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CED Notes Unit IV Japan Okochi^J Krash and Levine

Chapter 13
Introductory Macroeconomics (University of Delhi)

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Subject: Comparative Economic Development Paper Code: 12277602

Topic: The Japanese Industrial Relations System: A Summary
Unit 4 –Japan Okochi, Karsh & Levine Chapter 13
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Introduction

This reading gives an overview of the industrial relations system in Japan primarily after the World War
I. It discusses how the social traditional societal ranking curtailed their industrial hierarchy. Their
nonoccupational aspects were more prominent than occupational aspects as a criterion of ranking.
Compassion and obedience based on paternalism was considered ideal and constituted contrary to idea
of Yukichi Fukuzawa who considered that all human beings were created equal. The whole of Japanese
business society believed in guarding against the enforcement of the New Factory Law and in
maintaining traditional human relations because of the burden of increase labour and equipment cost
required by the law and the fear that enforcement of law might bring out the rise of industrial relations
based on egalitarian ideas.

The Origin of Lifetime Employment

During the end period of Meiji Era (1868-1912), Japan encountered high labour mobility denoting to
highly skilled labour. In order to achieve promotion and increments, labour had to be mobile giving rise
to horizontal labour markets. Until the early 1920s, Japan’s wage system closely resembled the
Western model.

Labour Mobility and Wage Hikes

There were differences in labour mobility depending on occupation i.e traditional Japanese craft or a
skill based Western technology. Wage rates were ascertained by the ranking of the grade of skill of an
occupation, without an association to the years of service in the same firm or to age of the labour.
Mobility not only strengthened their sense of independence and self-respect, but it also resulted in the
maintenance of wages at a reasonably high level. After the mid-1920s, average wages were much
higher. The opportunity cost of a skilled worker was higher for the employer due to rise in independence
from labour mobility. The system began to be replaced by “Lifetime” Employment after World War I,
and the latter became fully established through the rapid introduction of new production facilities in the
name of “rationalization” entered in large enterprises during and post-World War I.

New Production and Training

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New equipment and production processes were introduced with the objective of escaping from the post
war recession, recapturing domestic markets, and recovering share in world markets. Rationalising, by
cutting costs, lowering prices, and stimulating mass purchasing power, was considered the only way to
weather the crucial post-war situation.

Large enterprises in Japan rapidly developed personnel policies centered on acquiring and training their
own new labour forces. Thus, the method of recruitment changed, with the industry hiring only new
school graduates through the schools at a specified time and training them immediately. Each enterprise
or factory established its own training facilities for new employees within the organization. Trainers
who became proficient in skills, remained in good health, and where having sound thoughts were
selected gaining the status of “regular” or “permanent” employees.

Permanent Employee, Lifetime Employment and Seniority Wage System

Since regular employees were trained intentionally as single skilled operatives for an equipment, with
largely non-transferable skills, they could no longer move from one workplace. The status of a
permanent employee was based on the understanding that the new school graduates, after receiving skill
training within a factory, would continue to work as employees at that factory or enterprise for an
indefinite period. This was the beginning of the present-day system of permanent employment
combined with the rule of retirement at the age of 55. In turn, there developed a guarantee of lifetime
employment for so called permanent employees and the seniority wage system with automatic wage
increases depending upon length of service and corresponded to age.

Employment security, which is relatively costly was made economically feasible by the gradual
introduction of this so-called seniority wage system. In case of white-collar workers wage increases
based upon job ranks were becoming popular but the blue-collar workers had no system of periodic
wage rises. Wages began to be paid, not based on job, occupation, or skill level, but according to the
years of service as soon as permanent employment system began to be fixed.

Supplementary Benefits and Allowances

Retirement allowance were only gradually introduced for regular employees in large enterprises along
with seasonal and year-end bonuses, and various types of welfare facilities such as company housing,
recreation, medical care, and educational activities financed by the employer were steadily developed
by the large enterprises. These benefits were new and especially for the male employees.

Single Wage

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Wages had to be high enough to maintain the average worker with an average size family. The high
degree of labour mobility at that time made this possible. In contrast, the young recruits trained with
the enterprise, were paid barely enough money to maintain themselves as unmarried persons, referred
as the “single wage” which increased as the wage earner grew older and was assumed to have possessed
new and additional social responsibilities. In addition to the social component of this wage system,
periodic increases were given and various fringe benefits were provided in order to encourage
attachment of these workers to the enterprise and to further discourage turnover.

