The J-System (Part Three) - Lifetime Employment

"The nail that sticks up gets hammered down" (Japanese Proverb)

Introduction

Japan's seemingly relentless ascent between 1950 and 1989 from an economy decimated by a devastating World War and towards a global power house in only a few decades stunned many Japan observers in the west.

Not only were the nominal and per capita growth rates in Japan during that time breathtaking, also the efficiency of corporate Japan was. The annual growth rate per work hour was more than double that of the United States throughout the 1970s. (Puchniak)

In the 1980s, major Japanese manufacturing firms such as Toyota, Nissan, Toshiba, Hitachi, and Nippon Steel had grown highly competitive and made great inroads into US and European markets. In the US automobile industry, where the mass production system had been invented, Ford and GM were greatly surprised to discover the "flexible" mass production system developed by Toyota and the uniqueness of the underlying Japanese methods concerning human resource management (HRM). As the key to the high productivity of Japanese manufacturers, Japanese-style employment practice came to receive a great deal of attention from overseas researchers and practitioners, as it was an important pillar in the overall Japanese corporate governance and organization framework, the so called J- System. (Moriguchi)

Collectivism has historically been a core value for Japanese. Self-definition in the Japanese society has been a product of relationships. Although the significance has gradually diminished since Japan ended its isolation policy (Sakoku) during the Tokugawa regime of the mid-nineteenth century and it became more open to western influences, key practices like an emphasis on continuity, group integrity and egalitarianism remain in effect. Following World War II, the logic still played a critical role in (re-)forming Japanese corporations.

In addition, it extended from the intercorporation relationship, and the relationship between the corporation and its white collar workers, to include the blue collar employees as well. After WW2 Japanese workers started viewing its corporation as an arena to reflect their identification with the collective, and a context in which the constructed organizational norms reinforce the employee’s identification with the organization.

In this respect corporations were considered to be the group to which one primarily belongs and dedicates one’s life, almost like a family in the western sense. Indeed, the family principles, along with the Japanese values of collectivism and long-term orientation, played prominent roles in shaping traditional Japanese management approaches. (Kobayashi et al) The unique lifetime employment and Japanese HRM system, which started to develop in the interwar period, should be analyzed in that context.

This post is the last part of a series intended to shed some light on the J- System.

The first part  tackled the role of the Japanese main bank in the J- System.

The second part was dedicated to presenting Japan's Keiretsu network system in corporate Japan.

This last part will scrutinize the phenomenon of lifetime employment that is regarded to be unique to Japan. Lifetime employment is only one pillar, although the most important, of the overall Japanese HRM System. The other two are seniority wage (and promotion) and enterprise unionism.

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Lifetime Employment: Myths and Reality

The Japanese employment system was hailed by many economists and market pundits during the heydays of Japan's ascent. It was seen as the fundamental element in the J- System and Japanese overall HRM system that gave corporate Japan a productivity edge over the rest of the world. Lately though it has been under severe criticism. Critics point to the problem of rigidity and its inability to respond quickly to business cycle fluctuations in this system.

Lifetime employment exist in most large Japanese firms and cover white-collar, as well as most blue-collar, employees. (Puchinak)  Basically, regular workers are guaranteed a job for life, i.e. a worker remains with the same employer until the age of retirement. Lifetime employment does not extend beyond the mandatory retirement age. Usually one only speaks about lifetime employment in Japan when employees are hired right after they complete their schooling or university. This sets forth the condition of ‘‘infancy” (or Kogai). In this context, new school or university graduates are considered to be infants, and the firm takes on the parental role of raising their workers as if they were their own children (the previously mentioned family aspect of lifetime employment).

This practice of committing to a single employer for life should be seen as unique to Japan. But only a fraction of Japanese corporations offer lifetime employment. The likelihood of employees being offered lifetime protection is directly related to the size of the company. Almost none of the small and medium sized enterprises in Japan do offer lifetime employment, as they are not in the economic position to do so. (Ono)

Lifetime Employment: An Implicit Not An Explicit Promise

One major misconception concerning lifetime employment in Japan is that many believe there exists a statutory law that guarantees employment security in Japan. The reality is quite contrary. Labor laws in Japan explicitly uphold the employers' right to dismiss employees. (Moriguchi) Rather the lifetime employment system involves an implicit promise from the employer to the employee that he will not be laid off. In return employees, on their side, give an implicit promise not to abandon the company.

