Examining the Spring Wage Offensive as a Path to Higher Pay

Rising Wages, Falling Share for Labor?

The spring wage offensive of 2023 achieved a wage increase at a rate that had been unseen for some time. In the final figures published by Rengō, the Japanese Trade Union Confederation, on July 3, the wage increase rate was 3.58%, a record high since the 3.90% increase of 1993. This rate of increase exceeds the 2.8% increase of consumer prices that private-sector economists forecast for fiscal 2023 in the Japan Center for Economic Research’s September 2023 ESP Forecast, meaning that a rise in real wages can be expected for fiscal 2023. This would seem to be a satisfactory outcome for individual workers.

When viewed at the macro level, however, this assessment of the wage increase rate is no longer applicable. While the rate noted above applies to the annual wage increase of an individual worker including that due to rise in seniority, what is important at the macro level is the increase of the base pay component that determines the growth of total wages. In the spring wage offensive of 2023, the increase of the base pay component was a lower 2.12%. If we assume that the increase of base pay corresponds to the per-employee growth of wages for all employees, multiplying this figure by the increase in the number of employees will yield the growth of macro wages (employee compensation).

Since the number of employees rose 0.5% year on year in fiscal 2023 so far, employee compensation can be expected to grow by about 2.6%. If national income (equivalent to net national product) increases by about the same 5.1% that private-sector economists forecast for nominal GDP in fiscal 2023, the likelihood is high that labor’s share, the share of employee compensation in national income, will decline in fiscal 2023.

Wages That Trail National Income

When the economy is expanding, as is currently the case, it might be assumed that labor’s share would increase. In recent years, however, the decrease of labor’s share in expansionary periods has been the usual pattern (Figure 1). In contrast, labor’s share has tended to rise in recessionary periods.

Labor’s share moving inversely to the business cycle is related to Japan’s current employment system, which combines lifetime employment with seniority-based wages. This employment system makes it difficult to adjust employment levels or to reduce wages during economic downturns, causing labor’s share to rise. Then, when the economy improves, the number of employees and wages increase, but not as much as national income, causing labor’s share to decline.

Should this opposing tendency be equal in measure, the growth of national income and wages should not deviate over the long term. However, since expansionary periods tend to last longer than recessionary ones, periods when labor’s share declines last longer than periods when it rises. As a result, over the long term, employee compensation will not grow as much as national income. This difference in the rate of growth will be distributed to companies as profit.

To understand how increase in national income has been distributed to real wages and real profits over the long term, Figure 2 compares their real cumulative values for the twenty years to fiscal 2021. We can see in the chart that real wages have not kept up with the growth of national income. This is a trend that the spring wage offensive of 2023 was also unable to overcome.

The Significance of the Shuntō

The history of the shuntō, or spring wage offensive, dates back to 1955, when Japan’s economy was entering its high-growth period. Labor unions at that time tended to be organized around companies, and their bargaining power with respect to management was weak. To compensate for this weakness, labor unions decided to join together for a certain period of the year and demand higher wages on an industrywide basis. This is how the spring wage offensive made its start.

In those early days, management found it easy to respond to such labor union offensives. First, with Japan’s economy entering a high-growth period, corporate earnings were surging, and companies were more than able to increase wages. Second, if all companies in a given industry raised wages at the same time, this would not affect relative competitiveness between them. This was a time when the main competitors of companies were other domestic companies in the same industry.

As a result, the wage increase rate of spring wage offensives of the 1960s generally surpassed 10% (Figure 3). Higher household consumption enabled by such wage increases, together with higher capital spending, helped to support the rapid growth of Japan’s economy. During this period, a virtuous circle materialized between growth and distribution.

This relationship changed significantly with the first oil shock of 1973. The wage increase rate of 1974 was an exceedingly high 32.9%, which squeezed the earnings of companies. If such large wage increases were to continue, there was concern that stagflation, the combination of a sluggish economy and inflation, would persist for some time. Management therefore sought to curtail wages, and labor unions came to consider voluntary wage restraint. The wage increase rate fell below 10% starting in fiscal 1976 and fell further to around 4% in the second half of the 1980s.