There was the origin of the so-called “multi-employee household” where low wages in combination
with poor welfare facilities and fringe benefits often forced workers to rely on home work by wives,
children, and the aged, who earned small amounts of money to supplement the wages of the chief
breadwinner, thereby making it possible for a whole family to achieve a subsistence level of income.
Since the end of World War II, the lifetime employment rule had spread widely, to all firms and all
employees.

The Emergence of Labour Unions

Immediately after World War I many large enterprises instituted joint labour management conference
system which is known as “factory committees” or “factory council” as a policy designed to counter
the attempts of labour unions to organize their employees. Many strikes and other disturbances occurred
in various places, most were protest demonstrations against labour force reductions or dismissals of the
old type of skilled male workers. Young workers newly recruited into lifetime employment were not
involved in union organization.

After World War II enterprise labour unions became dominant, accounting for almost 90% of total
union membership, and their development was conditioned by the lifetime employment & seniority
wage system which took root between the two-world wars. Most labour unions in the pre-war period
were highly mobile workers and accordingly were horizontally organized, centering their activities
outside of the big concerns. An exception to this was the right wing of Sodomei, which managed to get
into large enterprises by adopting moderate & stable union policies aimed at concluding collective
agreements. The left-wing labour unions were confined to the sector of small sized enterprises that
developed radical activities in many places under the control of professional union leaders.

With the lack of mobility between the large and the small and medium-sized firms, only within the
latter-sector did workers move from factory to factory. In fact, once a worker began a career in a small
factory, he usually had to wander from one small firm to another for all of this working life, this having
high rate of mobility. Young workers in small and medium sized factories commonly did not settle
down, faced with low wages, few prospects for promotion and retirement benefits, and also no welfare
facilities. They were constantly subject to manipulation by left wing or the militant union leaders and

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many even withdrew from the labour market, discouraged by the difficulties they faced daily in trying
to earn a livelihood.

Post War Unions Advanced by Leaps and Bounds

The union movement began from scratch in 1945. By 1949, the number of union members exceeded
six million and the number of unions reached 30,000. Several factors in combination were responsible
for this phenomenal growth.

1. The occupation adopted as one of its main objectives the protection & encouragement of
“democratic” unionism. Under the cover of SACPs power, the Japanese unions developed
within the enterprises framework and the union movement developed rapidly. The occupation
policy, under the control of the United states army, sought to protect and foster unions. The
policy proved highly effect for the growth of democratic labour unions in Japan. However, the
occupation failed to understand the type of unionism that could emerge in an industrial relation
based on lifetime permanent employment rule, like the one which prevailed among the post-
war Japanese enterprises, and an age and seniority-based wage system.
2. Following the February 26th incident of 1936, the union movement in Japan went into a rapid
decline, and when the Shanghai incident occurred in July 1937, labour union were forced to
dissolve. In 1933, a totalitarian labour-management system was forcibly set up by the military
authority and secret police. The labour union were crushed and no autonomous union existed
in Japan for the 7 years from 1938 to 1945.
The Sanpō origination (a totalitarian movement) had taken the place of union even though there
was no sense of labour unions, through these groups white and blue-collar workers during war
came to realize the importance of “organizations”. The Sanpō movement had spread throughout
Japanese industry, including both the large and the small and medium-sized enterprises. It can
be concluded that the idea of “organization” by enterprise was understood to have meaning for
group discipline, apart from the original purpose of the organization or its ideology. The Sanpō
flag was replaced by the flag of the labour union on the day of the war’s end.
3. The widespread post-war inflation and distress over the difficulties of living with soaring prices
and terrible shortages made it necessary for most workers to organize unions if only to seek to
raise their low wages and to reconstruct their idle production facilities. The objectives of which
were to obtain a living wage and to reconstruct the production function of their enterprise.

Since the onset of Japanese reconstruction following the close of the Pacific War, the budding
industrial relation system has been based upon three factors: lifetime employment, a wage and general
reward system based on age and length of employment and the organization of workers into unions. All

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three factors are mutually related and constitute an integrated system. The management system is
strengthened and reinforced by the enterprise form of union organization and the lifetime employment
and special type of seniority system.

Fundamentally labour organization is characterized by the enterprise union organized solely by the
regular or permanent employees. The majority of the new employees are, as a rule, new graduates of
middle schools, high schools, or colleges and university. The labour market recruits mostly young men
and women. Accordingly, age and starting wage have a very close correlation, while wage and salaries
continue to be closely correlated with age and length of jobs to a given employer.