This promise is credible as external labor markets in Japan are non-existent (Puchinak) and the employment guarantee is accompanied by a deferred payment system, i.e. a steep age-earning profile and substantial severance pay that is dependent on the length of service and the most recent salary of the employee. Deferred payments substantially minimize the worker's incentive from shirking on the job or quitting altogether. (Ito) Thus, rather than as an explicit permanent employment contract, lifetime employment is better understood as an implicit contract and long-term commitment between workers and employers. (Ono)

The system of lifetime employment works especially well in an expansionary environment, since the relatively large pool of "underpaid" younger workers makes possible more "deferred" payments to retiring workers. When the organizational hierarchy of a corporation grows, more management positions are created, and therefore deferred payments increase. Although life-time employment is an integral part of Japanese labor relations that makes it possible for firms to enhance their human capital, it can also be seen as a type of pay-as-you-go company pension system.  (Ito)

Unfortunately, the lifetime employment system is gender biased by design. Firstly, it favors men, who are more able to make long-term commitments, and disfavors women who are less likely to do so because they are expected to take on family obligations. (Ono) Secondly, it is most common in heavy and electronical industries, where traditionally more man than woman were employed. However, it is hasty to assume that women are automatically excluded from coverage.

As a result of lifetime employment the survival of the company is intrinsically tied to the economic fortunes of executives and employees (Puchniak) leading to an extremely low voluntary and involuntary job turnover and an unemployment rate that is structurally low in Japan. (Ito)

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The Rationality behind Lifetime Employment

Lifetime employment is a specific feature of the Japanese HRM system. Generally it is argued that employment stability is an effective system of employee's motivation. It enables an efficient process of decision making, constant qualifications improvement and keeping labor cost flexible. (Grabowiecki) Lifetime employment enables the company to cultivate multi-skilled and firm-specific human resources developed internally through on-the-job training and job rotations. Knowledge sharing facilitated by job rotations, team-based structures, and intra-firm personnel transfer systems further helps effective diffusion of new and accumulated knowledge across the organization. (Kobayashi et al)

More specifically several motives for Japanese companies offering lifetime employment have been brought forth in the literature.

Firstly, given that voluntary and involuntary job turnover is extremely low in Japan, a firm has a greater incentive to spend significant resources needed to select new recruits carefully and then provide often costly, permanent on-the-job training and other significant investments in the human capital of its workers. (Grabowiecki) Western companies, where job turnover is significant, are said to hesitate when it comes to investments in the human resources of their employees, as they cannot be sure if those investments will amortize and benefit exclusively their corporation. Thus, the significant higher long-term investments in human resources in Japan compared to the west, are believed to have contributed significantly to an increased worker productivity in Japan.

Moreover, rotation through different job skills is common in both white-collar and blue-collar employment in Japan, especially at the beginning of an employee's career. It is argued that job rotation makes workers versatile at their present level and prepares them for higher positions in the same organization. Many are convinced that the productivity increases in Japan during the high growth era were mainly due to a combination of innovations in the manufacturing process and better communication between all levels in the firm, from planning and design to production to marketing. (Ito)  Finally, firm based training of employees serve as a mechanism to build a sense of membership, commitment and loyalty and self- sacrifice for the good of the corporate group. (Grabowiecki)

In addition to the implicit guarantee of lifetime employment, employers institute a system of periodic pay raises, bonuses, and internal promotion all of which is based (not only on seniority, but) critically on performance evaluation by supervisors. These policies make not only white-collar workers, but also production workers in the factories accumulate a broad set of intellectual skills and take part in small group activities to improve productivity. Many stress this outcome of the lifetime employment concept as remarkable. The empowerment of lower-level employees and the effective use of local knowledge they possess often generate ingenious "bottom-up" innovations in products and processes that could by no means be readily acquired from the external labor market. (Moriguchi)

