The Core of Work Style Innovation: Changing the Way Full-time Employees Work

As more laws are enacted to prevent extreme working hours, many companies are rushing to introduce work style innovation. However, the goal is not simply to curb long working hours. It can be said that the current work style innovation was largely caused by a mismatch between how full-time employees worked to fulfill their companies' wishes - in terms of overtime work, relocations, and doing whatever was required - and what the modern age needs.
Here, we will adopt an outlook that considers "the reform of full-time employees as the true core of work style innovation." From this perspective, we will examine the issues with the way full-time employees work and the changes that are needed.

Author profile
Hideo Hayakawa
Executive Fellow at the Fujitsu Research Institute Economic Research Center
Born in Aichi Prefecture in 1954. Graduated from Tokyo University in 1977 with a BA in Economics. Joined the Bank of Japan. Studied at Princeton University in the U.S. between 1983 - 1985 and received an MA in Economics. Worked as the Director General of the Research and Statistics Department and the General Manager of the Nagoya Branch before being appointed as the Executive Director at the Bank of Japan in 2009. After spending most of his time at the Bank of Japan in the research department, Hayakawa took up his current position in April 2013.

* This article was published in Chisounomori 2018, volume 1 (pages. 4-10) on Jan. 22, 2018.Chisounomori is an information magazine published by Fujitsu Research Institute (FRI).
* The author's title and article contents are from the time of publication.

Why Aren't Wages Rising Even Though the Economy is Improving?

I have always said that the key to work style innovation is to change the Japanese style of employment. In other words, changing the way full-time employees work in Japanese companies. The biggest characteristic of Japanese full-time employment is that job descriptions do not exist in the employment contract. As a result, companies hold almost limitless authority over personnel matters (allowing them to freely demand overtime work or relocations) in exchange for a guarantee of continued employment until retirement age. Japanese people have been prioritizing lifetime employment. However, consider this: if employees are told to stay late for overtime work, they do so even if they have to cancel any prior engagement they had. If they are told to relocate to Hokkaido the following month, they do so even if it means living away from their families. From an international perspective, this way of working is absurd. (Keiichiro Hamaguchi recently coined this type of work style "membership model employment." On the flipside, he called work styles that clearly define jobs as "job model employment.")

The reason work style innovation is being brought up now is because that type of working style for full-time employees is no longer suitable for the world we live in now. I will expand more on that later, but first, let us focus on the current state of the Japanese economy. The fact stands that even though the economy is improving and we are experiencing a serious lack of labor (the jobs-to-applicants' ratio currently exceeds that of the peak of the bubble economy period), wages are not rising and neither are commodity prices. Actually, it is only full-time employees who are not seeing a rise in wages. Hourly wages for part-time or temporary workers are clearly increasing due to the labor shortage (according to research by Recruit Jobs) (Fig. 1).

(Fig. 1) Nominal wages year-on-year (%)

People say that the jobs-to-applicants' ratio for full-time employees has only recently exceeded 1, and shortage of labor is not critical if we only look at full-time employment. However, this is likely because advertisements for full-time help are not often submitted to Hello Work. In a survey conducted by the Ministry of Health, Labor and Welfare (on labor economy trends), companies were asked directly about the excess or shortage of labor. The following figure shows that labor shortage for full-time employment was just as critical as that for part-time jobs (Fig. 2). Despite this, wages for full-time employees are not rising at all, which indicates that there are serious issues with the working style.

(Fig. 2) Diffusion index for determining labor excess/shortage by employment type

The "Showa Period Work Style" Has Become Obsolete

Until recently, the working style of full-time employees in Japanese companies was regarded as the foundation that made Japanese-style management strong. (There are many executive managers who still think so, which is troubling). However, that is the so-called "Showa Period work style" and I do not believe it is something that can be sustained today. The first reason for that is because the Showa Period work style depended on housewives to stay at home. Overtime work, relocations, and doing whatever was required were only possible because housewives took care of all the housework and child-raising responsibilities. However, in this day and age, double-income families are becoming the norm. With the productive population decreasing, the society needs women who have completed higher education to work. However, it is impossible to work long hours while raising children. In recent years, many people have focused their attention on the rising rate of women in the labor force, but most of them are older married women working as part-time workers who have finished raising their children. It does not mean that we have reached a place in time where all women have successful business careers.

Over the past few years, the research on happiness level has become a trend in economics. When looking at happiness levels in Japan and the U.S., results show that married women in Japan have lower happiness levels compared to men. This difference is particularly prominent for working women, and the happiness level of women with children are strikingly low. This is likely because men who work long hours do not actively participate in childrearing. In addition, the same research shows that elderly people in the U.S. and Europe have the highest levels of happiness, but that is not the case in Japan (Fig. 3). In particular, happiness levels are low among elderly men, especially those who have lost their wives. This is because men who devoted their lives to working have no roots in the local community, and when they lose their wives - the only people they could rely on after retiring - they become socially isolated. All of these indicate how the current work style of full-time employees has become a source of unhappiness.

