TOKYO -- Hourly earnings are showing an unusual pattern in Japan as rises in the minimum wage have left more people working near the pay floor despite a shortage of labor. The finding points to the existence of a congested segment of inefficient companies capable of paying their workers only at the lowest level.
Modest wage rises are often thought to improve productivity by spurring employers to boost efficiency in order to stay competitive. This argument will face an important test in Japan as to whether or not it is workable in this country.
Moves to raise the minimum wage gathered steam in Japan in 2007. More recently, the government announced a 3% annual increase in the minimum wage to stimulate consumption. Ahead of the election in the upper house this Sunday, many political parties have pledged to raise the minimum wage.
The effect of minimum wage rises on the distribution of income is noticeable on an hourly-wage basis.
The wage distribution in Tokyo showed a moderately rising curve in 2007, with only 72,000 people working for an hourly wage of less than 800 yen ($7.50) -- near the previous year's minimum wage of 719 yen. In 2017, however, nearly four times as many people, or 275,000, worked for less than 1,000 yen per hour against the previous year's minimum wage of 932 yen.
This suggests the possible presence of many companies that cannot afford to increase pay and have reluctantly complied with rises in the minimum wage.
According to data released by the Organization for Economic Cooperation and Development, the minimum wage in Japan rose 20% over the decade from 2007. But Japan's productivity improved only 9% during the period, indicating the strong presence of inefficient companies capable of paying no higher than the lowest salary levels. Growth in average annual income also lagged, at 2%.
Productivity is a measure of the output of goods and services by a worker, per hour. It is internationally understood that wages are high in countries with high productivity because an improvement in productivity creates more room for a salary increase. Recently, there has also been an argument that an increase in the minimum wage helps improve productivity. In line with this, the impact of having to pay higher wages can mean that employers make increased efforts to raise the morale of workers.
In Britain, which introduced a minimum wage in 1999, a group of scholars at Middlesex University analyzed the relationship between minimum wages and total factor productivity to 2008, finding that rises in the minimum wage were effective in improving productivity, mainly in cleaning, security and other labor intensive services.
Over the past 10 years, productivity growth in Britain has been sluggish, partly because of the financial crisis. The government has once again accelerated the pace of minimum wage increases and started to raise the bottom of the low productivity sector. The government and the private sector will work together to provide training programs for business management and to give executives of large companies a mentor role for small and midsize companies.
David Atkinson, a Japan-based British businessman and economist, calls for successive rises in the minimum wage so that employers are stimulated to strive for improving productivity.
But Masayuki Morikawa, vice president of the governmental Research Institute of Economy, Trade and Industry, said any relationship between minimum wage rises and their effect of improving regional and corporate productivity has not been confirmed "at least to date."
Nevertheless, an increase in minimum wages is certainly a powerful tool in regards people's salaries and corporate management. Minimum wage employers are mostly restaurants and retailers. Low wages are also noticeable in the nursing care industry, which takes a leading role in the 'super-aged' society.
As labor shortages intensify, companies will be unable to survive unless they reward those who work by increasing productivity through automation and other means.
A successful combination of policies, such as promoting entrepreneurship and improving the skills of workers, is needed for renewal.
South Korea has kept raising the minimum wage sharply in recent years to stabilize the life of workers and improve wealth distribution. The move seems to have realized a virtuous cycle as productivity has also improved. However, despite the growth of the South Korean economy, the rate of unemployment is rising. Employment opportunities have not increased either.
Small and midsize companies are possibly being weeded out without sufficient growth of new sources of employment being found.
A lesson from the South Korean example is that steep increases in the minimum wage can cause unemployment and the closure of smaller businesses. The outcome is a decrease in the number of workers despite an improvement in productivity.
The South Korean government has shifted to a policy of limiting minimum wage increases. To sustain the corporate sector, a combination of policies, such as encouraging the start of new businesses and improving workers' skills, is indispensable.
Once Sunday's election is over and the chorus fades for minimum wage rises, Japan will need to start working out a watertight policy package.