These changes to the spring wage offensive were highly acclaimed for enabling Japan to be the first to overcome the impact of the first oil crisis and for minimizing the effects of the second oil crisis. The Organization for Economic Cooperation and Development in its 2017 Employment Outlook, among other reports, took note of the shuntō system as a collective labor-management bargaining system where negotiations at the company level achieve wage increases that factor in macroeconomic influences.

Changing Shuntō Premises

The shuntō system began to show its limits in the 1990s as the management environment worsened for companies. With the collapse of the asset bubble, companies were forced to consider restructuring their operations, and labor unions came to prioritize the maintenance of employment. As a result, the wage increase rate of spring wage offensives fell from 5-6% to 2-3% in the 1990s and declined further to 1-2% in the 2000s.

In the 2010s, following the appearance of Abenomics, the government positioned wage increases as a means for overcoming deflation, and it reduced taxes and pushed companies to hike pay toward this end. These developments, however, did not change the outcome of shuntō. The wage increases achieved through spring wage offensives remained stuck at 2-3%, and employee compensation continued to grow more slowly than national income.

The sluggishness of the increases from spring wage offensives can be said to have originated in the collapse of the asset bubble. While the impact of this collapse was huge, other long-term factors were also at work. There was the aging of society and the steady rise of labor costs. Another was increased competition with emerging and developing economies that strengthened pressure to cut costs. These factors had a major impact on both management and labor unions.

In the case of management, companies’ capacity to pay wages declined sharply. Companies therefore curtailed as much as possible wage increases for regular employees and expanded nonregular hiring. A growing number of companies also changed the wage system from a seniority-based one premised on annual wage increases and base pay increases to a performance-based system promoting higher productivity and linked to business results.

In the case of labor unions, the growth of nonregular employees, whom labor unions have not sought to organize, reduced their membership rate, and their bargaining power fell sharply. The union membership rate has trended downward from a high of 55.8% in 1949 to a record low of 16.5% in 2022 (Figure 4).

Keeping Pace with National Income Growth

As the terms that have premised the spring wage offensive undergo change, what needs to be done to realize wage increases that correspond to the growth of national income?

First, labor unions need to be reformed. In order to strengthen their bargaining power, it will be necessary to increase their membership rate. To achieve this, stemming the decline of the membership rate of regular employees, who are the current core of labor unions, will be important. Equally important will be increasing the union membership rate of nonregular workers, centering on part-time employees whose numbers have been growing in recent years. While the union membership rate of part-time employees has been rising, it was still only 8.5% in 2022.

Another issue is the way the union membership rate is tilted toward large companies. While the membership rate is 39.6% for private enterprises with 1,000 or more employees, this rate is 10.5% for those with 100 to 999 employees and an extremely low 0.8% for those with 99 or fewer employees. A major issue will be how to increase the union membership rate of small and medium-sized enterprises.

Second, the labor market needs to be reformed. Labor unions currently premise their activities on a lifetime employment system. While companies compete in hiring new graduates under this system, the position of the company becomes far stronger than that of employees once they are hired. This interferes with corporate acceptance of demands for wage increases. To resolve this situation, it will be necessary to expand the flexibility of the labor market and to use the power of the market to strengthen employees’ bargaining power. If companies compete in hiring beyond new graduates, they are likely to offer the human resources they need wages suitable for the level of contribution they expect.

Increasing the flexibility of the labor market is likely to profoundly affect the employment system. Should job switching increase, this will mean an end to lifetime employment. If wages are determined by how much employees contribute to the company, the seniority-based wage system must also change. Companies are also no longer likely to offer in-house training from a long-term perspective. These changes will also require changes to labor unions organized around individual companies.

It will not be easy to reform the employment system in a major way. There is, however, no alternative than to make bold reforms if the sluggishness of wage increases is to be ended.

(Originally published in Japanese. Banner photo: President Yoshino Tomoko, at center, and others of the Japanese Trade Union Confederation rallying union members at a Chiyoda, Tokyo, assembly for the 2023 spring wage offensive on March 7, 2023. © Jiji.)