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Revitalizing the stagnant Japanese office

Companies can boost dismal productivity rates by boosting labor mobility and rewarding talent

| Japan
Japan's labor productivity problems lie mainly in offices instead of factories.   © Reuters

If there is a competition for economic graphs over which Japanese love to beat themselves up, the one on labor productivity is near the top of the list.

The yardstick shows Japan as constant last of the Group of Seven since 1970 at $46 of value-added per unit hour of labor as of 2016, according to the Japan Productivity Center. That puts a nation that prides itself on being an industrial superpower 20th of 35 member countries of the Organization for Economic Cooperation and Development and at about two thirds of the level of the U.S.

This is a humiliation and an enigma. Japan is supposed to be a brainy and hardworking kid. In the educational ranking run by PISA, Japan beats the OECD average by a wide margin in science, math and reading. How can it be the star student achieves only mediocre results in the workplace?

The core of the problem is not the field or the factory but the Japanese office. The traditional activities of farming, mining and manufacturing have been employing fewer and fewer people -- in 2007, the agricultural, manufacturing and construction industries together employed 31% of the total labor force; in 2017 the ratio had dwindled to 27%, according to data from the Ministry of Health, Labor and Welfare. With low-cost, low-productivity jobs moving to emerging economies and automation accelerating, these sectors have become quite lean.

But the services sector has been gobbling up labor with gusto. Unlike the manufacturing groups which long dominated the economy, Japanese service companies are not exposed to the full force of global competition and have not therefore been under the same pressure to raise productivity.

Of course, productivity is not an end of its own but a means to enlarge total value-added to grow the pie of the economy. There are two ways of raising total value-added in a country; increasing the quantity of labor and improving per-head productivity. In the absence of major immigration regime reform (unlikely in Japan), boosting the labor supply involves, in practice, bringing more women back into the workforce and extending the retirement age for all.

The Japanese parliament passed a work reform bill in early July 2018. While the original ambition three years ago was to introduce large-scale exemptions from paying overtime to white-collar staff, the bill ended up skirting around the productivity issue. Only one element directly addresses productivity improvement -- a narrow clause which exempts companies from paying overtime to some white-collar workers, thus improving productivity by reducing the hours worked per person and so increasing the output per hour. But even this rule applies only to those earning 10.75 million yen ($97,500) or more annually, which is a mere 3% of workers.

Meanwhile the private sector is implementing its own work reforms. Popular initiatives include banning overtime, introducing flexi-time or starting work earlier with, in some cases, the added incentive of breakfast served in the office to help workers kick off the work day earlier.

But, while these measures may be effective in changing the mindset that output counts than hours put in, they act at best like Chinese medicine to raising low productivity. Let us get back to the basic formula; labor productivity is value-added divided by labor input. The real problem is that in Japanese offices, the value-added per unit of labor remains low. No matter how much faster we respond to emails, if these actions are low value-adding, we will never escape the trap of "Japanese being efficient at doing inefficient things."

I can see two structural reasons for low value-added per unit labor in Japanese businesses. One is overwhelming amount of incremental activities in external-facing activities, such as marketing and sales, which keep us busy but are not built on truly innovative ideas. So, they do not bring home extra meaty value-added.

For example, while Japanese convenience stores (CVS) delight foreign tourists with a shiny product assortment, many new products disappear within half a year of introduction. A rat race exists between brand owners to keep popping slightly different new products on to CVS shelves. It is hard to find a winner in this game -- most consumers are rather indifferent. CVS chains are busy churning products. Brand owners have no time to come up with truly innovative ideas. The key to breaking the cycle is for brand owners and retailers to collaborate on true innovation. Managers then must reward employees who come up with ideas, not those who diligently run on the treadmill.

The other structural malaise consists of extensive internal operations which seem necessary but are low value-added. Compared with their Western counterparts, Japanese companies outsource noncore operations less. They are also reluctant to cooperate with industry peers, for example, in setting industry standards or in shared distribution.

Admittedly, there has been some change recently. For example, the last couple of years have seen a rush of joint distribution systems in the food and beverage industries. In the wake of modular manufacturing, automakers are less hung up on original specs for parts. Instead they are pushing for industry standardization even at the cost of weakening the ties in traditional keiretsu, the vertically-integrated industrial groupings.

It is important to analyze why Japanese companies preferred to operate stand-alone in the first place. The root cause is a lack of labor mobility. The 2018 Databook of International Labor Statistics published by the Japan Institute for Labor Policy and Training shows that the employees with tenure exceeding 10 years occupy a full 45% of posts in Japan compared with 29% in the U.S.

Even though the practice of lifetime employment is being challenged as companies have shifted increasingly from seniority-based promotion to merit-based since 2000s, Japanese labor is still relatively immobile. With few people jumping ship, the crew develops self-sufficient modes of operation. The cycle reinforces itself; with less movement between companies, there are fewer common commercial practices which in turn makes intercompany movement and pooling of ideas more difficult.

From the employer's side, layoffs are a legal challenge. Companies therefore turn a blind eye to inefficient but seemingly necessary internal work to "give workers something to do." But, sadly, long tenure does not enhance engagement. The 2017 Gallup employment survey reveals that a dismal 6% of Japanese employees are engaged and motivated, ranking Japan 132nd of all 139 countries.

Increased labor mobility could, therefore, help accelerate the reduction of inefficient internal processes. While employees would feel less protected, they would be more engaged in an environment refreshed by new hires, where people are valued at something closer to their market value. This would have a much bigger impact on labor productivity than tinkering with flextime. The government has a big role to play -- it should make firing and hiring easier, whilst at the same time preparing a better safety net and training for people switching jobs.

Increased labor mobility would have wider positive effects. It can help lift stagnant Japanese wages as people look for raises when they change jobs and it can open doors for foreign talent, a crying need in Japan.

A substantial uplift in labor productivity calls for a fundamental shift in business and society, far removed from company-sponsored breakfasts. With unemployment at a record low, now is the time to enhance labor mobility.

Nobuko Kobayashi is a partner with A.T. Kearney, a global management consulting firm. Based in Tokyo, she specializes in the consumer sector with a special focus on multi-national corporations operating in Japan.

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