It is expected by both the employer and the worker that the worker as a rule will not be separated from
the enterprise until they reach the compulsory retirement age. When the worker sees his employment
as a career with the same employer, mobility tends to be restricted within the enterprise for the
permanent or regular employee. Lifetime employment is neither an employment contract binding or
otherwise limiting the freedom of workers nor does an employment contract prohibits the freedom of
employers to discharge workers at their discretion.

The Reward System

Rewards in Japanese industry, particularly in the large-scale firms that constitute the most advanced
segments of the economy, are distributed mainly in the basis of so-called seniority. Seniority in Japan,
is measured in accordance with total length if service to the firm regardless of the content of the job or
occupation. Japanese labour relations are based on the assumption the longer one stays with the same
enterprise, the higher one’s position is likely to be and the more training is likely to be acquired. Wages
or salaries and other employment benefits reflect this clearly. Indeed, age, length of service, skill wage,
and prestige are all highly correlated and are taken as measure of the relative contribution of each
individual to the firm. And all of these is highly correlated with skill of the individual. It is expected
that there will be a high positive correlation between rate of increase in skill and length of service.

All of this is not peculiar to Japan. Commonly, employment protected by civil service norms in the
United States would probably show a similar high correlation between the age, length of service, and
the earnings. Furthermore, in many European countries as a rule, wages are based on the market rate of
a particular job dependent on the skill set of the individual which is in turn correlated with age. ‘Skill’
itself is a term highly variable in definition and usage such that it permits all sorts of social and other
non-economic elements to enter it determination and application to wages.

The Enterprise Union

Union in Japan were organized by enterprises in which they only accepted the regular employees as
members of the union. Existing enterprises unions are for the most part independent and autonomous

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organization. As independent organizations, the enterprises union included white and blue-collar
workers. The Japanese worker belonged to a given firm, rather than simply being employed by or in a
specific enterprise. Accordingly, the Japanese workers appears to be more sensitive to the prosperity of
the enterprise.

The wide range of companies’ activities suggests that enterprises are not only economic institutions
pursuing profit but are also social security institutions caring for the life of each employee. An enterprise
extends its concern for the worker to areas such as health, education, and his personal problems as well
as those of his family. Thus, one would expect that the enterprise-based union also functions as marriage
counsellor, travel agent and recreation center. Japanese union had made themselves ideologically
responsible for not only the economic welfare of their members but even for the fate of their members
as human beings.

The enterprise form of union organization has no exact counterpart in other industrialized countries. It
is indeed one of the unique characteristics of Japanese industrial relations. In Japan the development of
localized bargaining stems essentially from the absence of social distinctions drawn from occupational
differentiation, and from the relative particularism that characterize Japanese life in general, in the
United States the prevalence of plant and company negotiations may be seen as natural outgrowth of
the great size of the country, the highly competitive character of the economy, and the patterns of
organizations among employers and unions. National negotiations, as commonly found in Europe, were
hardly feasible both in Japan and US. Americans followed the example of European counterparts
whereas no evidence of Japan was ascertained. It appears that in one important respect, collective
bargaining structures, the Japanese and European situations are polar with the American structure closer
to the Japanese but not identical to it.

Concluding Observations: A Look Ahead

Japanese industrial relations system had adjusted to both tradition and change. Japanese industrial
system is primarily the combination of traditional and modern elements comprising the system. There
is a notion that social change has characterized Japanese society even before the onset of the modern
period century ago. The breakdown of traditional social relations began even before the end of the
Tokugawa era, and new forms and functions have been emerging since then.

Japan’s precipitous rush toward modern industrialism was characterized both by an economic and
social ‘dualism’ and by ‘imbalances’ in income and social welfare. The interesting aspect of the
transformation to industrialism is the degree to which the society achieved integration despite the
conflicts and tensions that arose in its wake. This achievement was the result of the imposition of
traditional hierarchical controls over the society than allowing the forces of the free market to structure
the newly emerging relationships. These developments marked a major social innovation which drew

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its strength from certain of the traditional social relationships but in reality, was designed to speed Japan
industrialization process. It was a new ‘paternalism’ (authoritarianism) system as a means of
restructuring the labour force.

With the rise of militarism after 1931 and its dominance after 1938, even the ‘new’ Japanese industrial
paternalism, oriented and focused on developing a centralized state control, oriented to standardize
and bring uniformity in the treatment of the industrial work force. Then the reforms were initiated by
the Allied Occupation to eradicate the elitist control that had characterized the pre-surrender Japan
however, the reforms were not so thorough to revamp totally the existing social structures. The
reemergence of ‘paternalism’ after the post-war period is considered to be another adaptation to the
changed conditions after the war. With the remarkable thrust of Japan’s economic growth after 1955,
the relationship finally got established.