(Fig. 3) Objective happiness levels by age (compared with the U.S.)
Source: Cabinet Office "FY 2008 White Paper on National Life"

The second reason the Showa Period work style cannot survive today is because it is a style that is rooted in the age of growth. All personnel were trained as generalists who would eventually take managerial positions. However, for such a structure to survive, the company's organization has to continue to grow and sustain a pyramid-shaped model, or else it will inevitably lead to a lack of available positions. Additionally, when a company's outstanding human capital is determined based on the amount of accumulated experience, this produces a wage curve that rises rapidly as employees age. With the average age of employees increasing, this generates a sudden increase in labor costs. For this reason, as growth slowed significantly in the Japanese economy from the late 1990s onward, companies attempted to cut costs by expanding part-time employment to supplement the inner circle of full-time employees. However, as is widely acknowledged, this produced various other problems, such as a widening disparity and unstable employment among younger workers.

The third reason is because it is a work style that was created at a time when companies had clear visions of its future. When I began working 40 years ago, the retirement age was 55 years old, which is 10 years younger than it is today. Many companies could also picture where they would be in 10 years' time. However, as a result of globalization and digitalization, the business models and lifecycles of companies have shortened, and their future visions have become markedly less clear. (There were, of course, changes in the Showa Period, such as the decline of the coal mining and cotton spinning industries, but those occurred over a span of 20 to 30 years, which cannot be compared to the speed of flat panel TVs and solar batteries declining in recent years.) There is no doubt that the main industry supporting Japan's economy today is the automobile industry, but it remains to be seen whether they will maintain their position 10 years from now in the age of electric cars and autonomous driving.

Half a year ago, companies competed fiercely against each other to acquire new employees who will graduate from university the following spring. However, if those newly employed personnel are to work until they are 65 years old, it means they will be a part of the company until 2060. By then, Japan's population will likely decrease by 30% and the employment field will be drastically changed by the spread of AI. I doubt the recruiting personnel could confidently guarantee employment until such an age. However, both HR departments and students are not willing to face this inconvenient truth and once they are employed, neither party has the courage to demand (or accept) significant wage increases. That is likely a reason why wages do not rise among full-time employees despite a shortage of labor force.

The fourth reason is because I do not believe the current work style of full-time employees in Japan is suited for adapting to new innovations. I think the Japanese system that allows long-term employees to slowly gain skills through on-the-job training was indeed appropriate for continuous improvements. Under the system, companies could also fully adapt to in-house R&D for semiconductors and liquid crystal panels in the age of advanced technology (which requires the company to create a development team, develop new products, put them on the production line, and mass produce them).

However, we are now living in an age of open innovation, which transcends companies and national borders. (It is also a destructive innovation that negatively influences other departments within a company.) Japanese companies train their employees so that they are useful only within the organization. As such, they are incapable of adapting to this new age, and I suspect their inaptitude is evident, whether in terms of AI, Fintech or the sharing economy.

In addition, companies that have expanded globally in earnest have often pointed out that the Japanese style of employment and the slow decision-making process behind it have caused difficulties when collaborating with overseas' departments. There have also been cases where such companies resolved the issue by transforming the Japanese organization into a job model employment.

Limits of the Government-Backed Work Style Innovation

It is widely known that the Abe administration has been dedicated to implementing work style innovation since last year. Related bills may even be established during the next ordinary Diet session at the earliest. This is in response to the various problems stated above, and the initiative itself should be highly praised. However, since it lacks the idea of "the reform of full-time employees as being the true core of work style innovation" (it may be avoiding the issue altogether due to opposition from the financial world and labor unions), I doubt it can present a fundamental solution to the problems. For example, I used to think that the "comply or explain" approach (if you cannot comply with a rule, explain the reason why) should be used for "equal pay for equal work," just as it was for corporate governance reforms, and a job description should be provided to explain wage differences. However, things never progressed that far, and the prepared guideline was vague. (It did not establish a standard for determining whether experience or skills were equal, leaving it up to the companies to decide.) As such, it held little authority, and people generally saw it as ineffective.

On the other hand, regulations to limit long working hours was supported by the public and became strict, with the inclusion of fines. If these are implemented, it may not be enough to encourage mothers to work full-time, but it will likely contribute towards ensuring mental health (and prevent deaths caused by overwork). However, the regulations are designed to uniformly restrict long working hours and give no thought to raising productivity within a shorter timeframe. In the end, improving productivity is left to each company and their efforts. If those efforts do not yield results, the labor shortage will likely only worsen.