Contrarily to popular believe, the lifetime employment concept is quite flexible. Although continued employment is implicitly guaranteed, job assignment, working hours, and rates of pay are handled in a flexible manner. (Ito)  Especially in the vertical Keiretsu network the flexible flow of labor is an important aspect of lifetime employment. Workers move from the core company to the suppliers and from the suppliers to the core company. The latter type of worker mobility differs from the former in the sense that it is overwhelmingly and unambiguously temporary. (Grabowiecki) and involves mainly younger employees. Usually it lasts for two years, during which the dispatching firm guaranteed the employee's salary. (Gerlach) Workers are transferred to work on specific project or to learn specific skills that they take back to their home firms. The core company, in contrast, transfers its workers to its subsidiaries often on a permanent as well as temporary assignment, at all levels of the organization. This outflow serves several purposes:

• Maintains strong communication links across the network

• Eases the transfer of technology and know- how from the core company to the subsidiaries

• Enables the core company to stay "lean" and to select only the high-commitment and high-performance employees from its labor pool

• Provides senior management positions for those if its managers who have plateaued in the core company

(Grabowiecki)

Concerning the last point it has to be noted that a fraction of the dispatched employees within a Keiretsu are managers in their early fifties who are unlikely to be promoted to the director level in their own firm before retirement. When upper-level executives are dispatched to other firms, it is usually on a permanent basis with the employee taking on an executive position in his new firm. Where these employees become officers or directors of the recipient firm, they are known as dispatched directors (or haken yakuin).

It explains the predominance of full-time managers as directors in Japanese companies. As a result of transfers, only about one-third of the directors of Japan's major corporations come in from the outside, compared to the United States where outside directors constitute over two-thirds of the total. The distinctive feature of this form of directorship is that the dispatched director in Japan becomes a full-time employee in the receiving firm. Connections to another organization are maintained. These generally represent longstanding and multistranded interorganizational linkages and serve the interests of management in two firms at once as part of an ongoing relationship between the firms. In the U.S, by contrast, the director is truly "outside", i.e. the directorship is usually a part-time position with no maintained connection to another organization. (Gerlach)

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Other Aspects of the Japanese HRM System

Enterprise Unions

Unlike their western counterparts, unions in Japan evolved into firm-specific forms encompassing both blue-collar and white-collar employees only from within the specific company. Many Japan observers credited the success of enterprise unions for their universality and inclusiveness. In such organizations, distinctions between the blue-collar and white-collar workers are further minimized. ‘Us’ becomes everyone within a firm, including management. ‘Them’ referred to people outside a firm.

In this respect, enterprise unions reinforce the notion of the "firm-as-the-family". To this end, unions are expected to contribute to the tradition, success, and reputation of the corporation through the hard work of their members, consultation with firm leaders, and participation in information forums at corporate, plant, and subunit levels. Enterprise unions in Japan are often seen essential for the working in harmony of blue collar workers with the firms’ management teams, often under slogans such as ‘we make our company an excellent company’ (Kobayashi et al)

Another important role enterprise unions play in Japan is that of information sharing, mutual monitoring and joint consultations between labor and management of a company. The aim of the Japanese HRM system is the constant improvement of productivity, which leads to potential labor redundancies, and thus conflicts of interests. It automatically increases the top executive's incentive to reduce the workforce in a company. Workers, on the other hand, have no genuine incentive to cooperate in productivity improvement. Given this conflict of interests and that the promise of "lifetime employment" is the linchpin of the Japanese HRM model, enterprise unions are pivotal to enforcing such an implicit and long-term employment contract in a credible manner. (Moriguchi)

Seniority- based promotion and compensation

The seniority based system is an integral component of traditional Japanese management. It implies a payment (periodic pay rise/ bonuses) and internal promotion system in Japanese corporations based on seniority. It is often argued that in Japan seniority is more important than achievement. (Kobayashi et al) But that is not correct, as the seniority based system is accompanied by a constant and critical evaluation of performance by supervisors. (Moriguchi)  Anyhow, the emphasis on seniority is often seen consistent with lifetime employment because a seniority-based system is efficient only on the assumption that with each passing year the worker acquires skill and experience, thereby enhancing his or her value to the firm. However, many critics of the seniority based system point to the negative side effect that it effectively curtails the potential effectiveness and innovations of younger talented workers. (Kobayashi et al)