Public policy provides an overall framework for rules and procedures in industrial relations. In tracing
through the developments of post war Japan’s public policy in these respects highlights the excessive
legalism that had emerged: an enormous flood of legislation, administrative rulings, court orders, and
the channels through which employers and unions attempt to structure their relationships rather than
resorting to direct negotiations and collective bargaining. Labour unions found the courts a major
barricade in protecting the rights they gained through the reforms of the occupation. In the light of this,
it was believed that excessive legalism had been signaling the breakdown of the established patterns of
the industrial relations and awaiting the emergence of new forms of direct negotiations and bargaining.

There has been immense transformation in Japanese labour markets as well. The rapid erosion of
the dual economy since 1955 and the consequent emergence of ‘wage consciousness’ which existed as
long as dualism persisted. The large rise in wage and salary employment, drop in agriculture labour
force, shift in labour demand toward heavy industries, concentration of skilled workers in large firms,
the alteration of the occupational structure and skill-mix, have been converting Japan into a single
national labour market with increasingly uniform wage rates. Labour disputes have lessened in intensity
since the 1955, when the Sohyo leadership hit upon a strike formula that was successfully launched
nationwide wage struggles without destroying the enterprise union base of labour organization.

Organizational structures and social relationships have responded imperfectly to the long-run
changes occurring in the course of Japan’s industrialization. The persistence of ‘vertical’ hierarchies in
Japanese enterprise has not been readily dispelled. Although one may argue that hierarchy was based
on social ranking. In the early decades of Japanese modern economic development, ‘horizontalism’ was
more typical than verticalism. The latter was supported by the political controls and a dual economic
structure. The resultant structures such as the Nenko wage system, the practice of life time employment,
paternalistic welfare practices, early retirement provisions and so on were envisioned by the elitist

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leadership as means to a new future than to preserve the old past. In the name of achieving equity and
egalitarianism, the military seized the ‘verticalism’ through the Sanpo movement to enhance Japan’s
war efforts.

Since World War II, management organization has undergone a professionalizing transformation as
the economy has grown and become increasingly dynamic. This has meant decentralization and
autonomy in exercising managerial authority. It has meant to separate professional management
interests from governmental and political control. On the other hand, management has had its own
internal conflicts. With the advent of increasingly sophisticated technology and new concepts of rational
organization, managements have become more and more functionally differentiated, thus requiring
greater emphasis upon skills, knowledge, and performance rather than on status based in education
level, length of service and age.

The Spring Labour Offensive

There was no doubt that this had been an exceedingly clever device attempting to reconcile the
horizontal ideology of the national centers with the vertical orientation of the enterprise unions in order
to develop a new industrial unionism capable of combining the political goal of socialism and the
economic goal of advancing worker living standards through effective collective bargaining. Though it
had reinforced the standardization of base ups and starting wages for new school graduates. It had yet
to affect significantly the base of enterprise unionism: seniority wage payment systems, welfare
programs and so on.

Nenkō System

The Nenkō system was never anything more than an ideal form rarely attained in practice. While
education and length of service and later age have been used as conditions. This was associated with
the verticalism of the traditional family system. Given the absence of the labour markets the Nenkō
system was just as much a device rationing skills and rewarding merits. The structure of Nenkō system
has been sufficiently flexible and adaptable to take account of a variety of factors other than the length
of service and level education. The radical union movement attempted to utilize the Nenkō system as a
means of achieving equity and enhancing egalitarianism. The departure from the pure Nenkō systems
was encouraged by the shortage of young workers and increased mobility the development of minimum
wage rate systems and the influence of oriented collective bargaining.

Japanese social security system has been elaborated since 1945, it still largely protects the workers who
are the most secure already, and it lacks certain major ingredients, such as effective family allowance
and old-age pensions, flexible and efficient use if human resources in a rapidly growing and diversifying

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economy. This can be achieved if the actors are able to shift their concerns from short-run to long run
goals.

This brief review of the findings adds up to the notion that the Japanese industrial relations system
has long been in a state of tension. Innovations have come at major turning points in economic and
industrial development or in shifts in political control. The demands of modern urbanization, the erosion
of economic and social dualism, the gradual spread of popular participation in the political process, the
clash of ideologies and changing attitudes toward an open society were the most prominent underlying
forces.

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