Another part of the work style innovation is the proposal of a system that pays workers by achievements and not by the hours worked. This is extremely natural for white collar workers in the research field or those who possess highly specialized skills. However, I find it strange that this has not lead to clearer job descriptions (unlike generalist managers, it is easy to define their work). On the contrary, if a system that pays by achievements is implemented without introducing clear job descriptions, I fear that employees working under malicious supervisors will be handed one task after another, which will only exacerbate the issue of excessive overwork.

To begin with, the Japanese style of employment was not determined by laws or regulations, but through practices in the private sector. However, many public systems - such as tax and social insurance systems, as well as education - were established based on this Japanese style of employment. This was a large characteristic of post-war Japan. Therefore, in order to change the nature of Japanese employment, the government has to first modify this old style and its supplementary systems. To this end, I believe it was an extremely important step that proposals were made last summer to review tax deductions for spouses, which restricted women from entering the workforce properly. However, the government and the ruling party feared a backlash from housewives and caved in easily. Additionally, in the field of education, many universities (excluding a handful of research institutes) were seeking educational reforms that would improve students' employability. However, the topic that is being discussed today is about making universities free, which is simply a way for politicians to gain votes, and no one is talking about the contents of the education itself. If things remain the way they are, any measures that are implemented will only work towards helping universities resolve their shortage of applicants.

  • (Note 1)The "Work Style Innovation Laws" were established on June 29, 2018.

Work Style Innovation Needs Job Model Employments

My theory for work style innovation is to make job model employments the default (this is not only my opinion alone, but the consensus of many experts). I use the term "default" here because I do not want to add a limited number of full-time job model employees to support a core of full-time employees who follow the old style. What I mean is that job model employees should become the norm, so that when someone asks, "What's your job?" The person can answer, "I'm an engineer," or "I work as an accountant," just as people do overseas, as opposed to simply saying, "I'm an employee at Company A." (The reason for this is because human assets that are specific to individual companies are becoming less important due to structural changes, or there is a high risk that such assets will become obsolete easily.)

In addition, up until now, only employees who could work without limits, including overtime work, relocations, and doing whatever was required, were considered first-rate in Japanese companies while everyone else was considered second-rate employees. This does not just apply to temporary workers. For example, women may be full-time employees on paper, but when they take maternity leave or work shorter hours to raise their children, some are suddenly called "mommy trucks" and considered second-rate. Many men may consider the issue irrelevant, but in a few years, the baby boomers will enter the later stages of old age. It will not be long before a large number of people in managerial positions will suddenly have to take on nursing responsibilities. Additionally, even highly skilled employees will abruptly find themselves being treated as second-rate when they pass the 60-year-old mark and look for re-employment. Such treatments are exceedingly wasteful and lack equality.

It goes without saying that individual companies need to respond to the modern day's demands and push this work style innovation forward. First, a company needs to set the level and capacity of work suitable for each employee based on their skills and limits, and determine their salaries accordingly. For example, if a company has a skilled female employee who is raising a child, they should give her work with an advanced level of difficulty but at a slightly smaller capacity. Wages during this period will be lowered, but once she finishes raising her child, her work capacity will be increased and her wages will be raised again. (She will not be called a "mommy truck" forever). I think the same should generally be done for executives with nursing responsibilities, but it will be better if they engage in work that requires specialized skills instead of managerial positions, especially if they can work remotely.

Personnel in the human resources department will likely say that such proposals are impossible and will oppose them strongly. However, in other countries around the world, this sort of job design is a central part of HR work. If such a change cannot be avoided, then it is better to be the first to adopt it. In fact, for companies that have implemented objective management schemes, it is possible to draw up job designs by adding challenges and goals to each employee's routine. In a regular Japanese company, a person may get transferred to different departments, which destroys their individual objectives and they will have to build new ones from scratch. However, if they are able to continue the same work, this becomes job model employment. (In companies outside Japan, it has become common to add flexibility to operations by inserting individuality into pre-existing, fixed and narrow jobs).

Even then, there are people who will think that they are facing a very difficult challenge. Those are the people who thought their jobs were to collectively employ a group of newly graduated students with relatively similar qualities, manage them as a group, and make personnel decisions such as "Person A will be succeeded by Person B." However, with job model employments, field managers are generally charged with creating job designs and managing personnel in lower positions. I believe the central role of HR as a corporate department is to know the organization's human assets as a whole, recruit the necessary personnel, and nurture skills that are lacking through on-the-job or off-the-job trainings. Moreover, the kind of personnel management that was not possible with physical paper documents is now becoming much easier as employee information is increasingly managed in databases. In this way, the old personnel department will change to become human resource management. I believe that when these changes are complete, they will not only transform the Japanese style of employment, but Japanese companies themselves. That is the reason work style innovation is seen as the most important structural reform and growth strategy.