History of Employment Relationships in Japan

Japanese working class society today could not be more different from that of around the 19th century, a period in Japan that was marked by a highly competitive, fluid and active labor market.  Employment relation in the workplace were short-lived due to both frequent resignations and dismissals, regardless of the size and ownership of the firm. It was the norm among skilled male workers to move frequently from one workplace to another to acquire new skills and higher wages. Japanese workers were known and feared for their self-reliance and footlessness. But also the Japanese executives did not handle their employees with kid-gloves. The management of blue-collar worker was delegated to a foremen who hired and fired them vigorously according to the prevalent business cycle. (Grabowiecki)

But not only blue-collar workers changed work frequently, also did white-collar workers (incl. engineers, technicians and managers). To retain them and instill loyalty, corporations introduced such policies as periodic pay raises, end-of-term bonuses, paid sick leave, company cafeterias, and company housing. Those benefits, however, were offered exclusively to white-collar staff.

Basically, a de facto class system existed within the Japanese companies where the corporation drew sharp status distinctions between white-collar staff and blue-collar workers. In contrast to what we tend to imagine Mejii era factory workers were neither hardworking nor dedicated, nor were they loyal to any employer. Especially those sharp differences to the present time situation underscore the fact that Japanese-style HRM is not a continuation of tradition that date back to early modern era. It is rather a whole new system that emerged in the course of modernization. (Grabowiecki)

With the rise of capital-intensive industries in the first two decades of the 20th century, Japanese were growing constantly larger. Many firms began attempting to improve discipline, morale and efficiency of its factory workers. To foster future foreman and line leaders, major firms launched an in-house apprenticeship program and carefully selected a small number of teenage boys newly graduated from school and trained them at company facilities. In addition, they were offered semi- annual pay raises and prospect of internal promotion.

Although those activities by Japanese companies were still small by scope and scale, the trend extensified significantly with the advent of the First World War. Facing unprecedented labor shortages caused by war demand let to a broader and deeper introduction of employment policies that had previously applied only to white-collar or elite blue-collar workers. But still this policy during the inter-war period was arbitrary, erratic and inconsistent. Management encouraged long-term employment when times were good, but in recession they made major layoffs and let go even skilled employees with long service in the company. (Grabowiecki)

Although during WW2 the military government intervened heavily in all aspects of the Japanese economy, including the labor market, personnel management, and labor relations, many historians argue that there was little impact on the overall HRM system in Japan. Others argue that the interventions did indeed have a major impact in shaping the Japanese- style employment system, pointing to similarities the regulations stipulated and Japanese-style practices followed in the recent history. As it is so often the case, the truth might lie somewhere between those two views. (Grabowiecki)

With Japan's surrender in 1945, the nation was placed under the indirect governance of the Allied powers. They launched democratic reforms, including the dissolution of holding companies and their Zaibatsu network and introduced labor rights. Japanese workers frenetically began to organize unions, where white-collar and blue-collar workers spontaneously formed separate unions, which soon merged to an employee union. Management, concerned by economic disorder and political turmoil, gave their employee unions extremely favorable contracts (generous wage increase, company benefits and employment guarantees). Furthermore, they also granted every regular employee of a company the right to be a union member. In exchange management was granted that only employees of the company could be members of the union. This exclusive employee membership later became a hallmark of enterprise unionism in Japan. The status distinction of the unions were abolished. (Grabowiecki)

Those post- war developments should be seen as the decisive step toward the "white-collarization" of blue-collar workers. The third pillar of the J- System was brought into existence.

Final Remarks

The Japanese employment system has, especially since the popping of the J-bubble, been criticized for its rigidity and inability to respond quickly to business cycle fluctuations. Many so called experts, especially those advocating the primacy of the Anglo- Saxon model of corporate governance and organization, keep on crying loud for structural reforms in Japan concerning the labor market and to reforming the HRM system on a company level. Others, pointing to the declining trend of core workers in Japanese corporations, even go as far as proclaiming the end of lifetime employment in Japan.

