Age

20. Across the OECD life expectancy has risen faster than the average retirement age. In Japan, the OECD country with the highest life expectancy at 82.6 years, a mandatory retirement age of 60—relative to the OECD average of 64.4 years—is incongruous. A recent law that encourages firms to rehire productive workers on non-regular contracts between the ages of 60 and 64 has helped lift employment rates for workers in this age group from 53 percent in 2006 to 57 percent in 2010. Despite this rise, however, employment rates still fall significantly with age, from 75 percent of the 55-to-59 group in 2010 to 57 percent of the 60-to-64 group and 36 percent of the 65-to-69 group (OECD 2011).6

21. Increasing the average retirement age would help increase labor participation and help reduce pressure on pension systems. But achieving this under the current lifetime employment system may create inequities for the younger generations, with many firms currently using the early retirement age as a means to reduce the number of workers. Thus, to achieve greater labor participation of the elderly by raising the retirement age requires also a change to the current lifetime employment system to one that places greater weight on performance and flexibility.

D. Conclusions

22. The earthquake has had an important impact on labor markets at the national level. In the near term, policies to support employment and protect incomes appear to have been effective, but will need to be phased out as the economy gains strength and complemented with training and job search assistance programs to facilitate a smooth reallocation of labor.

23. The earthquake provides, however, also an opportunity to accelerate reforms to raise growth. Policies to increase employment by tapping underutilized sources of labor will be increasingly important to help decelerate the speed at which Japan’s labor force declines. Moreover, reforms to Japan’s lifetime employment system are needed to help reduce current hiring inefficiencies for the young and old, and to reduce growing inequities between regular and non-regular workers.

References

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1

Prepared by Chad Steinberg.

2

Youth unemployment in Japan at around 11 percent is more than double the national average. But with a relatively low unemployment rate overall and a highly educated labor force, this figure is much lower than youth unemployment rates in other advanced economies.

3

This calculation assumes that the FLP rate rises from 62 percent in 2010 to 70 percent in 2030.

4

Despite efforts by the government to reduce gender discrimination—through the passage of two separate equal employment acts in 1986 and 1999—hiring practices by firms continue to be targeted towards male employees.

5

This also reflects a tax system that is biased towards part-time work.

6

In addition to the retirement age, the sharp drop-off in wages (30-40 percent) after age 60 discourages labor force participation.

Japan: Selected Issues
Author: International Monetary Fund