This begs the question if the Japanese employment has really changed over the past half-century of dramatic economic and technological changes. Fundamentally, it has not. The underlying values on which it was build remains its foundation. Key practices like an emphasis on continuity, on group integrity and on egalitarianism remain in effect. (Kobayashi)

Be it as it may. Japanese companies have nevertheless acted on constantly changing economic circumstance. In order to be more flexible and responsive to changes in the global economy, companies are reducing their core, and expanding their periphery labor force. But companies, especially the large ones, are still honoring the implicit contract of lifetime employment and protect those employees who are in the core. Hence, simplified statements that decry the end of lifetime employment are overblown, if not misplaced. Lifetime employment is far from dead for those who are in the, albeit shrinking, core. Concerning other aspects of the Japanese HRM system, namely the seniority based system of promotion and compensation, a similar phenomenon as with lifetime employment can be observed.

More and more companies in Japan evaluate employees based on their abilities, not on their ages. Asics, a leading Japanese sports shoe maker, was on the forefront here. Other companies, like Matsushita, Sanyo, Sanwa Bank and Mizuno also realized the necessity of employing a merit-based system during the economic recession of the 1990s. Senior executives recognized that it was unlikely to be able to survive global competition without the cultivation of young talented employees.

Basically, more and more companies in Japan weighting the ability and performance over tenure and age in wage and promotion decisions. (Kobayashi et al) But this is mainly the case in globalized Japanese companies that are engaged in newer (post-industrial) industries. Nevertheless does this phenomenon exemplifies the influence of western management practices on Japanese firms. This point is verified by Onitsuka’s, the founder of Asics, visionary statement made over 20 years ago: " (...) From now on, we should adopt the positive characteristics of western individualism into Japanese unmei kyōdōtai management and build the new Japanese management. Especially, as globalization within a company prevails, Japanese management alone would eventually vanish (...)." (Kobayashi et al)

Thus, elements from employment systems more familiar to the west have been constantly integrated into the J-System, not only recently. Often this modifications to the J- System appear to be implemented at a glacial pace and the Japanese do not shout those changes from the rooftops. But nevertheless they are done.

At Japanese companies, the proverb ‘the nail that sticks up gets hammered down’ implies that talented people will not to be rewarded properly and should rather leave the companies. The remaining people in the company will tend to be rather ordinary. It is to be expected that mainly companies which successfully cultivate individual talent and stimulate corporate vitality will be able to flourish significantly in the future. This is a significant shift towards western values. This shift symbolizes the diminishing, but not vanishing, importance of the family principles and traditional values in Japan. Not only in the industry but also in the contemporary Japanese society as a whole, as the adaptation of Japanese management to western values, culture, and practices has cohered with current shifts in Japanese society which is itself witnessing a tension between maintaining Japanese traditions while embracing western values as well a cultural and business practices. (Kobayashi et al)

Hopefully this process will further render those elements that have proved to be detrimental to progressive approaches within the Japanese corporations and the Japanese society as a whole, while those elements that have proved to be beneficial will stay intact.

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(The End)




Source:

Michael L. Gerlach; Alliance Capitalism: The Social Organization of Japanese Business; University of California Press 1997

Jerezy Grabowiecki; Keiretsu Groups: Their Role in the Japanese Economy and a Reference Point (or a paradigm) for Other Countries; V.R.F Series; No. 413; March 2006

Koji Kobayashi; John M. Amis; Richard Irwin; Richard Southall; Japanese Post-Industrial Management: The Cases of Asics & Mizuno; Edinburgh Research Explorer 2010

TAKATOSHI ITO;  Japan and the Asian Economies: A "Miracle" in Transition;  Brookings Papers on Economic Activity; 1996

Chiaki Moriguchi; Japanese- Style Human Resource Management and Its Historical Origins; Japan Labor Review; Volume 11, Number 3, Summer 2014

Hiroshi Ono: Lifetime employment in Japan: Concepts and measurements; Journal of The Japanese and International Economies; Volume24, Issue 1, March 2010

Dan W. Puchniak; The Efficiency of Friendliness: Japanese Corporate Governance Succeeds again without Hostile Takeovers; Berkeley Business Law Journal; Vol.5; Issue 2; September 2008

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